Chile, towards the end of the private pension system?



“End of AFP” and “Worthy retreats” were among the main demands of the social revolt that rocked Chile at the end of 2019. The future of retirement pensions is one of the fundamental and divisive subjects between the two candidates in the second round of the Chilean presidential election, this December 19, 2021 .

Both offer a basic universal pension. But the common point ends there. Gabriel Boric, left-wing candidate and former 35-year-old student leader, wants a complete overhaul and proposes a public and united system. Juan Antonio Kast, ultra-right candidate, considers that it is necessary to maintain the current private system by making some adjustments.

Low pensions

Symbol of the neoliberal model installed by the Pinochet dictatorship (1973-1990), the private and individual funded pension system promised in the 1980s “To retire with 100% of his income”. Forty years later, the reality is quite different. In 2019, pensions amounted to € 288 on average, with a significant difference between the average pensions for men (€ 355) and those for women (€ 213). In a country which has a standard of living close to that of Portugal, pension amounts are therefore low and most older people have to find informal employment to support themselves.

When it was set up in 1981 by José Piñera, brother of the outgoing billionaire president, the AFP (administration of pension funds) was seen as an innovative model that stood out as an exception. Before that date, Chileans contributed to a state-run common fund, similar to the pay-as-you-go pension system.

Today, they deposit around 10% of their remuneration, salary or taxable income each month into a personal account with a pension fund administrator. The objective is that these investments generate returns so that at the end of their working life, retirees can benefit from both the capital contributed and the accumulated gains. Unfortunately, the Chilean model has shown its limits. In 2018, the OECD considered Chile to be one of the five economies in the world with the lowest replacement rate. In other words, a Chilean worker who retires suffers one of the greatest losses in purchasing power.

Opposing candidates

This December 19, 2021, when the Chileans elect their new President, they will also decide on their retirement. Juan Antonio Kast, admirer of Augusto Pinochet, has always praised the AFP model and considers that “The individual capitalization system is the best system that can exist”. The 55-year-old lawyer nevertheless proposes to create a universal basic pension which would concern 80% of the lowest paid employees.

Gabriel Boric, thirty on the left, also offers a universal pension up to € 270 but he backs it up with a deep institutional reform. The young deputy wants ” build a new social security system, where workers will not have to dip into their savings to face a crisis “. Indeed, the AFP system began to be unraveled by parliamentarians in June 2020. Chileans were able to withdraw up to 30% of their individual savings to face the consequences of the pandemic. The next parliament, balanced between left and right, which will take office next March at the same time as the President, will have an important role to play in the reform of a system which has shown its limits.

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