Chile’s $172 Billion Pension Funds at Risk From Election Slogans

  • Pension commission head fears populism could take over debate
  • Pension system underpins capital markets, corporate borrowing

The man appointed by Chile’s President Michelle Bachelet to head a commission into pension reform has one message for politicians debating the issue -- reach an agreement quickly.

After hundreds of thousands of people marched through the streets demanding higher pensions and changes to a system that has amassed $172 billion in savings, David Bravo is concerned the debate will turn into a political football at the presidential election in November 2017. That would open the door to politicians promising to use the system’s funds that underpin local capital markets to make higher payments now, the worst possible scenario, he said.

"There is a risk that public unrest turns into a fight of slogans during the campaign," Bravo, an economist at the Catholic University, said in an interview in Santiago. "It could all lead to extreme proposals."

Since Bachelet unveiled a series of proposals on Aug. 9, politicians and cabinet members have lined up to give their own views on what should be done. The climate is too tense as the protest movement swells, the fiscal resources are too scarce and the prestige of the pension fund managers created during the dictatorship of Augusto Pinochet is too low for any easy solution. A cross-party accord is going to be “very difficult,” Bravo said.

Bachelet wants to make employers pay 5 percent of workers’ wages into a “solidarity pillar” that would be used to redistribute money to the poor, topping up reserves from people’s private savings accounts. Until now, the burden has fallen on workers, who pay 10 percent of their salaries into their savings accounts.

For more on Bachelet’s proposals to reform the system, click here.

No Trust

Bachelet must fend off demands for a return to the old pay-as-you-go system, or allowing people to withdraw money from their accounts early, after the popularity of her administration slumped to 15 percent in July, the lowest of any government since at least 2000, according to a survey by the Center of Public Studies.

"It is an enormous challenge,” Bravo said. “Bachelet’s chances of reaching an agreement are low, but she’s faced difficulties before.”

Bravo headed the pensions commission for 18 months, producing a 244-page report in September that recommended employers start contributing to a system that would bolster the current scheme for paying minimum pensions. Most commission members said money from individual accounts should not be used to bolster existing pensions.

Credibility Problems

The pension funds, known as AFPs, suffer from a credibility problem, Bravo said. Created in 1981 by the so-called Chicago Boys that advised Pinochet’s regime, they were imposed with little consultation with the public.

"There is a perception that they make high profits and that they haven’t done any self-criticism," Bravo said.

Earlier in the month, five senators introduced a proposal to allow Chilean workers to withdraw money from their pension savings to face "emergencies," such as buying a house, paying for their children’s studies or in case of illness. The proposal refers to a similar measure in Peru that has allowed workers to withdraw 25 percent of their pension to buy property.

"This debate was coming,” Bravo said. "When a system is overwhelmed responsible leaders end up putting forward proposals that could be populist.”

Understandable Anger

Chileans receive an average pension equivalent to 38 percent of their final income, the lowest rate among the 35 nations of the Organization of Economic Cooperation and Development after Mexico. The founders had indicated that it would be closer to 70 percent.

Moreover, the problem is only likely to get worse. Pension fund returns have been falling over the past decades, averaging 12.3 percent in the 1980’s, 10.4 percent in the 1990’s, 6.3 percent in the 2000’s and just 4.3 percent since 2010.

Last year, the average pension was $400 a month, with 40 percent of people receiving between $160 and $260. Given that, politicians and the industry should be grateful the protests didn’t happen sooner.

"Chile went from one extreme to the other” under Pinochet, Bravo said. “The change was drastic and now we are looking for a mixed system."