Chile to Revamp Private Social Security System

When Chile implemented its private social security system in 1980, it was considered something of a revolution in Latin America, where poorly financed, often broke, state-controlled systems were the rule.

Quickly, several Chilean neighbors moved to make similar changes.

A quarter of a century later, the system is sorely in need of some fine-tuning, and President Michele Bachelet is determined to make it happen, saying Chile's elderly deserve "decent pensions."

Revamping social security is one of the key programs of Bachelet, who was inaugurated March 11 as Chile's first female president and who said on the campaign trail that reforms were "a moral duty."

Under the system established under the 1973-90 dictatorship of Gen. Augusto Pinochet, some 148,000 retired Chileans are collecting pensions averaging $270 a month. By contrast, workers depositing into the system earn $630.

Population trends have led the administration to act with a sense of urgency: More than 10 percent of Chile's 15 million people are over 60, with their ranks predicted to swell to more than 2.5 million by 2020. Bachelet has appointed a special commission to study potential changes, which will be considered by Congress later this year.

"We must make sure all Chilean retirees get a decent pension," Bachelet said in her first state-of-the-nation address May 21.

The 54-year-old socialist and pediatrician said during her campaign that she would target windfall profits by the Pension Fund Administrators, or AFPs, which charge high commissions to administer retirement funds.

As of December 2005, five AFPs controlled some $75 billion contributed by more than 6 million workers who deposit up to 13 percent of their monthly salaries.

AFPs currently charge commissions of just over 2 percent plus other fees — to the tune of a 22.2 percent return on their investments during 2005, according to government regulators.

Workers are free to choose their own AFP, and the World Bank and other institutions and experts have proposed to lower the commissions and profit-taking by increasing the number of administrators to generate competition.

Another likely reform is to target what Willy Arthur, president of the Association of Administrators of Pension Funds, called the "main reason" for the low pensions: All too often, employers fail to transfer the money they deduct from their workers' salaries to the AFPs — leading to shocked employees who retire only to discover that their pensions are far smaller than expected.

Arthur also noted that the social security system has limited coverage, with many independent workers not contributing to any pension fund.

Bachelet has not specified what changes she has in mind, however, leading to rumors that the government may raise the retirement age for women from 60 to 65, the same as for men.

The possibility worries women like Elizabeth Rojas, a 59-year-old government social worker who is planning to retire next year.

"That would be unfair, because we, working women, usually have to work double — at home and at the job," Rojas said. "I am only one year away from retirement now, and I feel tired."

"That would be a punishment for hundreds of thousands of women," she said.

Given the high political cost Bachelet could suffer from such a move, the government seems likely to focus on other fixes.

In any case, administration officials said they would not return Chile to its pre-1981 social security plan, which was managed by the state — and broke.

Said Labor Minister Osvaldo Andrade: "No one is thinking of going back to the old system."