Reportaje The Finantial Times, 13.09.2016 Benedict Mander
Private system created when country was a free-market laboratory is paying meagre retirement income
The man who masterminded Chile’s world-famous privatised pension system still calls it the “Mercedes-Benz” of retirement systems, but that has proved an enraging comparison when the average pensioner is eking out an income that turned out to be less than the minimum wage.
José Piñera created the scheme as social security minister 35 years ago when Chile, under the military dictatorship of Augusto Pinochet, was the world’s free-market laboratory. His recent defence, attacked as arrogant and elitist, only fuelled the anger of protesters who have taken to the streets to demand the system’s reform — or even its abolition.
For many years, institutions like the World Bank held up Chile’s defined-contributions pension system as an example to follow, and it has been copied by more than 30 countries across Latin America, Southeast Asia and Eastern Europe, but its legitimacy is in question, and President Michelle Bachelet is promising reforms to try to shore up the system.
“The World Bank is terrified that the Chilean model will fail,” says David Blake, a pensions expert at the Cass Business School in London.
David Bravo, who led a presidential commission on pensions reform last year, says it is a matter of “perfecting” the existing system. “Under Pinochet, Chile went from one extreme to the other. Now we are seeking something a bit more balanced,” he explains.
Pensions saving was privatised in 1981, when Chile was one of Latin America’s poorest countries and shunned by foreign investors, and the new scheme replaced a failing state-funded pay-as-you-go system. By requiring employees to set aside 10 per cent of their income, it provided a huge boost for savings, investment, employment and growth.
In particular, Chile’s nascent capital market roared to life, and pension funds now exceed $170bn, or around 70 per cent of GDP. This played a key role in turning Chile into the richest country in the region, lifting millions out of poverty.
The problem is that most are not saving enough. The 10 per cent of pay that is sent to individual savings accounts is about half the total put into pension schemes in developed countries, according to Mr Bravo. The average monthly benefit is about $300, less than earnings from a minimum wage job. The problem is made worse because many people have made only inconsistent payments and there is a large informal economy. Women are especially hard hit.
Many also complain that a lack of competition has allowed the private companies, known as AFPs, that manage the pension funds to earn disproportionately high fees. Investment returns have averaged more than 8 per cent since the system was founded but after commissions, net returns are closer to 3 per cent, according to Mr Bravo’s commission report.
“Initially the Chilean model appeared to be very successful, but the sting in the tail appears to be that charges extracted by the industry have resulted in pensions being much lower than otherwise would be the case,” said Mr Blake.
Ms Bachelet implemented a first round of pension reforms in 2008 during her first term, moving towards a mixed public-private system by introducing a tax-funded “solidarity” scheme that supplemented the pensions of the lowest income workers.
The reforms under discussion now go further. They include requiring companies to contribute 5 per cent of workers’ pay to the solidarity fund, the introduction of a state-run AFP to increase competition, and measures to keep fund managers’ commissions under control.
If Chile’s reforms are successful, countries that face pensions shortfalls thanks to ageing populations and historically low bond yields will continue to look to the country as an example.
Unlike many other countries where governments have racked up enormous debts to pay promised pensions to public employees, that debt does not exist in Chile. The onus of saving has been transferred to individuals, says Jonathan Callund, a pensions policy consultant based in Santiago.
“Pensions may be in crisis worldwide, but one place where they are not is Chile,” he says, arguing the system is “far from broken”, even if it may need some “tightening”.
Whether or not significant reforms are approved by congress before presidential elections next year remains to be seen. The current proposals could add around $1.5bn, or 0.5 per cent of GDP, to the fiscal burden of a government that is already suffering from the end of the commodity boom.
Ms Bachelet’s political capital is also at historic lows — her approval ratings have sunk to just 15 per cent — making negotiations in her divided coalition complex.
Although political analysts say it is unlikely that Chile will cave in to the demands of street protesters and follow in the footsteps of countries like Argentina, which nationalised private pension fund managers in 2008, Mr Bravo fears “populist” solutions.
“The big risk is that pensions become a campaign issue as presidential elections approach, and the discussion becomes polarised and reduced to slogans,” said Mr Bravo. “That’s dangerous.”