Boric intends to impose an aggressive reform to the pension system of Chileans

By Daniela Carrasco*

Late Wednesday night, the President of Chile, Gabriel Boric, announced the Pension Reform, one of his campaign promises, to eliminate one of the institutional pillars of the Chilean “model”.

Therefore, according to the president, “the AFPs, in this reform, are finished”. However, numerous transversal criticisms have been raised against this initiative.

The pro-amplista Government had hoped that the proposed Constitution to end the AFP pension system would be approved. Still, since it was overwhelmingly rejected in the exit plebiscite, it announced this reform, which should enter the Chilean Congress next week as a bill.

Under the current system, workers must allocate 10% of their income to an individual savings fund, which is managed by highly regulated private entities called Pension Fund Administrators (AFP), plus a commission charged by each of these entities, which ranges between 0.58% and 1.45% of the total remuneration.

On the other hand, the proposal of Gabriel Boric’s Government seeks to increase contributions by 6% and thus create a “mixed” system.

That 6% would not go to the current individual accounts and would be used by a state entity in charge of “investing” it.

In particular, 70% of this new contribution would be allocated to a “notional” individual account and 30% to a solidarity pay-as-you-go fund.

HISTORY OF THE AFPs

Pension Fund Administrators (AFP) are institutions that manage pensions based on individual savings accounts, which are invested, generating individual capitalization.

They emerged during the Military Regime (1980). They replaced the pay-as-you-go system of the “Cajas de Previsión”, in which each person was associated with the one that corresponded to them according to their work.

However, this meant that the unions or groups that put the most pressure on their Pension Funds would be the ones to obtain the best negotiations for their retirement.

Although in 1980, contributors were allowed to choose whether to remain in the system or upgrade to the AFP, in 1982, all new contributors had to join the new individually funded system.

This process co-occurred as Chileans became more bankable and experienced social mobility.

Then, a modification was made during the Government of former President Ricardo Lagos. The AFPs began to be composed of five multi funds, which have different investment risks and, therefore, other returns, in which each contributor has the option to choose: from fund A (being the riskiest in the investment limit) to fund E (the least risky).

Subsequently, in her first Government, Michelle Bachelet made a reform and created a solidarity pillar complementary to the current AFP system for those who did not contribute for different reasons.

Likewise, APVs (Voluntary Pension Savings) were created to increase retirement.

In January of this year, when Sebastián Piñera was still president, the “PGU” (Universal Guaranteed Pension) was approved, replacing the Solidarity Pillar.

At this point, Chile has a mixed pension system based on individual capitalization.

Likewise, after its various indicators of success, the AFP model has been exported to different countries with very different realities and political systems, such as Australia and Peru.

THE DESTRUCTION OF THE MODEL

After the student mobilizations of 2011 -the time when Boric, Camila Vallejo, Giorgio Jackson, and Karol Cariola, among others, the emerged-another movement appeared under the name “No + AFP”, led by its spokesman Luis Mesina (who was a militant of the Socialist Party).

Thus, little by little, the idea was installed that it is necessary to eliminate the AFPs because they are one of the pillars of the Chilean “model” -established in the Military Regime-which would generate inequalities, gaps, and, therefore, discomfort.

In other words, instead of improving the system, the aim is to destroy it for ideological reasons.

On Oct. 18, amid anomie and while different actors were disputing the empty signifier of “dignity”, voices were raised calling for “decent pensions”.

This would be achieved by re-founding the model and changing the Constitution and all the pillars of the institutional order, such as the PFAs.

Then, in the middle of the pandemic, but with a conflict expressed in all political dimensions, different populist voices pushed the idea of early withdrawals of the money in the AFP accounts.

The supposed reason? The pandemic left many people without work, the State did not meet urgent needs, and Chileans had needs in a delicate period.

But other voices were more explicit, such as the leftist congresswoman Pamela Jiles, revealing the real intention, said that it was “time to give a coup de grâce to the AFPs”.

Thus, during the pandemic, three withdrawals of 10% were made from pension savings accounts, and other initiatives along the same lines have been installed but have been rejected.

All in all, these measures have affected the future pensions of Chileans.

On the other hand, we should not forget the threat that arose in the constituent process, which threatened the ownership of pension savings and their inheritability.

The initiative “With my money No”, which arose during the constituent process, obtained the most significant number of citizen signatures to be presented and heard by the former Constitutional Convention.

However, this initiative was rejected by the constituents, who refused to discuss it, generating a great scandal at the national level.

Former Constitutional Convention member Daniel Stingo stated that “it is not your platita”, confirming the legitimate concern of Chileans about the future of their pensions.

THE CURRENT PROPOSAL

It is necessary to emphasize that the Government intended to carry out this pension reform once the proposal for the new Constitution was approved, a situation that did not occur.

Therefore, Boric had to present this reform, which will be discussed in Congress, to leave behind the AFP system and install a “mixed” system, which will increase the collection by 6%, a percentage that the State itself will administer.

It would be implemented within 24 months, that is, by the end of 2024.

Among the axes of the reform, it is worth mentioning that the 6% increase in the contribution would go to a common fund under the euphemism of a “notional” account, i.e., it is an individual fictional account on which a projection of income is made, but it does not materially exist since that money is destined to other purposes, such as increasing current pensions or other “investments”.

In addition, the creation of a state institution that will be in charge of collecting this new contribution and administering it in a discretionary manner, without having a savings or capitalization mentality, leaving the door open for these funds to be used according to political considerations.

This 6% will be, according to the law, a charge to the worker which, although in time it will indeed end up becoming just another tax on labor, has an initial devastating effect on the flows of companies, which will have difficult decisions to make when these measures come into force.

On the other hand, the current and future funds coming from the recent 10% contribution would cease to be managed by the AFPs, giving way to new private administrators that will have to compete with a public administrator.

Given the above, after the presidential announcement, criticisms were quickly made since, in a scenario of uncertainty, in which the economy is in stagflation, September had a negative growth, added to the announcement of the Tax Reform in July of this year -which does not seek to increase investment or the creation of wealth, but quite the opposite-, clearly this type of measures do not help the current situation of Chileans.

The statements are varied.

They range from “it is a step backward”, that “it ignores the changes in the labor market,” to “the Government is not listening to the workers, very similar to the Convention”.

If the aim is really to increase and improve the pensions of Chileans, other strategies could work, even though they are not popular. Such as raising the retirement age has been empirically demonstrated to achieve this objective.

Finally, we must bear in mind that today, the Chilean State is led by the Government of Gabriel Boric, which has shown fiscal inefficiency, has not stopped bad practices it has deepened them- and has increased by 8,200 fiscal employees from March to October.

Therefore, we must be cautious about announcements that promise a lot but, in reality, represent a significant threat to the future of Chileans.

* Chilean political scientist and candidate for a Master’s degree in Political Communication. Researcher at the Jaime Guzmán Foundation and university professor.

With information from Gaceta