Chile’s pension withdrawal law could expose extent of social security deficit

. Aug 04, 2020

Congress allowed Chileans to make withdrawals from individual pension funds as an emergency measure during the Covid-19 pandemic. This could spell trouble for the Piñera government. With over 360,000 confirmed cases and pushing 10,000 Covid-19 deaths, Chile has the eighth highest infection tally in the world, despite having only the 63rd highest population. In response, Congress approved a law allowing citizens to make a 10 percent withdrawal from their individual pension funds, called Pension Fund Administrators (AFPs).

</p> <p>The move was pushed through without the consent of right-wing President Sebastián Piñera, but was supported by the majority of Chile&#8217;s lower house, in response to the severe economic crisis on the horizon, partly caused by the Covid-19 pandemic. In 2020 alone, the country&#8217;s own forecasts have Chile&#8217;s GDP falling 7.5 percent, which would be its worst result in 35 years.</p> <p>Beyond causing another headache to Mr. Piñera only three months before Chile goes to the polls for a referendum on opening a new constituent assembly, the government fears that opening up the <a href="">Pandora&#8217;s box</a> that is the country&#8217;s AFP pension system could reveal the extent of the social security deficit — one of the main point of contention sparking 2019 <a href="">street protests</a> against inequality.</p> <p>Over 10.9 million Chilean workers will be able to withdraw between CLP 1 million to 4.3 million (USD 1,250 to 5,400) from their individual pension funds. The government estimates an average withdrawal of CLP 1.2 million as a result of the measure.</p> <p>This move comes close to the 40th anniversary of Chile&#8217;s private pension system, which has become fraught with criticism in recent years. Social security as a whole ammasses up to USD 200 billion, representing almost 80 percent of the country&#8217;s GDP. However, that wealth is not being passed on to the population. In June, pensioners received an average of CLP 195,000, nearly 40 percent less than the national minimum wage of CLP 320,000.</p> <figure class="wp-block-image size-large"><img loading="lazy" width="660" height="400" src="" alt="Withdrawal" class="wp-image-45655" srcset=" 660w, 300w, 610w" sizes="(max-width: 660px) 100vw, 660px" /></figure> <p>The measly payments for retired Chileans helped cause national riots in 2019, something the government puts down to the country&#8217;s ageing population. At the beginning of the pay-as-you-go AFP pension system, brought in under hard-right dictator Augusto Pinochet, Chilean life expectancy was around 62 years old. In 2017, it reached 80 years. According to the Organization for Economic Co-operation and Development (OECD), the &#8216;demographic dependency ratio&#8217; of senior citizens — the rate of over 65 individuals for every 100 citizens of working age — will jump from 17 to 43 percent in 2050.&nbsp;</p> <h2><strong>Inequality, a legacy of the dictatorship</strong></h2> <p>Regardless, the fact that Chileans are living longer does not fully explain the massive social security deficit in the country. While the country&#8217;s economy appears to have been performing well on the surface, it is plagued by high levels of inequality. While there was stable inflation, modest GDP growth and low crime figures in 2019, the Gini coefficient shows Chile is the third most unequal nation out of OECD members.</p> <p>But the current problem comes from a simple equation. The private pension model establishes that each Chilean should deposit 10 percent of their salary in individual accounts, which would be managed by private companies and funds. These companies would then invest the money, so that it accrues value over time, or such was the intention.&nbsp;</p> <p>However, with economic fluctuations, market volatility and episodes of economic crisis since the 1970s, Chileans often do not get back what they have paid in. In addition to the wait to see their hard-earned money again, they also have to hope for a favorable economic outlook and a profitable investment. Simply putting money aside for retirement is not enough.</p> <p>The private pension system was established in 1981, during arguably the bloodiest chapter in Chile&#8217;s history, as the country was ruled by the brutal Pinochet dictatorship. The economists involved in creating the plan claimed they were unaware of the repression going on “outside the office,&#8221; while some claim the violence was the price to be paid for Chile to achieve its so-called &#8220;economic miracle,&#8221; which has left a legacy of inequality and poverty among some of the country&#8217;s most vulnerable populations.</p> <p>And despite all those mismatches, no democratic government since 1990 has had enough power to change the AFP system.</p> <h2><strong>Piñera must remain alert</strong></h2> <p>After falling to paltry approval ratings of just 9 percent back in January — as a residual effect of Chile&#8217;s 2019 anti-government anti-inequality protests — President Piñera had hoped that an efficient administration in combating the Covid-19 pandemic would save his popularity and allow him to finish his term.</p> <p>The reality has not been so clear cut, however. While managing to bump his approval ratings up to 29 percent in May, the capital city of Santiago has recorded a new increase in Covid-19 cases. Also, controversy around the proper reporting of cases and deaths led to the resignation of Health Minister Jaime Manalich. Suddenly, Sebastián Piñera is <a href="">in hot water again</a>. Now, this new law could cause him to sink further.

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Lucas Berti

Lucas Berti covers international affairs — specialized in Latin American politics and markets. He has been published by Opera Mundi, Revista VIP, and The Intercept Brasil, among others.

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