The Selfishness of Chile’s Private Pension Fund Reform Movement
EspañolThe forces of the NO + AFP movement — the manifestation of a wave of recent anti-private pension fund sentiment — took to the streets of Santiago earlier this month to demand an end to the pension system, which is based on self-capitalization and has been immoral, unjust and unethical policies.
Protesters and organizers argue individual savings should be divided throughout more of the person’s life, but this reasoning lacks all mathematical logic because it omits compound interest and does not allow us to observe the growth of real savings. In any case, I would like to focus on the reality of the system that operates in Chile and the argument the anti-private pension fund movement is putting forward.
There are basically two pension system models in the world. The first is that the state, through the collection of specific or general taxes, accumulates funds in tax coffers and distributes them to those within retirement age. This works when the workforce is at least double that of the country’s population of retirees.
When it comes to a country that has produced more than it spends for a long time (in essence, when the country is rich), then it can sustain this type of system for longer than a country that is not. But when the workforce begins to equal the population of retirees, few solutions remain because money starts to run out.
In this system, if the person does not invest the minimum of years determined by the system, they lose everything they have invested.
Once retirees begin to increase (which is often the case with developing and developed countries), the funds will no longer reach everyone in the abundance they did before. It is simple math. For the money to last for beneficiaries of the fund, allocations to new beneficiaries must be reduced.
There are not many solutions to this problem. The first is to reduce everyone’s pensions by increasing the chunk of money taken from the workforce by as much as 50 percent. That would still not reach the required amount, but at least the system would last for a longer time. The other solution is to acquire debt so as not to affect pensions and not obtain the money from those who are producing wealth because that would also imply political costs, since the labor force can also pay and will frown upon the reduction of their salary.
The problem is ultimately political, as the elderly vote in higher numbers and thus all but demand politicians favor their preferences. The governments who want to stay in power really only have the second option then: debt.
Though acquiring debt seems to solve an immediate problem, these types of solutions are actually monsters left for the following generation. Then, the next generation will do the same by creating a huge debt that will grow enough to explode on some other generation. Debt is never acquired without consequences and those consequences will be faced only by our children and grandchildren. In this case, not only would debt be inherited but also cause a terrible economic collapse like the one that took place not long ago in Greece.
The rule is simple. If there is nothing, either you wait or you acquire debt to get what you want, but debt always has to be paid back.
The other system is that of self-capitalization, which means that the state does not intervene because it is based on each person’s individual savings in their personal accounts, which are managed by institutions such as AFPs (Pension Fund Administrators) under supervision of the state.
These AFPs take a percentage of the person’s taxable salary and add it to their personal account for investments, which ends up multiplying according to the type of portfolio the user chooses.
When people reach retirement age, the accumulated funds (including everything the private pension fund multiplied) are returned to the user in monthly payments that are calculated by national life expectancy, regardless of how much they invested..
All of the problems in Chile’s system have a solution and they can be gradual if need be, but also effective. The country has to grow. You can not live like you’re rich if you do not produce as such. That’s what the leaders of the NO + AFP movement seem to miss.
They seem to forget that bread for today can be hunger for tomorrow. Those who speak about solidarity with the NO + AFP slogan only prove that their short-term thinking is a sign they are selfishly forgetting about the thousands who will be left in misery.