On Wednesday November 3, Chilean President Gabriel Boric reported that he would soon present to Congress a bill to reform the country’s current private pension system. President Boric said that the bill aims to create a new social security fund to guarantee better pensions and put an end to the seven existing Pension Fund Administrators (AFPs), created under the US-backed dictatorship of General Augusto Pinochet (1973-1990).
“Today we present a reform, which has been awaited and postponed for more than 15 years, which creates a mixed system that will guarantee better pensions for all, the current system is in crisis and the amounts are not enough for people to sustain a decent life in their old age,” said Boric on national television.
The president criticized the fact that “in Chile, 72% of pensions are below the minimum wage and that one in four retirees receives an amount that is below the poverty line.” He pointed out that “this occurs at the same time when the AFPs receive tremendous profits, even though the results and profitability of the funds are negative.”
The head of state stated that “the AFPs, in this reform, are finished. There will be new private investment managers with the exclusive purpose of investing pension funds, and there will also be a public alternative to increase competition with new players.”
The president explained that the reform will create “a mixed pension system, based on the principles of social security in which the State, employers and workers will contribute.”
He added that “the pension savings in individual accounts, both accumulated and future, will remain the individual’s property, may be inherited and will never be expropriated.”
Boric explained that this new system will give “freedom to choose where to invest your pension funds, an option that does not exist today, since everyone is obliged to be in an AFP.”
“We want to leave behind an extreme system that has not been able to meet the expectations placed on it and that has recognized deficiencies,” he declared.
The president called on Congress “to debate with responsibility and dialogue, but without delay, putting people and their needs at the center.”
— Presidencia de Chile (@Presidencia_cl) November 3, 2022
Under the mechanism in force, which created an individual capitalization method, each worker has 10.5% of his or her monthly salary deducted to a personal account managed by one of the seven AFPs. These funds are returned to the account holders when they reach their retirement age (60 years for women and 65 years for men).
In 2008, a reform was introduced and a state-financed universal pension was created for the poorest 60% who had never contributed or who received very low pensions. This contribution was increased in 2021 to 194,000 pesos per annum ($ 210). According to the Finance Ministry’s statement, the reform will further increase it to 250,000 pesos ($ 270).
The new system would obligate companies and employers to pay an additional 6% of their employees’ salaries to a new state-run social security company to improve current and future pensions.
Boric has promised to increase state spending on social services, introduce progressive taxes on corporations and wealthy individuals, and move towards a new fair and sustainable economic system. He has also pledged to replace the country’s pension system (AFP), which is managed by private insurers and has been a cause of dispute between the government and the population since last year, with a public alternative.
The overhaul of Chile’s pension system is one of Boric’s presidential campaign promises. The AFPs make huge profits by investing the workers’ savings in the market, which amount to about 8% of Chile’s GDP. But they are believed to have exclusively benefited the elites, and not the vast majority of poor Chileans. In the past years, given the public backlash against the system, there have been at least two attempts to reform it, but all failed to pass in the parliament.