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Chilean President Gabriel Boric announced on November 2 his long-awaited plan to reform the country’s controversial private pension system. “The AFPs, in this reform, are finished,” assured the president. What changes are coming?
Ending the controversial Chilean pension system, a pioneer in individual capitalization and replicated in the 90s in much of Latin America, was one of Gabriel Boric’s campaign promises.
Today, the president presents a plan to make it happen, in a new attempt after so many failed over the years to reform that system.
In a televised speech, the Chilean president said he plans to replace the Pension Fund Administrators (AFP) system with a new public-private social security system that would have new contributions from employers and the state.
Because #BestPensions is what our country needs to move forward and put an end to this system of excesses, we announce the Pension Reform. Our goal is to improve the system for current and future retirees, with special emphasis on women ✅ pic.twitter.com/iXsB1zqrrQ
– Government of Chile (@GobiernodeChile) November 3, 2022
Warning that the AFPs have no future left with the proposed reform, the president added that although the new private entities will be able to invest in pension funds, there will also be a public alternative.
“There will be new private investment managers with the exclusive purpose of investing pension funds and, in addition, there will be a public alternative, which will allow promoting competition with the entry of new actors,” he clarified.
Specifically, the initiative contemplates the creation of a mixed model with an increase in the contribution from 10% to 16%, with the possibility of the State managing part of the funds, an idea that for the opposition “will end up destroying the pensions”.
The Government has proposed a Statist Reform that creates an additional tax that workers will not be able to save in their individual savings accounts and that will be administered by an inefficient and ideological state body that will end up destroying the pension system
– José Antonio Kast Rist ?? (@joseantoniokast) November 3, 2022
A controversial system that served as an example in the region
The current Chilean pension system dates from the dictatorship of Augusto Pinochet and is financed solely by workers.
Each formal employee is required to contribute 10% of their monthly salary to a personal account that they can use when they retire (60 years in the case of women and 65 years for men), which is managed by one of the the seven Pension Fund Administrators (AFP) that exist.
The plan proposed by Boric would maintain individual contributions and gradually increase employer contributions until reaching 6%, for a total of 16%. The state would also contribute a certain amount.
The pension reform was a key requirement of the 2019 social outbreak that shook the nation and, months later, during the pandemic, the withdrawals of funds processed by the Government of Sebastián Piñera helped mitigate the economic impact of the emergency, draining billions of dollars of the system.
In Chile, 72% of pensions are below the minimum wage and one in four retirees receives a pension below the poverty line, while the AFPs have large profits, according to the Chilean president.
Boric’s proposal must now make its way through both chambers of Congress, where the ruling coalition does not have a majority.
With EFE and Reuters
