Pensions in Chile

Many critics and supporters see the reform as an important experiment under real conditions, that may give conclusions about the impact of the full conversion of a PAYGO-system to a capital funded system.

The poor payment record is attributed primarily to the fact that individual contributions had little correlation with anticipated pension benefits.

[1] On November 4, 1980, under the leadership of José Piñera, Secretary of Labor and Pensions under dictator Augusto Pinochet with the collaboration of his team of Chicago Boys, the PAYGO pension system was changed to a capital funded system run by investment funds.

[4] However, differently from what a regular, society-wide, PAYGO system would operate, military pensions go to a small section of the population and are financed by all of the taxpayers in the country.

[5] The Chilean workers yearly contributions in the private pension fund are amounting to about 3.5% of gross domestic product.

But there a two-year obligation for a new affiliated to be included in a single fund, selected by public bidding, based in the level of administrative costs.

[15] The amount of administrative costs was considered a problem of the Chilean pension system but have decreased significantly going from 15% in 1983 to 1,8% in 1993 of accumulated assets.

Andras Uthoff, the director of the Social Development Division of the United Nations Economic Commission for Latin America (ECLAC) states that the reformed Chilean pension system does not work with the reformed Chilean labor market because only a small percentage of workers are able to finance meaningful pensions.

According to the projection of Berstein, Larrain and Pino Rios from the year 2005 (based on data from the period 1981 - 2003) the kind of pensions to expect are predicted as following:[20] Sebastián Piñera, the brother of José Piñera and later president of Chile, said during the presidential candidacy in 2006: Chile's social security system requires deep reforms in all sectors, because half of Chileans have no pension coverage, and of those who do, 40 percent are going to find it hard to reach the minimum level.

Andrés Velasco, the leading economic adviser to the government, addressed the two main problems as the coverage of the population and the amount of the administrative costs.

A big part of the Chilean population is not able to finance meaningful pensions, because many workers are not able to regularly contribute a higher amount of money.

Since the pension funds charge high fixed administrative costs per insured person and only a small portion of the administrative costs depend on the amount of the capital account, capital accumulation by pension funds is very unprofitable for workers with lower incomes.