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Chile: Triumph for the socialist Boric, reform of private pension system approved

The government achieved the biggest reform in 40 years, but with financial risks and greater state intervention.

Chile: fotografía del presidente chileno, Gabriel Boric, en el Salón Oval de la Casa Blanca.

Gabriel Boric, president of ChileCordon Press.

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3 minutes read

Chile's Parliament approved on Wednesday the pension system reform promoted by Gabriel Boric's government, after years of debate and significant modifications to the original bill. The measure, presented two years ago, represents the most profound transformation of the retirement system since the creation of the individual capitalization model in 1981, during the government of Augusto Pinochet.

A mixed system with greater state intervention

The reform, endorsed in its third reading by the Chamber of Deputies, establishes a mixed pension system, introduces social insurance and improves the Universal Guaranteed Pension (UGP). Among the most relevant changes, it tightens the regulation of the Administradoras de Fondos de Pensiones (AFP), although without eliminating them, as initially intended by the Government.

After the approval, the Minister of Labor, Jeanette Jara, assured that the new model will benefit more than 1.5 million retirees and that it represents a structural change towards solidarity. "We are moving from a merely individualistic logic to complement it with social insurance," she declared. The reform contains pension increases of between 14% and 35% and raises the contribution from the current 10% to 17%, to be paid by the employer.

A political triumph for a worn-out government

President Gabriel Boric celebrated the reform as a "historic achievement" and an "act of justice" for Chileans, highlighting its positive impact on women who have worked inside and outside the home. "The reform has a woman's face and belongs to the whole nation," the president proclaimed.

Despite the concessions made to obtain the support of the opposition in a Congress without a ruling majority, the approval of the reform represents a relief for the government, which considered it one of its main campaign promises.

The reform applies a redistributive approach as in many countries in the world where the pension system is broken and constitutes a true "Ponzi scheme". Its impact on the country's economic sustainability will be devastating, experts have warned that the increase in the mandatory contribution and the creation of a social insurance could generate fiscal costs that put at risk the long-term stability of public finances.

Furthermore, doubts persist as to how improvements in pensions will be financed without affecting economic growth or discouraging individual savings. The experience of other countries in the region has shown that systems with greater state weight face sustainability problems.

The pension system has been one of the main debates among Chileans in recent years. Since its establishment in 1981, the individually funded model has been subject to partial reforms, none of which has achieved a definitive consensus. The burst perpetrated by the left in 2019 gave new impetus to plans for its transformation. With this new reform, Chile takes a turn towards a model with greater state intervention, compromising, even more, the country's economic stability.

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