Latin America: Ten commandments of pension reform
The ten basic premises of Chilean social security reform, as set out in El Ladrillo in 1973:
The benefits are to be equal to the contribution paid over time by each individual. - All employees are now obliged to pay 10% of their salary (up to a ceiling of around $1,900 per month) to an individual pension savings account. There are no employer contributions.
"The system is to be the same for all and no benefit is payable to persons or groups that do not contribute. - In 1980, there were over 100 different subsystems and benefit structures. Access to the 'old' system has been closed since 1983 and the administration of the different subsystems is now in the hands of a single State agency.
"The system is to be open to all. Ideally, there should be many independent competing funds, so ensuring efficient administration and low costs. - There are currently 13 AFPs competing for the 5.5m account holders and a total of $30bn in funds under management.
"The role of the State is to be limited to preserving the interest of the pensioners and controlling the fund managers, so as to avoid fraud, negligence and excessive risks. -The AFP Superintendency currently regulates and monitors: the collection of contributions, the investment of the funds, how information is recorded and provided to each member, the calculation and payment of benefits and management of the individual accounts.
"The contribution paid to the funds are to be pre-tax deduction from pay.- In addition, capital gains on the pension funds are tax free. Pensions are taxed as earned income. Additional voluntary contributions (by either the member or the employer) are permitted
"Switching of funds between managers is to be free of charge. -Members may (and last year over half of them did) switch every five months at no cost. This, in fact is one of the key problem areas with this type of system, due to the high cost of marketing and sales.
"All members are to be covered in the case of disability or death for an amount equal to that to which they would have been entitled at normal retirement age, had they continued contributing to that date.- AFPs are obliged to provide group insurance to make up the short-fall (the difference between the lump-sum required to purchase an annuity for a pension of 70% of average earnings - in the case of total disability - and the balance on account), which is charged on to the member as part of the monthly commission, which is currently around 3% of salary.
"The funds may not be used until retirement age. - Members may, however retire before the normal retire-ment ages of 65 (men) and 60 (women) if the accum-ulated funds are sufficient to purchase an annuity equal to at least 50% of average earnings.
"Such a system, based on pension funds, is not only an efficient means of social protection in old age, but leads to the accumulation of wealth in the hands of the worker. They will, in turn, become the principal source of savings to finance investment. The funds under management now represent around 40% of Chile's GDP.
"The cost of current pensioners and contributions prior to the new system are to be financed out of general taxation. - In practice, the cost of pensions has been paid for through fiscal savings, the increased tax revenue due to the expansion of the Chilean economy and the issuing of Government debt. Jonathan Callund"