Social Insecurity In Chile

By: Fred J. Solowey
February 1997

Worry rarely leaves Margarita Vargas' face. She raised seven children, worked hard all her life and had hoped to enjoy a secure retirement with Luis, her husband of more than 40 years. Mr. Vargas did retire in 1989 from 40 years as a skilled machinist with General Electric in the couple's homeland of Chile. But with the destruction of a once-impressive system of Social Security, the Vargases are anything but secure.

A few years ago, Ms. Vargas had a serious operation that would have been fully covered under Social Security. Instead, the bills put the Vargases - already barely getting by on a frozen pension deep into debt. Mr. Vargas, himself suffering from a bad back and diabetes works full time in his home workshop to survive. He makes vases and Christmas ornaments out of used fluorescent bulbs he picks out of trash bins at office buildings.

It is painful for Ms. Vargas to watch her husband labor and to think about the bleak future facing her children. And it confuses both wife and husband to hear that U.S. business publications and "experts" are saying people like the Vargases are thriving in retirement because of the transformation of Chile's Social Security system into a profit-making business run by investment companies. They're baffled when told there are lawmakers and economic leaders in the United States who want to follow in Chile's path, a path set by Gen. Augusto Pinochet during his 17-year military dictatorship that ended in 1990. Supporters of the private plan never met the Vargas family or scores of other Chileans like single parent Cecilia Prado.

"Back in 1981, I switched to the new private pension plan because of the heavy marketing," said Ms. Prado, a 17-year government employee. "They bombarded us with it. That bombardment was one sided, said Fresia Arcos, an attorney and Social Security expert. "We were stopped from defending the public system," Ms. Arcos said. "I proposed putting out a piece comparing the two systems objectively, but was prohibited from even doing that." One reason workers switched was that they wound up with a net increase in take-home pay - at least temporarily. Many employees really didn't have free choice, Ms. Arcos added, saying employers forced them to switch.

Even staying in the public pension system was costly, said Ms. Arcos, who went that route. With employees expected to assume the entire cost of their participation a majority of which had been paid by employers in the public system - she has seen her costs go up 300 percent. No wonder Cecelia Prado and most Chilean workers switched. Ms. Prado would make a different choice today. "With the information I now have, I never would have switched," Ms. Prado said. "Under a democratic government, they never could have imposed it on us. And if they ever passed a law allowing people to go back, there would be a great exodus."

Ms. Prado has justification for this statement. She works in the Santiago service center of the government's Institute of Pension Normalization, which runs what remains of the Social Security retirement program. She estimated she sees at least 6,000 people with problems per year. "Many of them are so desperate that they feel like slitting their wrists," she said. "Most of them are widows who have rage and fury against the system."

Social insecurity

Many Chileans believe the Social Security system has been replaced by a system of social insecurity. Such a statement arises when costs of the former public program are compared with those of the new private system. For example, under the public system, employers assumed the bulk of the cost with workers contributing through payroll deductions. Since 1981, employers have not been required to contribute to employees' pensions or health care leaving employees responsible for the full costs.

With the public system, benefits were progressive so those with lower incomes received more assistance as their needs demanded. Benefits included a national healthcare system, low-interest housing loans from pension funds, and recreational programs. Private system benefits are not progressive and the additional benefits of the public system are not offered. One thing that has not changed is that few Chilean companies provide company pension plans. When health care was privatized, new workers were required to open individual retirement accounts with competing private pension companies, and they were required to put 10 percent of their salary in the accounts.


While the new rules applied to most workers, the military was exempted, said Matilde Erazo, a production worker at a Pamela Grant cosmetics factory. "The military stayed in the old Social Security system even though they forced the new system on the rest of the country," Ms. Erazo said. "That shows what they really thought about it." Military and police continue to have guaranteed pensions and national health care. This leaves Ms. Erazo bitter. "They pulled the wool over our eyes," she said. "The administrator who did the paperwork in this factory just about ordered us to change over to the private system. "I'm not going to be able to retire," she added sadly. "I'll just have to keep working as long as I can and hope I don't get sick. Under the old system I would not have had to worry." It will take great luck for Ms. Erazo not to wind up as yet another older Chilean woman in line for a welfare pension.

Women hit hardest

The pension issues are compounded for women, said Angelica Carvallo, a labor-union leader. "Women earn less than men and live longer and can retire five years younger so they are much more likely to outlive their meager pensions," Ms. Carvallo said. Those who outlive husbands have similar problems trying to make it on survivors' pensions. Women are more likely than men to have employment gaps because of child rearing. The new system makes it even harder for such women to qualify for a government-guaranteed minimum pension. Under the Social Security system, it took 10 years of contributions to qualify. Under the new individual accounts of the private pension system, it takes 20 years of contributions. Ms. Carvallo pointed to economic studies by the International Labor Organization showing the privatized pension system cannot deliver the promised high pensions for the vast majority of Chileans. "More than 60 percent of Chilean workers either have no pension account, or don't contribute regularly to one because of irregular employment in the formal sector," Ms. Carvallo said. "We're going to see massive poverty - especially among women in the future."

But the problems are not all in the future. Poverty among older women already is growing, even among women like Maria Louisa Morral, a former telegrapher, who retired in 1970 with a full disability pension under Social Security. "When I was working, 1 was able to buy my own house without a down payment thanks to a fixed, low-interest loan from my pension fund," Ms. Morral said. "And I could pay it off in just a few years." Ms. Morral also got hefty severance pay, which provided a retirement nest egg. That's gone for most workers. Ms. Morral's nest egg is gone, too, because of the destruction of the national health-care component of Social,Security. "In the old system, all health care was free to retirees like me, including dental, medical, medicine and sanitarium," she said. "Ten years ago I had a serious cancer operation. Under the old system, it would have all been taken care of, but I had to pay a fortune. With our private system, if you don't have money, you die."

Health-care nightmare

Or, you may just have your baby held hostage. That's what happened to Marcela, the neighbor of community-health trainer and organizer Bernarda Agiar. Marcela's husband, a low-wage, blue-collar worker, had his family enrolled in the Chilean version of a health maintenance organization, but was laid off three months before the baby was bom. The family, though poor, wasn't considered poor enough for free or subsidized care. When the couple couldn't pay the costs of childbirth, the public hospital kept the baby. On the advice of Ms. Agiar, the mother refused to leave without her baby. Ms. Agiar organized protests and shamed local officials into releasing the baby.

But it's not just poorer workers facing problems. Veronica Prado is a government attorney and legal advisor in the national government comptroller's office. "In just one year, my health maintenance orgainization raised my family premium 400 percent," Ms. Prado said. "I can't pay it. If you can't pay it, they don't throw someone like me out. They just dramatically reduce your coverage. And the government is facing a financial squeeze as it has to pay out Social Security pension obligations with no payroll taxes coming in. Social spending, including for education, has been cut to free dollars to pay pensions.

Privatization of Social Security in Chile was done along with a series of other economic "reforms" to give corporations maximum freedom to make profits without addressing envirom-nental regulations or worker rights. A new labor code ensures a "flexible labor market" for employers, which means weak unions unable to defend workers, fewer full-time permanent jobs with benefits, lower wages, and a growing "informal" economy with people earning money any way they can.

Informal economy grows

That's bad news, especially for women. For example, a 1994 study found that 873,514 women - 27 percent of those listed as "inactive" in a national employment survey - had worked an average of three and a half months out of the year - usually off the books as maids, agricultural laborers, street vendors.

Patricia Saez does community development work with women in a once-thriving mining and port area in southern Chile. The women's husbands who once had stable employment no longer do. "All of the women I work with are in sporadic work - diving into the water to collect coal that falls off conveyor belts, washing clothes or cleaning houses," Ms. Saez said. "Almost none will ever get pensions under the new system."

The economic impact of Chile's pension privatization has been to foster an increase in the concentration of economic and political power in Chile. Money in private pension funds soon will equal half of the country's Gross National Product. The top three funds control a majority of the money. Backers of the private system, however, applaud it for giving working people a stake in the system. Workers, through individual retirement accounts, have become capitalists, backers say. Surgical nurse Maria Adriana disagreed. "I don't feel like a capitalist or an owner of Chile because of my pension account, and I don't know anyone who does," Ms. Adriana said. "I know nothing of how my pension money is invested, but I do know that I'm not building up a very good pension fund. I'd much rather have the security of the old system." At a prestigious Chilean private hospital, emergency-room clerk Cecilia Grau must face the fact that her parents have to work in retirement and that friends have recently retired with barely more than the poverty-level minimum pension. But she can't concern herself now with her own retirement issues.

Surviving for now

"I have so many survival issues that I can't even tackle that one," Ms. Grau said. A single parent and sole provider for two sons, she is buried in medical bills because her son, Diego, had cerebral meningitis. She is thousands of dollars in debt for his treatment despite the fact her union at the hospital won health benefits most people don't have. "I'll be paying the bills off for a very long time, and I just have to hope that none of us get seriously sick again," Ms. Grau said.

Her co-worker, nurse Ximena Larrain, noted the bitter irony in the Chilean system being copied elsewhere in Latin America and pushed in the United States. "It's ironic that they're talking about the Chilean model for Social Security in the United States for what we have here is a model developed by right-wing economists in the United States and brought to Chile," Ms. Larrain said.

With recent polls showing deep public distrust of both the private pension and health-care systems, Social Security privatization is one import from the North that average Chileans say they are sorry they got.

Fred J. Solowey, is a Washington, D.C.based free-lance labor journalist. He made his fifth trip to Chile earlier this year.

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