How Chile’s Government Aims to Overhaul Country’s Aging Pension System

In an interview with Bloomberg Línea, Labor Minister Jeannette Jara talks about the proposed bill that aims to bring the country’s pension system in line with OECD recommendations

Chile's government will present a pension reform to Congress
October 17, 2022 | 07:05 PM

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Santiago — Chile is preparing to discuss a reform of its current pension system as President Gabriel Boric’s government will present to a proposal to Congress that aims to modify the country’s pension model.

“It is very important to produce a change that will allow us to get out of this corner,” Labor Minister Jeannette Jara Román said in an interview with Bloomberg Línea from her office in downtown Santiago .

Pension fund administrators (called AFPs for their Spanish acronym) have been the vehicles that manage pensions in the country since 1981, but the scheme has been brought into question in recent years.

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Improved pensions were one of the main demands of the social unrest that broke out in the country on October 18, 2019, and in the second term of former president Michelle Bachelet’s administration, a in which Jara was undersecretary for social welfare, a social movement calling itself “No more AFP” had emerged.

“Older adults have been left to their own devices, having to resolve their incomes during old age. This situation becomes unsustainable, not only for the economy of each one of these pensioners, but also socially and, in addition, it cracks the social cohesion,” Jara said.

Photo: Chilean Labor Ministrydfd

The proposed pension reform plans to make improvements to “the non-contributory pillar” and “will converge toward a mixed system in order to get the country out of the extreme situation in which it finds itself”, she says.

The intention of the government is to get the country’s pension system in line with the average of the countries of the Organization for Economic Cooperation and Development (OECD) which, together with having an individual and private savings pillar, have public and solidarity systems.

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“This with the understanding that social security is a human right,” Jara said.

The political moment

The government had planned to present its project prior to the constitutional plebiscite on September 4, but postponed the plans to October, Jara explains.

“It made a lot of sense for us to separate such an important reform, which is going to govern several years of Chile’s social security history, from an electoral cycle. In a plebiscite, more divergent opinions are strengthened. We wanted to have a dialogue that would allow us to de-anchor this discussion, which is going to take place now, with respect to the political moment”, Jara says.

Following the rejection of the proposed Constitution drafted by the constitutional convention by 61% of the electorate on September 4, Jara says the government continued to talking to a variety of figures, and particularly in Congress, where the government does not have a majority.

“This is very important, because in order to consolidate this bill, majorities are required, and building majorities requires political dialogue”, she adds.

She explains that the pension savings of workers with individual funds continue under the same regime and “will not be touched, they are their private property and there is not, there was not, and there will not be any intention to expropriate them”.

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She recalled that during the campaign prior to the plebiscite, false rumors to that end were spread.

Jara affirms that there are different visions in the legislature regarding the proposed pension reform, but she believes that they will be able to reach an agreement.

“We all know that we must improve [the pension system], and to continue repeating the recipe of the last 40 years is to continue to starve pensioners, so we cannot solve it that way. The AFP system has already failed to pay good pensions. We have to change it, and for that we need to bring mixed pension systems to Chile”.

The following conversation has been edited for length and clarity:

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Bloomberg Línea: What will you do differently compared to previous governments to advance the reform?

Jeanette Jara: The proposal includes part of the previous experiences. It does not start from scratch, but takes into account what has been done by previous presidential advisory commissions, such as the Bravo Commission, as well as elements of the projects of the two former presidents [Bachelet and Sebastián Piñera], such as employers’ contributions.

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Nobody in Chile has any doubt today about the need for a pension reform. Something that eight or 10 years ago could have had a certain level of divergence in opinions, today is an evident truth.

We are going to propose to Congress a reform proposal with moderate, mixed and technically very robust signals, and which produces a concrete effect: to improve pensions as soon as the proposal is approved. It is an important material improvement, which is produced both through the non-contributory pillar, through the universal guaranteed pension; but also through the contributory pillar, and with a special focus on women.

What will be the role of the AFPs, according to the project to be submitted to Congress?

There will be other public and private pension fund investment managers, where people will be able to exercise their right to freedom of choice, which is an important citizen demand. In the new pension system, people will be able to choose between public and private entities for the investment of their funds, without being obliged to opt only for the AFPs.

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Could that have any impact on the markets?

All this will be applied in a transitional, gradual and responsible manner to cushion any other undesirable externalities.

Would the AFPs have to be transformed?

Like any other company that meets the requirements for managing private investment funds, and that complies with the requirements established by law.

Pensioners need a pension reform, and this proposal can only bring good news. If we do not reach agreements, we will remain in the situation we are in. But if we reach an agreement, the pensions of current retirees will improve and that is extremely important for Chilean society.

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There is concern in the mining sector about the royalties proposed in the tax reform. Could this have a negative impact on employment?

For some sectors in our country, when it comes to advancing both labor rights and tax reforms of a more progressive nature, there is some resistance. In the legislative work, carried out by the Ministry of Finance, all the elements related to investment and employment, which are a priority for the government, are taken into account.

In another area of public policies, the budget for 2023 has three guiding principles, one of them being looking after jobs, and people’s income. Like the rest of the world, Chile has experienced the process of the rising costs of living, and this is very worrying in a society where there are many people who are earning the minimum wage or close to it, with a very inequitable wage structure, and many pensioners who earned below the minimum wage.

Another project under discussion is the shortening of the working day. Could it affect the productivity of companies?

We hope that it will be an opportunity for companies to make a leap in terms of production processes. Chile’s productivity has been stagnant for more than 10 years.

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The proposals related to innovation, training, research, digitization; will also contribute to new productive processes.

The reduction of the working day will take place in five years, in three stages.

In the face of a recession, what is the government doing to protect employment?

Since the end of the health and social crisis caused by the Covid-19 pandemic, Chile has experienced a cooling process in its economy, which was necessary. Today we have mechanisms in place that promote formality in employment and hiring, which was implemented as a state policy because it passed from one government to another. We have subsidies, and now within the pension reform project there will be a subsidy for the pension gaps due to unemployment, which will mainly benefit women.

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These are labor instruments. An investment plan was also presented by the ministries of finance and economy which, among other elements, seeks to reduce bureaucracy.

When do you expect Chile to recover pre-pandemic employment levels?

This will depend a lot on the strength of the investment projects that we are pushing with the productivity agenda, which will also be presented in the next few days.