Latin America, awaiting the pension reform that Boric promises

Chile’s private pension model, which recently turned 41, is being strongly questioned, to the point that the president-elect, Gabriel Boric, promised to replace it with a public one, a decision that could generate a “domino effect” in some countries in the region with similar systems.

Implanted by the Augusto Pinochet dictatorship (1973-1990) and devised by one of the outgoing president’s brothers, Sebastián Piñera, the system was a pioneer in the region in establishing individual capitalization.

Boric, who prevailed with a broad victory, promised “decent pensions” during his campaign, something he intends to achieve by ending the controversial Pension Fund Administrators (AFP) and moving towards a public system.

The former student leader, however, has repeatedly explained that it will not “interfere” with the ownership of the funds saved to date and that his proposal “must be open to modifications.”

For Francisco Castañeda, from the Universidad Mayor, Boric’s objective seems “complex” due to the composition of the future Parliament – highly fragmented and without a majority – and his reform could end up not being so ambitious.

What is the Chilean model?

Pensions have been in the ranking of the main concerns of Chileans for years and the total re-founding of the system was one of the main demands of the 2019 protests, the most serious since the return to democracy.

“The AFPs have never provided decent pensions because they were not created for it, but to generate a capital market around the elites,” denounced Mario Villanueva, one of the founders of the No + AFP movement, which has been mobilizing thousands of people in the streets.

In Chile, each formal worker is obliged to contribute 10% of their monthly salary to a personal account that is supervised by the AFPs and which they can use when they retire (60 years for women and 65 years for men).

Currently there are seven AFPs, which obtain millionaire benefits after investing workers’ savings in the markets, which add up to more than US $ 200,000 million, about 8% of Chilean GDP.

The average profitability that the AFPs have provided in these four decades, Villanueva pointed out, “does not reach 5%”, compared to the average profits of 25% they have obtained: “It is a failed system,” he added.

According to the Superintendency of Pensions, the more than 8,000 people who retired in November received on average a monthly pension of US $ 260, a little less than half the minimum wage.

“From the investment point of view, the AFPs have contributed to growth, but the workers have not received what they expected,” explained Castañeda, who pointed out that the system works if you have a stable job and a high income, something unthinkable for the vast majority of Chilean workers.

Germán Vera, from the Universidad de Los Andes, told Efe that part of the responsibility for the AFPs being so unpopular “rests with the architects of the system, who promised replacement rates of 100% to achieve its adoption”, when in today they are around 30%.

The system, however, has undergone reforms in recent years, such as the one promoted in 2008 in the first Government of Michelle Bachelet, who introduced the so-called “Solidarity Pillar”, a type of pension financed by the State and aimed at 60% poorest of the population that had never contributed.

In a historic event, the Chilean Parliament approved in July 2020 the first early withdrawal of 10% of pension funds so that the punished middle class could face the crisis caused by the pandemic in the face of “insufficient” government aid.

Since then, another two withdrawals have already been given the green light and the AFPs have disbursed more than US $ 46.5 billion, which implies a significant decapitalization.

“Domino effect” in the region?

The Chilean model was expanded to other countries in the region, such as Peru, Mexico or Colombia, but it was combined with public systems.

A report by the International Labor Organization (ILO) pointed out in 2018 that 60% of the countries that privatized their pensions reversed the measures, especially after the Great Recession, because the privatization “did not give the expected results.”

“Individual capitalization systems had the positive effect of involving less tax burden in contexts of heavy backpacks of public debt, but now it is imperative that adjustments be made,” said Castañeda.

In Peru, a pioneer in approving early pension withdrawals and workers can choose to contribute to the public system or join an AFP, criticism of individual capitalization is also widespread.

The pandemic also generated more pressure on the AFPs, which disbursed US $ 16.48 billion between 2020 and 2021 in five extraordinary advances, and attacks against the private pension system in Peru are constant during presidential campaigns.

The debate in Colombia is also on the table and a possible contagion of what happens in Chile Much will depend on the outcome of next year’s elections, in which all polls favor leftist Gustavo Petro, who has spoken of reforming the current mixed system.

Boric’s plans may in some way impact the business of Grupo Sura, one of the main financial services conglomerates in Colombia and which controls at least 20% of Chile’s pension funds.

The group, however, denied last weekend that its operation in Chile is at risk: “To date, we are not aware of any decision by the Chilean government in this regard.”

Boric’s proposal has also found an echo in Mexico, where “the Mexican technocracy of Ernesto Zedillo (president from 1994-2000) made an almost tracing copy of the privatization of Augusto Pinochet’s pension system,” said Gustavo Leal, of the National Autonomous University of Mexico (UNAM).

Last January, under the government of Manuel López Obrador, the first reform to the system since 1997 came into force, which seeks to increase the income of retirees by 40%.

For Leal, the reform “is insufficient because it preserves the model that Boric wants to replace”: “In a collusion with the business sector and with an intensely corporate segment of unionism, the president gave at least ten more years of oxygen to the system equivalent to the AFPs ”, he added.

Champions of the public system

Brazil and Argentina are the great defenders of the PAYGO systems in the region.

In the largest Latin American economy, the pension system continues to be public, although there is the possibility that workers voluntarily contribute to private funds to supplement their future income, since the maximum public pension is 6,000 reais (a little more than US $ 1,000).

The Brazilian president, Jair Bolsonaro, proposed in 2019 to create private funds as an alternative to the public system, but Congress rejected it and approved a softer reform, which imposed a minimum retirement age (62 years for women and 65 for men), as well as a minimum contribution of 15 and 20 years, respectively.

In Argentina, a country with recurring periods of high inflation, the system is completely public, but the law establishes that the replacement rate must be 82% and be updated periodically.

This legal imposition has not always been complied with and has sparked conflicts over the decades. Until 2017, the update was biannual and based on a formula determined in equal parts by the variation in tax collection and the variation in wages.

Former governor Mauricio Macri changed the formula (70% inflation and 30% salary variation), but the Alberto Fernández government recovered tax collection and salaries as components of the update.