Pension Reform to Combat Systemic Poverty

By Daniela Estrada, Inter Press Service

September 15, 2006

In 20 years, even the minimum pension benefits will be out of reach for close to half of Chile 's retirees. This troublesome forecast has spurred government into action, and potentially spells sweeping changes for the country's once internationally lauded privatised pension system, set up by the former dictatorship in 1981.

A bill currently being drafted by a team of President Michelle Bachelet's ministers and almost ready to be sent to Congress draws on a number of proposals put forward by an expert advisory council appointed in March.

However, the document submitted by the team has come under fire by civil society organisations for focusing too heavily on technical aspects, at the expense of social considerations.

"The current pension system impoverishes seniors, engendering the worst kind of poverty. It is sorely in need of reform," Cristian Paiba, a researcher with the National Centre for Alternative Development Studies (CENDA), told IPS .

This centre, along with dozens of trade-union, business, academic and social organisations, took several concerns and ideas to the Presidential Advisory Council on Pension Reform, created by Bachelet on Mar. 17 -- just six days after she took over as the first female president of this South American country of 15.6 million.

On Jun. 30, the 15 economists who make up the Council delivered their report, laying out a series of initiatives to improve the individual capitalisation pension system, established by then dictator Augusto Pinochet (1973-1990), who all but eliminated the original state-run, tax-funded plan.

Pinochet issued a decree creating Administered Pension Funds ( AFP ), incorporated companies set up to manage mandatory employee and voluntary independent-worker pension contributions, investing the funds nationally and internationally and paying out benefits.

When the system was launched, the government offered affiliates of the former Compensation Funds, administered by the National Pensions Institute (INP), special pension rates as an incentive to switch to the AFPs. However, many opted to stay with the INP.

Today, the INP also provides state-funded minimum monthly pensions of 87,853 pesos (some 170 dollars), to seniors who paid into both systems but whose balances do not qualify them to receive more, and assistance for low-income sectors, to a monthly maximum of 44,186 pesos (88 dollars).

The expert advisory council concluded that the system is not in crisis, but acknowledged that, as it stands, it will not be able to meet the country's pension needs. The shortfall is largely due to demographic changes and shifting labour trends, among them high turnover rates and extended periods of high unemployment rates.

While it highlights a number of reported benefits attributable to the individual capitalisation system, such as the growth of the country's capital markets, the report criticises the inadequate coverage for portions of the population, gender inequalities and high operating costs.

Also of concern is the system's excessive market concentration -- Chile is served by only six AFPs, three of which account for 80 percent of the country's 7.3 million affiliates.

"Without changes to the system, it is estimated that within 20 years only half of Chile's senior citizens will receive more than the minimum pension, less than five percent will have access to the minimum income guaranteed by the state, and the rest will scrape by on less than the minimum, a poverty pension, or nothing," predicted the advisory council.

The most vulnerable sectors include the working poor, temporary and independent workers and a large proportion of women, stated the team of economists headed by Mario Marcel, former budget director in the Ricardo Lagos administration (2000-2006).

The "Marcel Commission" report is currently being analysed by a ministers' committee comprising representatives from the Labour, Taxation, Chief of Staff and National Women's Agency ministries, which is drafting the bill. The president has committed to submitting the bill to Congress by December.

Concrete recommendations made by the advisory council include expanding the current "solidarity pensions" (minimum and poverty pensions) to establish a baseline universal pension. It maintains the fundamental concept of support through worker quotas, and emphasises a third aspect, in which contributors can add voluntary savings to fill out their individual accounts.

The council also suggested eliminating the distinction between dependent and independent workers, creating a user committee with state, AFP and worker representatives, to better monitor performance of the system.

The report also recommends fostering price competition among administrators, which last year boasted capital returns of 24 percent and operating profits of 30 percent, topping the list of the country's most profitable companies.

One of the most controversial ideas mentioned in the report is the suggestion to increase the retirement age for women to 65. Bachelet rejected the proposal out of hand when she received the report, announcing that the government would consider all the recommendations except that one.

"I want to make sure the women of Chile know they have nothing to worry about, as this president is not going to make any decision that could jeopardize their retirement situation," she declared. In Chile , legal retirement age is 60 for women and 65 for men.

However, the commission did put forth a few alternatives for addressing gender inequality. One would give women in the poorest 60 percent of the population a special bonus of one year of additional contributions for each live birth, which met with approval from trade unions.

Another would authorise solidarity pension contributions to third-party accounts, enabling, for example, a spouse working in the paid economy to contribute in the name of the partner dedicated to childcare and domestic work.

But overall, the document was not well received by social organisations. "We feel it is basically a technical report, with little social focus," Ana María Muñoz, director of the Central Unitaria de Trabajadores (CUT) trade union federation, told IPS . A case in point would be the attempt to increase the retirement age for women.

Muñoz said they did not expect much more, given that the council was, in her opinion, stacked with AFP development-model proponents and AFP representatives.

The team also came under fire for including Martín Costabal, who served as tax minister under the dictatorship (1989-1990), as opponents of the individual capitalisation system say its dictatorship roots are precisely what strips it of legitimacy.

Nevertheless, the union leader praised the proposal to strengthen the solidarity pensions, describing it as a move in the right direction. The CUT vision, however, encompasses three contribution sources in this column: the state, workers and employers.

Some organisations, such as CENDA, have asked for a gradual return to the pension system abandoned in 1981, rebuilding it on the model recently adopted by Sweden . The Socialist Party -- Bachelet's party and a member of the ruling centre-left coalition -- proposed, for example, creating a state-run AFP .

Rossana Costa, a researcher with the right-leaning Freedom and Development Institute, and member of the advisory council, refuted criticisms that the group's focus was overly technical, telling IPS that the recommended changes "take a leap that even goes a little beyond what is reasonable." The advisory council recognises that the social pensions are weak, and intends to strengthen them, she added.

According to the economist, "in industrialised countries, capital returns are higher than salary increments, so a contributing system yields better benefits than a distributive system." Furthermore, she clarified that President Bachelet never intended to replace the current system, only improve it.

Paiba is greatly concerned about the lack of awareness among Chilean workers in regards to this issue.

"If they are not familiar with the current system, they will not be able to evaluate the reforms that are coming," said the CENDA researcher, who said that while the technical aspects of the new scheme will be established by Congress, the final result will be decided by citizen mobilisation.

To this end, Muñoz revealed that CUT is already talking with the government and legislators, in an attempt to counterbalance AFP lobbying, and that the union will be lining up information meetings throughout the country.

"We do not believe that this reform process will result in a distributive system, but it is the goal we need to shoot for and work towards little by little," said Muñoz.

She also said that the governing coalition and right-wing opposition will reveal their true commitment to the reform during the debate in Congress. However, the government is expected to make the project a high priority.