Chile's Private Pension Plan System Fails to Protect Elderly
By Nathan Gill, Santiago Times
November 30, 2005
Chile's current pension system leaves many of the country's elderly population
without retirement security. Photo by Brad Horrigan
Presidential Candidates Acknowledge The Need For Urgent Reforms
As Chile celebrates the 25th anniversary of its private pension fund administration system (AFPs) this year, the first generation of workers is preparing to cash in on the promise of a retirement free of the haunting specter of poverty.
Still, not everyone is convinced that Chile's workers have benefited from the AFPs, and the four presidential candidates now competing in the Dec. 11 election have given only qualified support to the system. The candidates say the private pension fund system needs to be closely reviewed because many workers receive a paltry sum, while many others - especially housewives and seasonal workers - receive no pension at all.
Since the initiation of the AFPs in 1980, over 6 million people have enrolled in various private plans and monetary reserves have grown to US$68 billion, yet the average payment remains far below the amount necessary to support the average retiree.
For example, in 1994 the average AFP paid US$165 a month with an average of 85,205 people registered in each fund. In 2004, the average monthly payment was US$173 with an average AFP membership of more than 200,000 people in each fund.
To understand why the average pension has not increased commensurate with the increase in contributors, it is necessary to look at the profits that the fund managers are receiving. In 1984, the AFPs brought in approximately US$639,877. In 2004, the funds earned more than US$178.2 million in profits for their owners.
If you compare the minimum wage against the minimum pension, the privatized plans fall short of projected results. In 1979, the minimum pension payout was 60 percent of the minimum wage. Today, the minimum pension is 35 percent of the minimum wage.
The original plan to privatize Chilean pensions was drafted by Jose Piñera in 1980. The government sold the idea to the nation as an effort to give the average worker more individual liberty and control over his or her own future. However, at a presentation commemorating the 25th anniversary of the AFPs, José Piñera said, "the capital system does not promise pensions, it only says that if a person saves, they may be able to obtain this amount of money plus a compounded interest at the time of their retirement."
Under this plan, Chileans would invest their savings in private pension plans managed by large financial institutes with limited government oversight. Security was replaced by opportunity and while not guaranteeing returns, the plans promised a compounded interest rate on individual investments and the possibility of substantial growth of personal savings sufficient to retire comfortably.
According to Mercedes Ezguerra, a member of the State advising committee in 1980, "workers with medium to high incomes should benefit the most from the new program; everyone else should be able to maintain a pension commensurate with the minimum wage."
The Ministry of Labor of that era hailed the plan as a much needed reform to protect the average Chilean from the threat of communism and poverty. "This reform drastically improves the margins of individual liberty; these, together with the participation of the social base and the economic progress, constitute the unbreakable barriers against communism. (The reform) will solve one of the elemental aspirations of all Chilean families, security against old age."
Because Chile was controlled by military dictator Gen. Augusto Pinochet at the time, almost no public debate actually occurred on the proposed plan. Opposing the dictator was dangerous and often resulted in imprisonment, torture, or execution. Even so, some did speak out against the plan, calling it a thinly veiled effort by the financial elite to gain access to new sources of investment capital.
Juan Manuel Sepúlveda, vice-president of the National Union Coordinator, said, "The new funds will simply be administrative investment instruments of a privileged group of business and financial entities that will take control of the average workers' savings."
Sergio Férnandez Aguayo, a former deputy of the Christian Democratic (DC) party, was even more critical, saying "the changes to the current system that the government is pretending to introduce will not benefit the interests of the Chilean worker . It would seem that the system is trying to fortify the private economic concentration instead of creating dynamic social benefits."
Initially, there were government safeguards against this eventuality. Restrictions were imposed prohibiting workers' savings from being used as investment capital in private businesses. However, after the economic and banking crisis of 1983, the military junta authorized pension fund administrators to invest in private companies as a means of stimulating the nation's economy. By the end of 1984, private retirement accounts were in fact being used as an easy source of capital for the nation's largest conglomerates.
One striking example of how Chile's financial elite used the private pension funds for personal gains can be seen in the actions of the plan's creator, Jose Piñera.
Chilectra Metropolitana was a government owned corporation run by Chile's Corporation for the Promotion of Production (CORFO) in 1980. When pensions were first privatized, CORFO sold 21 percent of Chilectra's stock to workers investing in the new retirement accounts. Four years later, the government deregulated the pension funds, restructured Chilectra's administration and left José Piñera and José Yuraszeck, at that time president of Chile's biggest power company, Empresa Nacional de Electricidad (ENDESA), in charge of the company.
Other major players in Chile's AFPs are the Angelini group, controlled by Anacleto Angelini, the richest man in Chile; Entel Chile, a satellite communication company; and CTC, a telecommunications company. Altogether, these and other business conglomerates control US$68 billion coming from over 7 million workers; funds that were initially ear-marked for retirement accounts.