A pension deal? Political wrinkles and potential economic impact

CHILE - Report 28 Jan 2025 by Igal Magendzo and Robert Funk

The summer break is well underway in Chile. And by the time things gear up again in March, the presidential and congressional election campaigns will be as well. Primaries, to be held at the end of June, are now less than six months away. Recall that presidential and congressional elections will be held on November 16th. A runoff, in the likely event that no candidate receives an absolute majority, will be held on December 14th. Given the hectic electoral calendar, the question is how much the Gabriel Boric government will be able to get done before electioneering starts.

Hence the haste with which Boric and his ministers have pushed ahead on a pension reform deal. Once the electorate rejected both constitutional proposals, the onus was on the president to advance a reform agenda, particularly on those issues at the center of the 2019 protests: education, healthcare and pensions. For three years there was precious little progress in any of these areas. But over the last few months the government has been showing some progress, even if at the cost of watering down its original plans.

Now the government and part of the opposition have agreed on a new pension reform proposal. The agreement raises the employer’s social security contribution to 8.5% of an employee’s monthly wages. This includes existing payments (disability and survival insurance, which amounts to 1.5%), and an additional contribution of 7% to be applied gradually over nine years (to mitigate the impact on small and medium-sized businesses). Of that, 4.5% will go directly to workers' individual accounts; 1.5% to a new fund called Autonomous Pension Protection Fund (FAPP, intended to finance a future defined-benefit pillar); and the remaining 1% is intended to increase women's pensions. In addition, the guaranteed universal pension (PGU), paid out directly by the government to retirees who have low or zero pensions from the private system, will rise gradually to $250.000 a month ($250). Plus, there will be transition from the current multi-fund system, in which savers can choose among funds with different levels of risk, to generational funds in which savers are allocated a fund depending on their age and years to retirement.

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