Eps 3: The Chilean Pension System and its failures
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Angel Sims
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The Wall Street Journal hailed his brother Sebastian, who would later become president, as a "pied piper" for Chile's public pension system. In July, the Chilean public learned that his father, former President Juan Manuel Santos, receives a monthly pension of $7,800 after retiring from public service.
With the average Chilean receiving only a monthly pension of about $300, the scandal served as a boiling point for many Chilean citizens, who had grown weary of perceived corruption in Chile's pension system and immediately followed it with a wave of protests. On July 22, hundreds of thousands of Chileans took to the streets in Santiago to protest the failure of Chile's privatized pension systems. In the same week, 500,000 Chilean citizens reportedly took to the streets of the capital to protest against the government's privatization of state pensions.
The reformers who created Chile's privatized pension system promised that everyone would receive an income replacement of 70% in retirement, but the reality is closer to 38%. The average monthly pension payment is a meager $400, and many workers have only enough income to live a dignified retirement for a few months, or even a few years. When the first workers to participate in the system's individual private accounts retired, they realized that they would retire on a monthly income of just $300, or less than 1% of their original salary.
The Government has not made enough of its commitment that normal levels of contributions, interrupted by periods of inactivity, will not buy a pension that meets the 70% target.
Protesters want Chile's President Michelle Bachelet to replace the private pension system with a government-funded system that, like you, provides defined benefits. Several countries that have adopted the Chilean model have switched to a mixed system in which the state does not replace private funds, notes Nicholas Barr of the London School of Economics, and several have reduced the low commissions that AFP, which offers lower commissions, has awarded to new contributors since the 2010 reforms.
Chile's social security system has been so successful that it was once hailed by former President George W. Bush as a model and has become a model for other countries such as the United States and Canada, but recent massive protests show that, despite its success in facilitating the retirement of millions of Chileans in recent decades, the system is still in tatters and in urgent need of reform. The pension system, which has improved since 2008, offers help to those in need. If future governments want to provide tomorrow's pensioners with a stable and adequate source of income, the next reforms should offer more comprehensive changes to the systems.
If successful, the reforms could serve as a model for other countries facing similar pension gaps. If they fail, it will illustrate a mistake that other countries should avoid. The pension system and the AFP news agency have been under criticism since protests began in mid-October. At least 27 people were killed, thousands arrested, property damaged and thousands more injured in the protests.
Many Chileans live on pensions that are well below the minimum wage, even though they have worked for most or all of their lives.
Then in November 1980 - President Jose Luis Pinera, the son of former President Juan Manuel Santos, has launched a plan to replace the state-financed salary-like - you - salary system by a fully privatized system based on personal pension funds. Shortly after the protests began, his brother, who introduced the current system during Augusto Pinochet's era, said he would increase the existing pension reform law that is making its way through Congress. The reform would mean that pensioners would now fall below the poverty line and that no one who has paid into the pension system for more than 30 years would live on the amount that is currently above the minimum wage, "he said.
Under Pinera's system, Chilean citizens must pay into five investment funds managed by private companies, such as private pension funds and private insurance companies.
Viewed as a real-time experiment, Pinera's idea enabled Chile to become the first country to fully privatize social security. The second Bachelet government established a presidential advisory commission on pension systems, which published a comprehensive social security diagnosis in Chile in 2015 .
In late 2018, President Sebastian Pinera, in a congressional review, proposed a plebiscite on the future of Chile's social security system, the first of its kind in Latin America. Almost one million Chileans took part in the plebiscite, and 96% to 76% were in favour of changing the pension system. In recent years, the country's public sector has been increasingly denationalised and public services such as health and education have been privatised.