Eps 2: The Chilean Pension System and its benefits
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Leon Knight
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Many critics and advocates see the reform as an important real-world experiment that could provide a better understanding of the benefits of a fully capital-funded system. The Government has also made significant concessions to critics of its proposal by building up a pool of private individual pension savings for private pension funds.
From a wage-earner's perspective, the new system offers a better understanding of what pension they can actually expect in retirement. Chilean workers have been led to demand nationalization of the system, fearing that the meagre pension benefits will drive people into poverty after retirement. This amendment includes calls for tenders to close the existing pension fund managers . This has been controversial to say the least and a major blow to the country's pension system.
The main problem is that about 40 percent of Chilean workers are not in the system and do not pay contributions to AFP or anywhere else. This means that half of Chile's low-paid workers do not benefit fully from employer pensions, which is most common in the poorest sections of the population.
Last year, hundreds of thousands of Chileans took to the streets in Santiago to protest the failure of Chile's privatized pension system.
The reformers they created promised that everyone would get a 70% income replacement in retirement, but the reality is closer to 38%. When the first workers to join the scheme's individual private accounts retired, they realised that they were retiring at a much lower pension level than their employer's income.
The traditional system provides pension benefits to at least two-thirds of the working population, but the average monthly pension benefit is a paltry $400, and many workers have only a sufficient income to fund a dignified retirement. When private pension accounts were introduced, workers who were covered by the traditional pension scheme were given the opportunity to join the new scheme. But they did not, partly because of a lack of confidence in the system's benefits. The new systems also face serious challenges, as low-income workers retire, owing to a combination of low wages, high interest rates and high cost of living.
The Pinera Pension Plan was created and established on 1 May 1981 and is known as a private pension account managed by private investment firms. Since 1982, all workers' wages have been paid into private pension accounts, but the self-employed have volunteered to contribute. Almost the entire workforce participates in their careers by participating in managed investments, with the exception of a small number of high-income workers.
While the traditional social security model finances current pension benefits from the contributions of current workers, workers "pensions are based on their personal account contributions. Once employees have paid into the account, they have the right to decide what type of investments they want to manage and what type of investments they want to make, including the desired risk. After 20 years of contributions and reaching the minimum retirement age, an employee can take out a pension combination or receive a payout into their account at the end of their career.
This system offers workers advantages based on the individual capitalization of the person. After retirement, a person is entitled to a government bonus of 10% of their annual salary. The bonus is paid as long as it does not exceed ten times the total compulsory contributions of the employee during the year.
Capitalisation will be carried out by the funds of the AFPs, which will invest in their subsidiaries and increase the fund in the future.
Maria Luz Navarrete says she worked as a public servant for three decades, but at 70 had to do side jobs like janitors to make ends meet. Many people in the Andean country cannot pay enough regular contributions to end up receiving sufficient payouts, while Chileans who do informal jobs, such as unemployed women who have no work to raise children, often do not get enough - changed jobs. That means there is a need for local pension funds to invest billions of dollars in investments both in Chile and overseas.
But defenders of the system say it is not just about the pension system, but also the country's aging population and the need for more investment.