Chile takes first step towards reforming private pension system

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The lower house of Chile’s Congress has provisionally approved a reform of its private pension system proposed by leftist President Gabriel Boric, in a rare breakthrough for the country’s polarised politics that opens the door to resolving a long-standing social demand.

Representatives voted 84 to 64, with three abstentions, to advance a bill that would increase employer pension contributions and redesign the system. The move signals it is highly likely that a reform will receive lower house backing, analysts say, though it faces significant amendments by opposition lawmakers before being sent to the Senate.

Pension reform has been high on the political agenda in Chile for more than a decade. The pension system, in which workers pay into individual accounts managed exclusively by private investment funds, forms the backbone of capital markets that have helped Chile become one of Latin America’s most developed economies.

But the meagre incomes it generates for the working and middle class, with 72 per cent of retirees receiving less than the minimum wage, have been a central complaint in disruptive mass protests.

Rightwing and leftwing leaders have clashed over how to protect the benefits of the pension system while resolving social discontent. Proposals put forward by Boric’s two predecessors were rejected.

“This is a very important step towards taking care of both those challenges,” said Eduardo Engel, a professor of economics at the University of Chile. Final approval of the bill by the Senate would maintain individual accounts, while adding a redistribution component, he noted, leading to a “significant increase of national saving capacity”.

The current text proposes introducing new pension contributions of 6 per cent of salaries for employers, on top of the 10 per cent of salaries workers must currently set aside. Of the extra 6 per cent, 3 per cent would go to workers’ individual accounts and 3 per cent to a new solidarity fund that would top up smaller pensions.

It would also increase the minimum guaranteed pension paid out by the government to poorer people, and replace the deeply unpopular private pension administrators with a public administrator, though Chileans would still be able to choose private funds to invest their pensions. A state-run investing alternative would also be created.

Legislators in the lower house and the Senate are likely to seek changes to some of those measures. Boric’s leftist coalition has minorities in both chambers. The vote on Wednesday relied on a group of independent and centrist lawmakers, some of whom have said they will seek to put a larger share of the extra 6 per cent of contributions into workers’ individual accounts.

Chile’s politics have become increasingly stagnant over the past decade, with the fragmentation of Congress, polarisation between the hard left and right, and a failed four-year long effort to rewrite the constitution leaving lawmakers unable to agree significant reforms.

Boric has failed to win approval for the two central planks of his agenda: pension reform and tax increases to fund social programmes. He was forced to back down from his original proposal to send the full 6 per cent additional contribution to the solidarity fund.

Patricio Navia, a political scientist and professor at New York University, said a rejection of the pension bill, which would have prohibited the government from introducing new legislation on the topic for a year, would have been hugely damaging to Boric as he approaches the midpoint of his presidency in March.

“Now he is still in the game, he could still achieve pension reform, which is something his predecessors weren’t able to do,” he said. “It won’t be the pension reform he wants, it will be one that confirms the free market model, but it is a pension reform.”