A few days ago, the Senate began the processing of the pension reform presented by the Government of President Gabriel Boric, after its approval by the Chamber of Deputies, in January of this year.
Specifically, the Ministers of Labor and Social Welfare, Jeannette Jara, and of Finance, Mario Marcel, began with the presentation of the scope of the project in the Labor and Social Welfare Commission, chaired until last week by the senator from Ñuble, Loreto Carvajal.
Both authorities were accompanied by the Undersecretary of Social Security, Claudio Reyes, and the Superintendent of Pensions, Osvaldo Macías, who also participated in the presentation.
“The dialogue has just begun. The President has ordered us to be open to finding formulas that allow us to increase the amount of pensions, which is the objective of this pension reform. But without a doubt, if the debate leads to the entire employer’s contribution going to individual capitalization, that would be very complex, because it would mean that pensions would not increase for 25 more years,” said the Minister of Labor and Social Security, Jeannette Jara.
He added that “we say it with this certainty, because the technical studies that have been carried out indicate that if the 6% goes entirely to individual capitalization, it would not allow pensions to be raised for one and a half million retirees today (…) All those people who are around 50 years old, 45 or 42 years old would take much longer to accumulate individually in their account than obtaining Social Security benefits, to increase the amount of their pension. We are in that task.”
For his part, the Minister of Finance, Mario Marcel, reiterated in his presentation the need for additional resources to increase the PGU and for the State to be able to finance as an employer the 6 percentage point increase in the contribution per civil servant.
“Given the spending commitments, the sustainability of the fiscal commitments for the payment of pensions is linked to any matter that is wanted to be done in fiscal matters. Two statements from the Autonomous Fiscal Council are cited here, which reiterate something that we have repeated many years ago and very correctly: permanent expenses have to be financed with permanent income. And in the case of future benefits, it is noted that, in the absence of new sources of structural financing, which may come from trend growth or new tax revenues, the growth of public spending until 2028 should be very limited. All this tells us that whatever we want to add as tax benefits must have their financing.”
What does the reform seek?
The ministers stressed that it is necessary to sustainably increase the pensions of current and future pensioners. Along the same lines, the project seeks to increase the amount and density of contributions, increasing the capacity to accumulate savings throughout life; and reduce gender gaps, increasing the amount of pensions and replacement rates for women.
In addition, the creation of a Social Security and an Integrated Pension Fund financed by employers is established, which allows laying the foundations for a mixed contributory system and aligning the country with the vast majority of member states of the Organization for Cooperation and Economic Development (OECD).
In the same way, it is proposed to increase the financial return of contributions to the system and the accumulation of funds, reducing administration costs and commissions, encouraging the entry of new competitors, reducing liquidity needs and increasing efficiency. The objective is also to strengthen the freedom of choice of members, through the creation of a public investment management entity.
On the other hand, it seeks to significantly reduce exposure to individual risks of old age in the pension system, especially in areas where individual decisions have demonstrably led to a worsening of pensions.
Current system status
In the presentation, the ministers also shared the general background that gave rise to the project, explaining the development of social security in Chile, including the replacement of the old system by Decree Law 3,500, which governs the current pension system; the creation of the Pilar Solidario, in 2008; and the subsequent Universal Guaranteed Pension (PGU), in 2022.
Added to the above were the reform projects of former presidents Michelle Bachelet, in 2017, and Sebastián Piñera, in 2021, in addition to the current initiative, presented in November 2022. Likewise, the fiscal spending on pension matters that Today it is equivalent to 4% of the Gross Domestic Product (GDP) and 16% of total public spending. In addition, it was noted that for 50% of retirees the State finances 60% or more of their final pension.
On the other hand, the problems of the Contributory Pillar of the current system were listed, such as, for example, low pensions and replacement rates. In that sense, it was detailed that the median self-financed replacement rate for men is 27%, while in the case of women it is only 11%, also demonstrating the gender gap in the system.
Added to the above are, among other aspects, the low contribution rate for pension savings (10% of taxable income), the deep gender gap to the detriment of women, the decreasing profitability of the system, the high profit margin of the AFPs and their low operational risk.
Regarding this last point, it was stated that the operational expenses of the AFPs grew by 3% in real terms between 2017 and 2023, while their income, in the same period, grew by 22% in real terms, mainly as a result of the increase in mass. wage. Likewise, it was noted that the commissions charged by the administrators are mainly allocated to support and marketing expenses, equivalent to 93% of their operating expenses, while the remaining 7% is allocated to Investments.
The above meant that the price that members paid for the pension service between 2017 and 2023 was 19.6 times the price of the Unemployment Insurance service and the margin on the cost of the AFPs was 3.4 times that of the Fund Administrator. of Unemployment (AFC). For this reason, the authorities stated that support activities do not register major differences between both institutions, since, for example, while the AFC manages 11.5 million accounts and collects 5.1 million contributions, the AFPs manage 12. 7 million accounts and collect 5.8 million contributions.
The presentation also included the complexity of the current system, which leads members, on several occasions, to make bad decisions regarding their pension savings, as is the case with transfers of funds. This would be reflected in the fact that 72.3% of the members who have made transfers have obtained worse performance in their strategy than if they had stayed in the Fund that the regulations define by default. The median profitability loss amounts to 5.7%, which would imply a 0.8% annual decrease in profitability.
Move forward, but without ideology
According to the UDI senator for Ñuble, Gustavo Sanhueza, the pension reform is a long-standing project, where the last major change was the one promoted by President Sebastián Piñera, with the creation of the Universal Guaranteed Pension (PGU).
“Today we have a fairly transversal consensus that pensions in Chile are low, but the differences between the government and the opposition are on the path to solution. While citizens, more than 70%, want their funds to go to their individual accounts, the government insists on an outdated recipe, which will not ensure better pensions in the future,” said the legislator, who represents the vision of centrist parliamentarians. right.
“In the Senate we have every will to advance a substantial agreement on this matter, for example, so that the PGU rises to at least 250 thousand pesos. Also, if both the government and the opposition agree to increase the contribution by 3% to strengthen the individual account of each worker, we are fully willing to approve that increase immediately. On the other hand, it seems to us that there are positive signs on the part of the government to open itself to creating longevity insurance, which is ultimately pension insurance, which will allow us to improve the quality of life of older people who do not have enough savings, assuring them the same amount of pension for the rest of your life. This can be financed through a model similar to unemployment insurance or with a portion of the 3% additional contribution.”
On the issue of commissions, he said, “there is also an agreement that we must correct its charging system, something that the industry has otherwise been open to being able to achieve. All these elements give us a positive framework that our caucus and the opposition in general are willing to reach good agreements with the government.”
Where would the bottom knot be, then?
According to Sanhueza, “in that, unfortunately, the government is more in an ideological dispute, from which it has not moved one iota. This bill has been trying to move in the House for two years. During the past year, there were many meetings, but the government’s actions are not consistent with all those meetings that sought to reach agreements, because in the end what they did was move on to whatever the project gave rise to, without discussing it with the depth it required. An example is that when the government presented the indications in the Labor Commission, there was no discussion. The project was approved by chapters and that went directly to the room to say that they had approved the project in the Chamber of Deputies. In summary, we are open to approving a good project for the elderly in Chile, but we are not willing to support the idea that the State be the one that administers the additional contribution or part of it. The worst that could happen is that only next year we will be agreeing on a pension reform, in the middle of the presidential debate for the Chile of the next decade. This year we must reach an agreement and, hopefully, as soon as possible,” he highlighted.
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