What happened to the emblematic Chilean pension model?

At the beginning of the 1980s, Chile launched a pension system managed by private institutions, as part of the economic reforms promoted by the military government of Augusto Pinochet, which a few years later was replicated in several Latin American nations such as Colombia, Argentina and Peru. .

In essence, the Chilean pension system put an end to the previous one, in which workers, employers and the State contributed, to make way for the new model that was based on the mandatory savings of workers in an individual account managed by the Fund Administrators. Pension Funds (AFP), and whose funds are invested in the capital market.

This private system, which at the time US President George W. Bush called an example to follow, seemed to be the answer to the problems of low and inefficiently administered pensions by the States of the region.

In summary, it promoted that each worker compulsorily save 10% of their income that went to an individual account managed by the AFPs, institutions that invested that money in a series of financial instruments and charged a commission for it.

But the results did not meet expectations and several countries that had implemented the system backed down. In 2008, the government of Cristina Fernández in Argentina nationalized private pension funds, and two years later Evo Morales did the same in Bolivia.

In Chile, they also tried to adjust the course with a series of amendments to their own system, but it was not enough.
The governments of Michelle Bachelet and Sebastián Piñera promoted changes to improve pensions, but they did not meet expectations.

In 2016 there were huge national protests, which under the slogan “No+AFP” demanded the end of the private pension system.
The population loudly demanded changes and mobilizations.

The most recent

Chile witnessed at the end of 2019 a social outbreak that, among other demands, demanded an end to the current pension system.

The issue was part of the campaign promises of the current president Gabriel Boric, who at the beginning of November declared the end of the AFP. He did so in a message to the nation in which he presented his proposal to reform the current system.

“The current pension system is in crisis, and no one doubts that. Today’s pensions are not enough for our fathers, mothers, grandfathers, grandmothers to sustain a decent life in their old age, regardless of how much they worked during their lives, ”he said in his speech.

“The AFPs, in this reform, are over,” he said.

It now depends on the Chilean Congress whether or not to approve these reforms proposed by Boric, who does not have a majority in either chamber.

The impact in Latin America

For Juan Ríos, a senior economist at the Observatory of the Economic Context of the Chilean University Diego Portales, in practice the pension market is a reflection of the labor market. In the case of Chile, like that of other countries in the region, average wages are low and this means that people manage to save little to finance their pensions.

“The AFPs did a job that they had to do, it is a system that in theory works very well but does not solve problems inherent to the labor market and that is something that people do not perceive and what unfortunately does affect is when you see the pension and when you see very low pensions for the public, it means that the AFP did not comply,” he told the voice of america.

He also highlighted that the mistake that Chile made “was that they did not give people the opportunity to choose and in a certain way the population has the feeling that they were forced and the truth is that they were forced, in the sense that the State did not give options, alternatives, to the AFPs”.

In countries like Colombia and Peru, the worker can choose between having a private system or a state one, he said.

“Communicationally it does generate an impact since the AFPs were created in Chile and 40 years later we are saying there are no more AFPs,” he highlighted when referring to the repercussions in the countries that adopted the Chilean pension model.

From Peru

Enrique Castellanos, professor of Economics and Finance at the Universidad del Pacífico del Perú, considered that the AFP model has been losing acceptance among the population because in practice it is only working for a reduced percentage of the population that has a better economic position and not for the bulk of the employees.

“The AFPs have already lost the political battle and the people no longer want them, so now in general terms they are talking about mixed systems where the State is part and the private sector is part, which I don’t think is going to be the solution either,” he told the VOA.

“The only way to have better pensions, at least in Peru, is for salaries to be higher and informality to be reduced. But if I have minimum wages and of my 40 years of working life I spend 20 in the formal sector and 20 in the informal sector without contributing, where is the money going to come from to be able to retire?” he reflected.

Labor informality in Latin America reaches more than half of the employed population, according to the International Labor Organization. Bolivia is the country in the region with the highest rate of informality, followed by Ecuador, Peru and Colombia.

In Peru there have already been up to four proposals to reform the pension system in the last five years and President Pedro Castillo announced months ago the formation of a commission to work on this issue, but so far they have only remained in announcements.

“It has become a very political issue,” said Castellanos, who considered that the Chilean president’s announcement will have an impact because “it will dust off the reform attempts” that are still dormant.

“The problem in Peru is that when the pension funds have been public, and we have already had that problem, they drawered (misused) either the fund or all the money that people put into their pension funds,” he said. the expert.

From Colombia

The government of Gustavo Petro announced a reform to the pension system in Colombia during the presidential campaign, which will begin to be discussed in 2023 in Congress. According to the Colombian president, the purpose of this reform proposal is for older adults who do not have savings for their pension to access it.

Currently in Colombia there are two pension schemes, the public system (Colpensiones) and the Pension Fund Administrators (AFP). With the first, a fund is used to pay current pensions. The second, for their part, people save individually, generating returns according to the investments of the companies, these profits add to the savings of each worker.

The last pension reform that was processed in Colombia and that completely reformed its entire Social Security system (pensions (disability, old age and death); health, and protection against professional risks) occurred in 2003.

The voice of america consulted the Colombian lawyer Giovanna Yayguaje, a pension specialist, about the measure announced by the president of the trans-Andean country and considered that “the process that is taking place in Chile does leave us with many elements of analysis in view of the reform that is going to be presented President Gustavo Petro”.

He explained that when Colombia changed the structure of the pension system in 1993, a mixed system of individual savings was created that is partly taken from the capitalization regime of Chile. Now, he said, expectations are growing for what the government of his country can propose, especially with regard to the functions of private pension funds.

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