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Chile’s Snowballing Government: State-Run Retirement Here We Come

By: Belén Marty - @belenmarty - Jun 19, 2014, 9:22 am

EspañolOn Wednesday, June 18, Michelle Bachelet hit the 100th day of her presidency with 92 percent of her campaign promises fulfilled. The latest, and perhaps most controversial, is an attempt to create a government-controlled Pension Fund Administration (AFP).

This initiative, signed and sent to Congress on Monday, is one of many profound changes proposed by Bachelet and an example of the ongoing debate in Chile regarding the country’s economic model of development and role of government.

Reforming the pension system, currently run by private entities, is one of the 56 policy changes Bachelet promised to deliver during her first 100 days in office. The proposal aims to improve the Chilean pension system for people working in dangerous environments and the self-employed.

“The idea is to expand the system and extend coverage to women, the self-employed, and those living in outermost regions of the country,” said the president during the signing of the initiative in the Palacio de la Moneda.

As for the AFP, it will operate as a corporation and will be funded initially with capital from the Corporation for the Promotion of Production (CORFO). The CORFO will provide 99 percent of its funding, while the remaining 1 percent will be supplied by the Chilean treasury. The AFP will be led by a seven-member board of directors, three members appointed directly by Bachelet and the other four proposed by CORFO.

Bachelet expects the state-run AFP to gain higher returns and charge lower commissions than its future competitors. This will allow for an increase in pension payments for low-income retirees that currently receive CL$180,000 (US$335) a month on average, less than the minimum monthly salary (US$381).

The state-run company will be allowed to invest in public companies and will compete in the marketplace without privileges.

Isabel Allende, president of the Senate, socialist, and daughter of former President Salvador Allende, expressed her support for Bachelet’s proposal. “We have a pretty dramatic situation. We all know pensions are much too low, and the difficulties people have in living a dignified life after they retire. We will need many other policy changes, because this proposal simply aims to boost competition, to implement best practices, to lower commissions, and to make life easier for those living in more remote communities. But is not the definitive solution, and we all know that,” she said.

For Minister of Labor Javiera Blanco, this proposal shows the government’s commitment to provide decent and fair pensions for all retired workers, including workers who have been marginalized by private pension funds in their attempt to achieve higher returns.

Robert Funk, director of the Center for the Study of Public Opinion at the University of Chile, said that the reforms carried out by the president are important changes, but do not imply a radical shift. “These reforms don’t change the foundation of the system. The creation of the state-owned AFP won’t change that, because it will operate just like any other AFP,” the academic told La Tercera, to highlight that the state-owned AFP will compete on an equal footing with its counterparts already in the market.

Criticism of the Government’s AFP

Felipe de Mussy, of the Independent Democratic Union (UDI), said that a state-owned AFP will not guarantee Chileans enjoy higher pensions.

“This project will not improve the pension system, because it doesn’t introduce more competition. We don’t believe that a state enterprise is the solution for increasing pensions. On the contrary, it will become in a sink hole for millions of dollars and will do nothing in terms of solving the pension issue in Chile,” said De Mussy.

Rodrigo Pérez Mackenna, current president of the Association of AFPs and former housing minister under President Sebastián Piñera, said the industry is not afraid of competition, but that this proposal generates certain “concerns.”

“The industry values and favors competition. In fact, the AFPs compete in terms of quality of service, in taking good care of pensioners and members, and investing in better returns and fees,” said Mckenna.

Translated by Alan Furth.

Belén Marty Belén Marty

Belén Marty is the Libertarian Latina, a journalist based in Buenos Aires, Argentina. She has lived in Guatemala, Jordan, the United Arab Emirates, and the United States and is a former candidate for local office with Argentina's Libertarian Party. Follow @BelenMarty.