CHILE’S PRIVATE PENSION PLAN FAILS TO PROTECT ELDERLY

Presidential Candidates Acknowledge The Need For Urgent Reofrms
As Chile celebrates the 25th anniversary of its private pension funds (AFP) this year, the first generation of workers is preparing to cash in on the promise of a retirement free of the haunting specter of poverty. Yet despite assurances from plan administrators that the funds are performing as planned, politicians and economists are worried that Chile’s AFPs are not providing retirees with enough to survive on.

Chile’s presidential candidates reflect the growing apprehension of the general public in campaign speeches around Chile. Joaquín Lavín, the Independent Democratic Union (UDI) candidate, has promised to give every poor woman over 60 a guaranteed pension. Michelle Bachelet, presidential candidate for the center-left Concertación party, cautioned the public not to believe the claim while promising to review the issue if elected president.

Sebastián Piñera, National Renovation Party (RN) candidate and brother of José Piñera, original architect of the private pension plan, promises a series of reforms aimed at reducing the high cost of fees associated with investing as well as realigning contribution requirements with the realities of Chile’s labor force. Far-left Juntos Podemos Más candidate Tomás Hirsch has outlined a plan to do away with the speculative nature of the current investment system and invite more active public participation in the administration of the plans.

Since the initiation of the AFPs in 1980, over 6 million people have enrolled in various private plans and monetary reserves have grown to US$68 billion, yet the average payment remains far below the amount necessary to support the average retiree.

For example, in 1994 the average AFP paid US$165 a month with 85,205 people registered in the fund. In 2004, the average monthly payment was US$173 with an average increase of 115,000 people paying into the plan.

To understand why the average pension has not increased commensurate with the increase in contributors, it is necessary to look at the profits that the fund managers are receiving. In 1984, the AFPs brought in approximately US$639,877. In 2004, the funds earned more than US$178.2 million.

If you compare the minimum wage against the minimum pension, the privatized plans still fall short of projected results. In 1979, the minimum pension was 60 percent of the minimum wage. Today, the minimum pension is 35 percent of the minimum wage.

The original plan to privatize Chilean pensions was drafted by Jose Piñera, in 1980. The government sold the idea to the nation as an effort to give the average worker more individual liberty and control over their own future.

Under this plan, Chileans would invest their savings in private pension plans managed by large financial institutes with limited government oversight. Security was replaced by opportunity and while not guaranteeing returns, the plans promised a compounded interest rate on individual investments and the possibility of substantial growth of personal savings sufficient to retire comfortably.

According to Mercedes Ezguerra, a member of the state advising committee in 1980, “workers with medium to high incomes should benefit the most from the new program; everyone else should be able to maintain a pension commensurate with the minimum wage.”

The Ministry of Labor hailed the plan as a much needed reform to protect the average Chilean from the threat of communism and poverty. “This reform drastically improves the margins of individual liberty, these, together with the participation of the social base and the economic progressives, constitute the unbreakable barriers against communism. (The reform) will solve one of the elemental aspirations of all Chilean families, security against old age.”

Because Chile was controlled by military dictator Gen. Augusto Pinochet at the time, almost no public debate actually occurred on the proposed plan. Opposing the dictator was dangerous and often resulted in imprisonment, torture, or execution. Even so, some did speak out against the plan, calling it a thinly veiled effort of the financial elite to gain access to new sources of investment capital.

Juan Manuel Sepúlveda, vice-president of the National Syndicate Coordinator, said, “the new funds will simply be administrative investment instruments of a privileged group of business and financial entities that will take control of the average workers’ savings.”

Sergio Férnandez Aguayo, former deputy of the Christian Democratic (DC) party, was even more critical, saying “the changes to the current system that the government is pretending to introduce will not benefit the interests of the Chilean worker … It would seem that the system is trying to fortify the private economic concentration instead of creating dynamic social benefits.”

Initially, there were government safeguards against this eventuality. Restrictions were imposed prohibiting workers’ savings from being used as investment capital in private businesses. However, after the economic and banking crisis of 1983, the military junta authorized pension fund administrators to invest in private companies as a means of stimulating the nation’s economy. By the end of 1984, private retirement accounts were in fact being used as an easy source of capital for the nation’s largest conglomerates.

One striking example of how Chile’s financial elite used the private pension funds for personal gains can be seen in the actions of Jose Piñera, the architect of the pension system.

Chilectra Metropolitana was a government owned corporation run by Chile’s Corporation for the Promotion of Production (CORFO) in 1980. When pensions were first privatized, CORFO sold 21 percent of Chilectra’s stock to workers investing in the new retirement accounts. Four years later, the government deregulated the pension funds, restructured Chilectra’s administration and left José Piñera and José Yuraszeck, now president of Chile’s biggest power company, Empresa Nacional de Electricidad (ENDESA), in charge of the company.

Other major players in Chile’s AFPs are the Angelini group, controlled by Anacleto Angelini, the richest man in Chile; Entel Chile, a satellite communication company; and CTC, a telecommunications company. Altogether, these and other business conglomerates control US$68 billion of over 7 million workers, funds that were initially ear-marked for retirement accounts.

In a presentation commemorating the 25th anniversary of the AFPs José Piñera said, “the capital system does not promise pensions, it only says that if a person saves, they may be able to obtain this amount of money plus a compounded interest at the time of their retirement.”