Civil Society, Development & Aid, Economy & Trade, Headlines, Labour, Latin America & the Caribbean, Population, Poverty & SDGs

CHILE: Pension Reform – Just a Face-Lift, or the Real Thing?

Daniela Estrada

SANTIAGO, Dec 28 2006 (IPS) - Chile’s social security system, one of the jewels in the crown of the dictatorship of the late General Augusto Pinochet, will be fiercely debated in Congress in 2007. But the reform initiative with which President Michelle Bachelet wants to “make history” has already come under fire.

The reform includes 10 major changes, the most significant of which would be the creation of a Basic Solidarity Pension (PBS) for workers unable to save towards their retirement.

The PBS, initially aimed at the poorest 40 percent of the population, will be worth 60,000 pesos (115 dollars) a month in 2008, when the government expects the reforms to be in place, and will rise to 75,000 pesos (142 dollars) in 2009. By 2017 the PBS would be received by the lowest-earning 60 percent of the population.

While the PBS itself was welcomed by all sectors of society, there are already arguments over the adequacy of the initial payments and the year in which they should start.

During her electoral campaign, Bachelet promised to send a draft law to Congress in the second half of 2006 to overhaul the privatised pension system, imposed by decree in 1981 by then dictator Pinochet (1973-1990).

Six days after her inauguration as president on Mar. 11, 2006, Bachelet created the Presidential Advisory Council on Social Security Reform, made up of 15 economists and public policy experts, who received ideas and proposals from dozens of trade union, business, academic and social organisations.

After four months’ work, the Council issued an alarming final report on Jul. 6, which estimated that if present policies were continued, within 20 years only about half of older adults would receive a pension greater than the minimum pension.

The worst-hit would be low-paid workers, temporary workers, the self-employed and a large proportion of women, the report said.

The Council’s recommendations were assessed by an inter-ministerial committee which included the ministries of finance, labour, social security, national women’s service, and general secretariat of the presidency.

Finally, on Dec. 15 Bachelet publicly announced the initiative she is about to send to Congress, which contains close to 80 percent of the recommendations of the Advisory Council, according to the minister of Labour and Social Security, Osvaldo Andrade.

In effect, the Council proposed the introduction of the PBS, but according to its calculations its value should rise to 75,000 pesos (142 dollars) a month only in 2025, so as not to remove the incentive for workers to save. This was changed by Bachelet, who wants people on the lowest incomes to receive this amount in 2009, an election year.

Focusing on the timing, the rightwing opposition called for the PBS to be launched in 2007, to avoid any kind of electoral interference, pointing to the latest corruption scandals involving allegations against members of the Ricardo Lagos administration (2000-2006).

The United Workers’ Federation (CUT), the largest trade union in the country, demanded a higher PBS of 85,000 pesos (160 dollars) a month, and also criticised the retention of the system of individual capitalisation in personal pension accounts, which disregards, for instance, the contributions of employers towards workers’ pensions.

In 1981 Pinochet nearly killed off the traditional solidarity-based system of pension payments by creating private Pension Fund Administrators (AFPs), which invest the contributions of employees and self-employed workers.

The AFPs invest these savings in Chile and abroad, and when their members retire they draw their pensions based on the funds accumulated throughout their working lives.

But the privatisation of the pension system did not quite eliminate the Institute of Social Security Administration (INP), which comprises the old Compensation Funds (Cajas de Compensación) on which 156,000 people still depend.

In addition to the pensions paid out to its members, the INP pays out a minimum pension to the poor, from state funds. If the social security reform is approved, this role would be taken over by the PBS.

Bachelet said on Dec. 15 that this “is a reform of the kind that makes history, that reflects people’s wish for more security in their lives, a security that gives them enough peace of mind to dream of a better future, undertake new initiatives without fear, develop as human beings and live a dignified old age.”

When implemented, the pension reform will cost one percent of gross domestic product (GDP), and will be financed with funds resulting from economic growth and the money liberated from the old system, among other means.

The government plan also provides for the state to pay top-up social security contributions in solidarity with workers who receive a low pension, which will gradually increase, to up to 200,000 pesos (400 dollars) a month over five years.

Furthermore, the proposal includes bonuses for women workers. Twelve social security contributions based on the minimum salary will be paid for every live birth, and homemakers will receive the PBS. A government subsidy will be added to the social security contributions of young workers on low pay.

There will be opportunities for ordinary citizens to participate and have their say, greater coverage for self-employed workers, more competition among AFPs, higher returns on the funds saved, incentives for voluntary pension savings above the obligatory minimum, and fiscal discipline and transparency.

The AFPs have criticised the proposal to put the portfolio of new pension scheme members out to tender every year, meaning that young people starting out on their working life will be assigned to the Administrator offering the best terms, and the lowest commission.

The AFPs are also concerned about the plans to involve new financial institutions, such as banks and insurance companies, which will be able to operate their own AFPs affiliated to the pension scheme. The fixed commissions for AFPs, which are at present discounted from workers’ salaries, will be eliminated, and this also displeases the AFPs.

However, the AFPs appreciate the potential to increase their investments abroad. At present there is a limit on foreign investment of 30 percent of the total, but this is set to gradually increase to 80 percent.

The two rightwing opposition parties and the AFP Association have asked the government to split the draft law into two parts, so that the measures that enjoy broad acceptance can be discussed first, and the more controversial ones are debated later. This idea was called “ridiculous” by the Minister Secretary General of the Presidency, Paulina Veloso.

“This is a tremendous opportunity for the AFPs to legitimise their operations and improve their own management. I am not afraid of the AFP lobby, because I don’t believe that they will make the historic mistake of maintaining their image as imposed, illegitimate institutions,” Labour Minister Andrade told the La Tercera newspaper.

However, the CUT complained that “the initiative leaves the AFP system intact: a group of private companies, most of them transnational corporations, taking advantage of their position as a monopoly, make millions in profits using workers’ savings, and accumulate economic power of such magnitude that they end up defining political decisions.”

For its part, the Centre for National Studies on Alternative Development (CENDA) said that this is only a “half-hearted” reform, as “the state will continue to pay the pensions of poor people, the middle sectors will remain at the mercy of the AFPs, with uncertain pensions that are lower than they were under the old system, and the big financial conglomerates will continue to rake in the obligatory savings of the Chilean people.”

The administration foresees arduous debates in Congress during 2007, and approval of the draft law by the first half of 2008 at the latest.

The head of the non-governmental Labour Economy Programme (PET), Carmen Espinoza, told IPS that “the 10 changes proposed by Bachelet have very attractive and eye-catching titles, but when you read the small print it turns out to be a weak reform and not a very hopeful one.”

The lawyer predicted a “difficult, complex debate” with social and union organisations that are well-informed and fighting for an old age with real dignity, but she feared that the eventual outcome would be the approval of “small reforms that only benefit the AFP industry.”

In Chile, men retire at the age of 65 and women at 60. Today, there are nearly two million people aged over 60, equivalent to less than 12 percent of the total population of nearly 16 million. By 2020 it is estimated there will be over three million people in that age group, or 17 percent of the population, and forecasts for 2025 indicate there will be 5.7 million people over 60, equivalent to 28 percent of the total.