Chileans protest against private pension scheme introduced under Pinochet

Chileans protest against private pension scheme introduced under Pinochet

On 24 July 2016, over a million people across Chile demonstrated against the privatised pension system. Since then, a string of demonstrations, like this one on 26 March 2017, have be held to call for fair pensions and the scrapping of the AFPs.

(AP/Esteban Felix)

Chileans are raising their voices against the private pension system that has been in place since the military dictatorship of Augusto Pinochet. Over the past year, tens of thousands of Chileans have taken part in demonstrations organised by the No More AFP movement, calling for an end to the Pension Fund Administrators (AFP) and the establishment of a social security system providing decent pensions.

Chile does not have a state-run social security system that provides workers with pensions when they retire. Instead, employees have to pay into one of six private companies, referred to as Pension Fund Administrators (AFP), some controlled by US multinationals.

The AFPs take 10 per cent of the employees’ pay and invest it in financial instruments in Chile and abroad. The money is kept in individual capitalisation accounts that increase in accordance with the workers’ monthly contributions and the earnings from the AFP investments.

The AFPs charge a commission for managing and administering the funds. The amount charged by the six companies comprising the system varies. The lowest is around 0.5 per cent and the highest 1.5 per cent.

The AFPs manage over US$190 billion (around €166 billion), which they are able to invest in Chile’s biggest companies, such as the retailer Falabella, energy company Enersis or the airline Latam.

The problem with the system, which has been in place since 1981, is that it has failed to provide pensions that allow retired people to live with dignity. According to Fundación Sol, the AFPs pay out almost 1.2 million in pensions of around US$320 (around €280) on average, which is below the minimum wage.

The association grouping the AFPs argues that the pensions are low because of the low amounts paid into the system and the gaps in many workers’ contributions.

For Marco Kremerman, an economist with Fundación Sol, the problem is that the monthly amounts received by the AFPs are not used to pay pensions.

“All of this money is invested in banks and other national and international groups. They are provided with fresh money, at a very low rate of interest, thanks to which the companies keep growing. They are using practically free capital,” Kremerman explains to Equal Times.

The spark fuelling the mobilisations

Support for AFPs and the private pension system has always been very low, but they have become part of the landscape over the years and no one had dared to seriously question the model. Until 24 July 2016, when over a million people across Chile answered the No More AFP movement’s call to demonstrate.

What prompted people to take to the streets to express their opposition to a system they consider unjust? The trigger was a local news item that led to a nationwide scandal, in a matter of days. The central figure was Myriam Olate, a woman who was, until that point, completely unknown to the public.

Olate is the former wife of the socialist member of parliament Osvaldo Andrade, a well-known politician in Chile. It came to light that she had retired from her post as deputy director of the Gendarmeria (prison service), with a pension of US$7,800 a month (around €6,800).

She was not contributing to the AFP scheme but a special retirement fund for members of the police, criminal investigations department and the prison service.

Some weeks later, the Comptroller’s Office ruled that Olate did not fulfil the criteria to pay into this scheme, but the controversy had already been triggered and featured strongly in the demonstration of 24 July.

“Myriam Olate’s pension created uproar on social media. We took advantage of the outcry and called the demonstration. We expected it to be well attended, but not that well,” Luis Mesina, spokesperson for the No More AFP movement, told Equal Times.

There has been a string of marches since then. Although not as large as the protest in July 2016, they have gathered enough people to put pensions firmly on the political agenda, and have forced President Michelle Bachelet to take action.

Bachelet announced a five per cent increase in the rate of contributions paid by employers. It has not yet been determined who is to administer these funds and how, but the government has made it clear that they will not be handled by the AFPs.

For Mesina, this proposal is an “important step forward”, secured by the mobilisations, but he fears that Bachelet’s government is not contemplating a complete overhaul that would remove the AFPs from the pension system.

Kremerman sees it as no more than a ’Band-Aid solution’, which will have a minimal impact, given the country’s extremely low pension payments.

“For pensions to be enough to live on in Chile they would have to be increased by at least 100 per cent, to bring them up to around US$675 (around €590),” he argues.

The No More AFP movement, backed by Fundación Sol and other organisations, have presented a proposal to replace the AFP scheme with a solidarity-based system funded by workers, employers and the state.

AFP for all...except the police and military

In May 1981, the military junta that had been ruling Chile since the coup d’état headed by General Augusto Pinochet on 11 September 1973, decided to privatise the pension system. The labour minister at the time, José Piñera, brother of former president and current presidential candidate Sebastián Piñera, headed the process that led to the creation of the Pension Fund Administrators (AFP).

But the new system was not designed for all workers. Paradoxically, the police and military were excluded and maintained the old system, under which their pension is based on the last taxable wage earned before retirement.

As a result, they are able to retire with pensions equal or very similar to the pay received during their final years of service, a situation that contrasts sharply with that of most other workers.

The ideologues of the AFP system defend the viability of the model and the returns it offers contributors. An argument repeatedly used to defend its success is the fact that many other countries have implemented individual capitalisation systems like Chile’s.

According to the Association of AFPs, this is the case in Peru, Colombia, Uruguay, Mexico, Sweden, Poland, Panama and other countries, 27 in total.

The Fundación Sol qualifies these figures, pointing out that the Chilean model of total privatisation only operates in around 10 countries: Chile, Hong Kong, Maldives, Malawi, Kosovo, Israel, Australia, Mexico, Dominican Republic and El Salvador. Kremerman underlines that in Uruguay and Sweden, for example, a fifth of the contributions go to individual accounts and the rest are paid into a solidarity-based system.

This article has been translated from Spanish.