Pensions in Chile

The Chilean pension system is a state-regulated form of retirement, it has existed since 1920. The pension system in 1980 changed from PAYG to funded schemes under the military dictatorship of Augusto Pinochet. Many critics as well as proponents see in the reform an important experiment under real conditions, which provides insight into the impact of a full conversion of a pension system to a funded basis. The development was therefore observed internationally with great interest. In 2008, the pension system under the government of Michelle Bachelet was reformed again.

History (1920-1980)

In Chile, a social insurance system was introduced in 1920, which included a PAYG pension system. Although until 1973 einzahlten a share of 73 % of all workers in the system, the financing of the pension fund was low, since almost all workers contributed only the minimum statutory contribution and many successfully completely removed from the transfer of pension contributions. The poor payment is mainly attributed to the fact that the individual pension amount depended little on the amount of pension contributions. 1980 reached the deficit of the pension funds 1.8% of gross domestic product. Furthermore, there was the problem that the amount of benefits for different occupational groups turned out differently high. The differences are usually attributed to a different successful lobbying of the various professional groups.

Pension reform in 1980/81

In 1980, the Pinochet government under the leadership of former Labor Minister José Piñera, the former PAYG pension system to the funded system in order. The idea of privatizing the pension came José Piñera for the first time while reading the book Capitalism and Freedom by Milton Friedman. Various private pension funds were established, the so-called Administradoras de Fondos de Pensions ( AFPs ). For all citizens who are legally defined as workers, employers are required to pay a portion of salary to the pension system. Workers who had been paid in the old system were given an option to continue to pay into the old system. The statutory minimum contributions to the new private pension schemes, however, were 11 % lower than the stated contributions to the old pension system, so change all workers as possible.

Obligation to contribute

All workers and employees must pay into the system. Self-employed must pay, but do not. Mandatory contributions amount to 13% of monthly income. The part of the monthly income that exceeds $ 2,000 is contributory. Pension contributions can be deducted as special expenses in the income tax deducted.

Members of the military have a private pension scheme ( PAYG ) and are not liable for contributions in the general pension system.

Role of the state

The establishment and operation of private pension schemes are regulated by law. So, for example, must form each pension fund reserves at a minimum. Also, there are provisions for the type of investment. The compliance of the private pension funds are supervised by a state supervisory authority, the Superintendencia de AFP.

There are state guarantees for the following cases:

In addition, the state pays social assistance, the Pension Funds Asistenciales ( Pasi ), for those citizens who are not entitled to the minimum pension.

Due to the change of the system from PAYG to funded schemes still occur up to about 2045 switching costs. Because the contribution payments are made almost entirely in the new system, are the pension rights from the old system to almost no deposits. The difference is paid by the Chilean state. Likewise, the State finances the increase in the pension rights of such citizens who have moved into the new system. This conversion cost burden on the budget considerably:

Government subsidies to the pension system ( switching costs, Pension Funds Asistenciales, minimum pension ) amounted in the period 1981-2004 to an average of 4.7% of GDP per year. The grants were so much higher than before the reform, as the deficit "only" 1.8% of GDP per year, respectively.

Administrative costs

The pension fund - so the newly introduced insurance - are funded by administrative costs. Pension funds are not regulated by law as to the type, number and level of administrative costs. Usually incurred management fees for the opening and for various changes of an account. Furthermore, part of the monthly pension contributions will be retained to finance, as well as a part of voluntary contributions. Only the introduction of administrative costs for the early termination of the pension fund (for purposes of the Fund change ) is prohibited by law.

Of the pensionable insured population and amount of benefits

The expected amount of pension depends on the performance of the pension funds and the amount of the withdrawn administrative costs. The administrative costs are relatively high in the Chilean pension funds. The nominal rate of return of the pension fund was in the past an average of 10 %, the real rate of return (net of administrative expenses) amounted to an average of 4.5-6.5 %. The performance of the Chilean pension fund is thus compared with the performance of private pension funds of developed industrial countries so far above average, compared with the performance of private pension funds other South American countries on average. The amount of previous earnings is attributed by observers partly due to special factors, such as the previously high real interest rates and the boom in the financial markets and shares, which is also related to the capital accumulation of pension funds.

In addition to or instead of the pensions from private pension funds, there may be entitled to government assistance:

Citizens who have paid for 20 years in the insurance system and their pension entitlement is still below a certain level, are entitled to the minimum pension ( Pension Garantía de Mínima ). In this case, the pension will be increased at government expense. The age at which this statutory minimum pension is paid at the earliest, was increased in the reform for men from 60 to 65 years and for women from 55 to 60 years.

Furthermore, there is the Pension Funds Asistenciales ( Pasi ) for citizens who do not have a pension or have paid less than 20 years. But is for PaSIS services a fixed ( and usually narrow ) budget. When the annual budget is used up, no more pensions are paid.

The number of workers who actually pay into the pension insurance amounted to 1980 ( before the reform ) and decreased 64% by 2006 to 58%. The low number based professor of Diego Portales University Patricio Navia on the view of many citizens believes that the administrative costs are too high and too low expectable pension is unfair. Therefore, many citizens are trying to escape from the pension system. Andras Uthoff, director of the Social Development Division of the UN Economic Commission for Latin America (ECLAC ) believes the reformed Chilean pension system did not fit, build up a significant pension claim to the reformed Chilean labor market, which allows only a small percentage of the citizens.

After the projection of future Berstein, Larrain Rios and Pino from the year 2005 ( based on data from the period 1981 - 2003), the nature of future pensions was predicted as follows:

Sebastián Piñera, brother of José Piñera and later President of Chile, said during the presidential campaign 2005/2006:

" Chile's social security system needs a radical reform in all areas, since one half of the Chileans have no pension, and 40% of the other, it is difficult to achieve even the conditions for the minimum pension. This must now be addressed, and we agree with Michelle Bachelet and will, I hope, to work together to tackle this. "

Macro data

The Chileans pay an annual fees of about 3.5 % of gross domestic product in the private pension funds. The pension payments from the pension funds are still relatively low, as yet have reached retirement age a few depositors. The private pension funds have accumulated up to 2008 capital amounting to 52.77 % of gross domestic product.

International significance of the Chilean pension reform

Ripple effect in other South American countries

The Chilean pension reform was strong internationally observed and served some countries as a model. Bolivia, Mexico, El Salvador and the Dominican Republic have pension reforms carried out, which closely followed the presentation of the Chilean model; in particular, there was also a full transition to the funded system. Colombia and Peru led private pension funds only as a voluntary alternative to PAYG. Argentina, Uruguay and Costa Rica introduced a mixed system of PAYG and private pension funds. In Argentina and Peru took place in 2007, however, a partial retreat from the reforms. It there laws have been enacted that allow contributors to return in the publicly - managed PAYG legally.

Aspect of the aggregate saving rate

Since 1985, the Chilean national saving has risen sharply. It more investments were made, and Chile became independent of foreign loans. The increase in the aggregate saving rate has been interpreted by some economists as a direct result of the introduction of the funded system and recommended the Chilean pension reform as a model.

In other countries, then a funded system has also been introduced with the aim to increase the overall savings ratio and thereby stimulate higher economic growth. However, a slight increase in the aggregate saving rate could only be observed in time coincidence with the pension reform in Peru. In Argentina, arose in the course of pension reform, no change in the savings rate. In Colombia and Mexico, the national saving rate declined after the introduction of the funded system back even.

The relationship between the macroeconomic savings rate in Chile and the conversion of the Chilean pension system to the funded system is now being debated again in the economics debate. It is noted that e.g. payments into the pension fund amounted in 1988 to 2.7% of gross national product, which private savings has increased accordingly. At the same time, the conversion costs amounted to approximately 4% of gross domestic product, what the public saving has correspondingly reduced. In sum, the conversion of the pension system was contrary to initial assumptions not positive, but a negative impact on the Chilean savings rate.

Peter R. Orszag and Joseph E. Stiglitz come to the conclusion that the introduction of a funded system in itself has no macroeconomic impact. The introduction of a funded system does not, for example, then an increase in the aggregate saving rate, when the citizens have saved up a similarly large sum without this pension reform in a different way (ie, if the pension savings replace other forms of capital investment only ). Likewise is the case when the citizens or the state taking on more debt in the pension change to the extent that such a capital stock is built up in the accumulation phase. So it does not matter how a pension system is organized, the funding process may be introduced for public pension schemes as well as for private pensions. Furthermore, the fact of the introduction of a funded system in itself does not lead alone to an increase in aggregate savings rate, this depends on the further behavior of citizens and the state. Against this background, it should be noted that were carried out in Chile in the 1980s in other sectors of the economy reforms, which led to a maturation of the Chilean capital market and to increase confidence in the institutions of the Chilean capital market and an increase in savings and investment readiness have.

Pension reform in 2008

Under the Bachelet government, the pension system was reformed again in 2008. As the two main problems tackled ligands called Andrés Velasco, the leading economic adviser to the Bachelet government, the security of the population and administrative costs. Too many people are outside of the pension system, and capital formation using the pension fund is quite expensive. The reform follows a recommendation of the World Bank, which has seen the 1980 pension system a strong redistributive component at the expense of low or irregular earning workers. Much of the Chilean population was therefore cut off from the pension, because the Chilean labor market many workers does not allow regular and high payment of pension contributions. Many workers have therefore difficulties to come to the 20 years of contributions, to achieve at least the (state spiked ) minimum pension. Since the pension funds charge high fixed administrative costs per policyholder and only a small portion of administrative expenses depends on the amount of managed capital account, the Chilean private pension fund for workers with lower incomes represent himself in the case of gapless contributions as very unprofitable and inadequate retirement provision Investment therefore, the world Bank recommended the minimum pension and the pension Funds Asistenciales ( Pasi ) be abolished and instead introduce a solidary basic security, which is only topped by the private pension funds.

The reform includes the following main points:

  • The minimum pension and the Pension Funds Asistenciales ( Pasi ) were replaced by a tax-financed solidarity Pension System (SPS). This is all legal residents who are older than 65 years, since at least 20 years of age live in Chile and below their private pension claims a certain level.
  • The unfavorable treatment of women was somewhat mitigated.
  • The legally defined framework within which the pension fund investments are allowed, has been extended.
  • Within a transitional period until 2015, self-employed are included in the pension system.
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