Chile for retirement

Parent Category: ROOT Published: Tuesday, 27 April 2021 Print
Chile, Santiago

How to retire in Chile

Chile was the first Latin American country to reform its pension system. The experience of this state has already been used by many countries, including Kazakhstan, Hungary, the USA, Germany, and Poland.

Similar systems are also operating in Peru, Argentina, and Colombia. How to retire in Chile and the nuances of reform are discussed directly below.

The Chilean pension model, launched in the 1980s, has gained significant authority in the eyes of the international community as one of the best alternatives to the state retirement system. The principles of mandatory individual accumulation enshrined in it allowed reconsidering the practice of functioning of previously existing systems and reducing the role of the state in this area of social security. An additional argument in support of it was that the introduction of a new pension system in Chile, among other things, had a positive impact on the country's economy, contributed to the development of the national financial system, privatization processes, and stimulated mortgage construction.  This system is defined by some experts as one of the most stable systems, the experience of which is successfully used, especially by Latin American countries (at the same time, in neighboring Argentina, which used the Chilean experience, according to the latest retirement reform, there is a gradual strengthening of the state pension fund ).

 

Benefits of retiring in Chile

According to the current pension system of Chile, each working citizen has an individual account to which his contributions (10% of salary) are credited. Individual savings are formed at the expense of investment income, which management companies make from the funds accumulated by the funds. At the end of the working period, this capital is returned to the participant or his successors in the form of pensions. The Chilean pension system is managed by private administrators of pension funds (Administradoras de Fondos de Pensiones). Their number changes due to mergers. Today, six pension fund administrators in Chile receive pension contributions, account for them in the individual account of each depositor, invest the funds received and then pay pensions. In addition, AFPs enter into insurance agreements with insurance companies for their members to cover the risks of disability and loss of breadwinners. AFR charges a commission for its services, the amount of which depends on each company (on average 2.3 - 2.5%). Working citizens have the right to freely choose and change the AFP. In addition, they can choose the type of pension fund depending on the chosen investment strategy. A special feature of the Chilean pension model is the strict control by the state (exercised by the Superintendencia de Administradoras de Fondos de Penciones - SAFP) of the activities of private pension fund administrators. Pension funds are allowed to invest in government securities, mortgages, instruments of financial institutions: promissory notes, bonds, and shares of private corporations, foreign securities.

At the same time, despite the positive achievements of the Chilean pension system, criticism of it and demands for its reform have recently intensified in government circles and among the population.

 

pensione signage near brown concrete building

 

Controversial issues in the Chilean pension

It should be noted that under current law, not everyone would be able to retire successfully in Chile and meet the golden years.

Thus, the share of employees in the retirement system is not high enough and tends to decrease (about 50-60% of the working population). In addition, this system is good for people with consistently high incomes working in the public or private sectors of the economy, whose pension contributions are made by the employer in the amount of 10% of wages. Citizens who do not have a permanent job, or are engaged in individual employment, are outside the mentioned system and can count only on a supplementary pension. Another disadvantage - according to government experts, the level of administrative costs and commissions taken by private pension funds for their services is high (2.3 - 2.5%). During the 26 years of existence of the mentioned pension system, the number of pension funds has decreased from 20 to 6. Accordingly, the lack of sufficient competition does not reduce the high cost of administration, which negatively affects the final amount of pensions. 

In addition, according to some Chilean economists, about 40-50% of people who contribute to private pension funds do not accumulate a guaranteed state retirement in Chile. At the same time, women who stop contributing to pension funds due to maternity are in the most vulnerable position.

Accordingly, when reforming the current system, there are proposals to increase the retirement age for women from 60 to 65 or to provide benefits to women caring for children by making state payments to pension funds for each child, which is equivalent to an annual contribution to this fund.

Summing up the above, it should be noted that in any case, the Chilean pension system solves three very important problems. First, those who work officially do not support pensioners. Secondly, the state does not save the Pension Fund from bankruptcy. It does not need to increase taxes and look for money to close the budget deficit. And the most important thing is that people realize that their savings directly depend on how the economy develops in the country. In this case, the person already has a worse attitude towards corruption, is more interested in politics, and goes to elections. Everyone understands that everything in the state depends on her or him personally. And that is what every modern state strives for.

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