Universidad Mayor | CEAS [Columna] A seguir esperando CIAH | Universidad Mayor
23 July 2019

[Column] We'll have to keep waiting

Claudia Sanhueza's column on the government's pension system reform

We'll have to keep waiting

Claudia Sanuheza

The Executive's instructions to his bill - which were approved only by men in the Committee on the Labour and Social Security of the Chamber of congress- create the so-called "Additional Savings Investment Agents" (before the agreement with the DC, they were called "Additional Savings Managers"). These institutions will be responsible for managing the individual savings of the additional 4% in contribution. In addition, a "Social Insurance Administrator Council for Additional Savings" will be created, which will tender the savings to these agents.

All of this is in the logic of individual capitalization, the same one that promised 100% replacement rates. However, data indicates that the individual capitalization system aims at replacement rates of only 20%. Moreover, as returns go down, from 12.4% in the eighties to 3.8% in recent years, estimates by former minister Valdés indicate that each percentage point less of profitability is translated to pension drops of 25%; in order for the individual capitalization system to keep - and I stress here: keep, not increase - the ammount pensions they are handing out today, contribution should increase to more than 20%, in addition to the raise the retirement age, which is already quite high.

The individual capitalization system is absolutely unaffordable in the long run.

Not only that. Individual capitalization, either in AFPs or in these "Additional Savings Investment Agents", generates great costs for workers, who translate into utilities for AFPs owners. Estimates of F. López (2016) indicate that the average return on equity of AFPs in the period 2006-2015 was 25.4%, when only 5.3% is justifiable for their exposure to market risk, which, in monetary terms, indicates that there would be a profit of $3.5 billion; which is almost the same as what was paid in pensions by the AFPs on the last year.

In short, with this additional contribution pensions will not improve, and thus we'll just have to keep waiting for a better reform. The only thing that will guarantee decent pensions for workers is the creation of a social security component with mixed sources of funding (employer, worker and public funding). That component is viable and necessary. For this reason, the united center-left was argued for a Uruguayan-style system in the Pension-commission (2015); and that is why the opposition's technical table in congress said that the increase in 4% in contributions should be used for social security and not individual funds.

Original source: La Tercera (in spanish).

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