an Eldis Resource
Pension reform in Chile revisited: what has been learned?
What new challenges are there for Chile's pension system?
Authors:
A. Iglesias-Palau
Publisher:
Organisation for Economic Co-operation and Development , 2009
This paper describes Chile’s pension reform of 1980, which replaced the existing pay-as-you-go public pension programmes by a new funded pension programme managed by private companies (the “AFPs”). It comments on the main results of this reform so far, and identifies the current challenges faced by the country’s pension system.
In March 2008, a package of substantial changes to the pension system emerging from 1980 reform was approved by the Parliament. Although several other changes had been made earlier, these most recent changes deserve special attention, not only because of their broad scope but also because they were motivated by a critical diagnosis of the AFP programme that originated mostly with prominent representatives of the current government, some of whom were calling for re-building a public contributory pension system. Thus the paper also describes the latest reform in sand assesses its potential impact.
The Chilean case shows that parametric reforms preceding the creation of a funded programme can reduce political resistance to structural pension reform. Chile’s experience also suggests that the consistency of opinions among the economic, social security and labour market authorities responsible of designing and conducting a pension reform process can help to sell the reform to the political authorities. If the decision is to replace an existing pension programme by a new one, it also seems necessary to have specific rules that, in some particular circumstances and for a limited period of time, allow discontented workers to go back to their former pension programme. Chile’s experience also shows that the quality of pension programmes' micro design is relevant since individual decisions and portfolio managers investments decisions are shaped by regulations.
The author argues that results so far suggests that the reform has been successful in improving the long term sustainability of Chile’s pension system; in creating a more fair system; in promoting the development of capital markets; and in removing some distortions to the operation of labour markets. On the other side, there is some room for the new programme operational costs and prices to go down, and expectations about an increase in second pillar coverage have not been met. While some regulatory changes could improve the extent and quality of the funded pension programme coverage, the long-term solution to the economic problems of retirement involves the labour market. To improve future pensions more jobs in the formal sector of the economy should be created; unemployment must be reduced; and working lives should be extended. [Adapted from author]
