Paula Garda
Aida Caldera Sánchez
Expanding Social Protection and Addressing Informality in Latin America
This chapter builds on an original background report prepared by Olga Fuentes for the OECD submitted in October 2022. The current version has been substantially revised, edited and expanded by Aida Caldera and Paula Garda, incorporating additional analysis and updates.
Abstract
Chile has built a comprehensive social protection system, but gaps persist due to informality. The COVID-19 crisis exposed these weaknesses, as informal workers lacked adequate protection and relied on emergency transfers, fuelling demands for reform. Recent measures, including the universal pension, tax and labour reforms, and the 2025 pension reform, strengthen coverage and benefit adequacy of the social system, but further integration and incentives for formalisation are needed to close gaps and build resilience.
Chile stands out in Latin America for its continuous economic development over the last three decades. Economic progress has been complemented by one of the most comprehensive social security systems in Latin America, including a universal basic pension (Pensión Garantizada Universal, PGU), universal access to healthcare, unemployment insurance and employment subsidies for formal-sector workers. These schemes have contributed to sustained poverty reduction.
Despite the strength of the social protection system, challenges remain. Over a quarter of workers are employed in the informal sector, notably lower than the Latin American average of around 50%. Importantly, Chile's informality typically manifests as partial informality, where businesses partially comply with regulations rather than operating entirely outside legal frameworks. Additionally, self-employment, particularly prevalent among informal workers, often involves low-productivity, survival-oriented activities. Informal workers often lack access to social security benefits such as unemployment insurance, holidays or maternity leave.
Around a third of the population is economically vulnerable, and income inequality remains high (OECD, 2022[1]). These problems dampen economic growth and generate public dissatisfaction due to disparities in access to economic opportunities, basic services, and social security benefits. These disparities culminated in a surge of social unrest at the end of 2019 and demands for reforms, particularly of the pension system.
The Covid-19 pandemic exposed the vulnerabilities of the social protection system. Despite exceptionally strong policy support during the pandemic, with a fiscal response at over 12% of GDP by 2021, one of the highest among emerging markets, the Covid-19 pandemic increased poverty and income inequality. This was primarily due to the large number of informal workers, often lacking access to social security benefits, and the limited reach of social assistance. Informal workers had to rely on emergency cash transfers, which suffered roll-out delays during the first months of the pandemic due to the patchy cash transfer systems coverage. The weak social support led to high pressures on authorities to approve extra-ordinary pension fund withdrawals and develop an almost universal cash transfer scheme in 2021. As a result, overall support overcompensated the loss of incomes during the pandemic and fuelled a temporary consumption boom and inflationary pressures.
Recent years have seen significant reforms aimed at strengthening social protection and reducing informality. Post-pandemic, Chile's macroeconomic recovery has been characterised by the normalization and control of inflation and inflation expectations, the recovery of growth in line with the medium-term trend, and significant social and economic reforms. One measure is the Electronic Family Wallet (Bolsillo Familiar Electrónico), a targeted subsidy designed to alleviate the rising cost of living for vulnerable households. A comprehensive tax reform, Ley de Cumplimiento Tributario, was approved to strengthen tax administration, reduce informality and combat tax avoidance. The reform introduces measures to level the playing field for SMEs and the self-employed, particularly in relation to large online marketplaces. These include eliminating the VAT exemption for low-value imports, new reporting requirements for banks on frequent transfers, increased penalties for non-compliance in digital platforms, and obligations for marketplaces to share information on informal sellers. Additionally, Chile introduced reforms to enhance pension coverage and adequacy, improved unemployment insurance, and expanded employment subsidies for formal-sector workers. These measures collectively aim to encourage formalisation, strengthen social protection, and reduce inequality.
Persistent informality continues to pose a challenge limiting the reach and effectiveness of social protection, while reducing productivity and diminished potential tax revenues. There is a need for developing a better social protection system that does not differentiate between formal and informal workers. Recent evidence from Chile indicates that the informality rate has slightly decreased despite significant increases in the minimum wage, suggesting complementary policies such as targeted subsidies, enhanced pension coverage, temporary subsidies for SMEs to offset minimum wage increases, and tax compliance reforms likely offset the increased formal employment costs. Still, developing a comprehensive policy agenda remains essential, particularly addressing structural factors such as productivity gaps of workers and firms. The design of the social protection system itself also significantly influences incentives for formal employment and thus must be carefully structured to encourage formalisation. Ensuring some basic social protection coverage for all, including in pensions, health and unemployment insurance, while simultaneously reducing the cost of formal employment, would reduce labour informality and improve social protection. These reforms would help to mitigate the impacts of future crises and cushion the income effects of economic transformations, such as the digital transformation, climate change, or natural disasters.
This chapter describes Chile’s social protection system, including pensions, health, unemployment insurance and social assistance and proposes policy options to strengthen social protection while increasing formal employment.
The COVID-19 pandemic had a significant negative impact on the Chilean economy. Unemployment peaked at 13.1% in July 2020 with job loss rates, higher among low- and middle-income households, peaking at 25% for women and 20% for men between May and July 2020. Despite dropping more recently to around 8% during 2024, unemployment remains above the pre-pandemic rate of 7.2% in 2019. Job losses affected particularly informal workers, but also women and youths, exacerbating pre-existing inequalities. However, rising unemployment and declining participation rates among young people, women, and older adults have been structural trends for over a decade. The pandemic accelerated existing structural transformations, including higher youth enrolment in education partly due to tuition-free policies, reducing youth employment, and lower participation among older adults linked to the introduction of the universal guaranteed pension (PGU).
The Covid-19 pandemic reversed decades of declining poverty and inequality. The poverty rate increased from 8.6% in 2017 to 10.8% in 2020, and extreme poverty from 2.3% to 4.3% (Figure 6.1). In 2022, poverty rates started decreasing again to 6.5% and extreme poverty to 2%. Inequality, as measured by the Gini coefficient, increased by 4 points during 2020, to then decrease in 2022, but is still higher than a decade ago.
The strong negative impact of the Covid-19 pandemic on social outcomes can largely be explained by pre-existing structural characteristics of the labour market, including high rates of informality, self-employment, temporary work, and job turnover (Figure 6.2). Unlike in previous recessions, which led to an increase in informal sector jobs, as workers lost formal jobs, the pandemic, and in particular, the lock downs and mobility restrictions, caused massive job losses in the informal sector forcing many informal workers to stay home. Job losses among informal workers were twice as high as among formal workers (OECD, 2022). Stimulus policies in the form of credits, wage subsidies or furlough schemes generally failed to reach informal workers. Moreover, as informal workers typically lack savings and social protection, they relied on social assistance cash transfers that only partially compensated for their lost income (Busso et al., 2020[2]).
Note: In Panel A, poverty is defined as the share of people living in a household below the 50% of the median disposable household per capita income (or, in some cases, consumption expenditure). This poverty measure is different from the national definition of poverty by the Ministry of Social Development, which is used in Panel C. Gini index measures the extent to which the distribution of income after taxes and transfers (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. Panel C shows poverty using the national definition based on the calculation of the basic food consumption basket.
Source: World Bank, WDI; Ministerio de Desarrollo Social y Familia de Chile.
Note: Year 2021. INE identifies three main employment groups: (1) employees and paid-domestic workers, (2) own-account workers and employers, and (3) unpaid family workers. For group (1) a formal worker is the one paying social security contributions. For group (2) a formal worker or employer is the one owing a formal sector enterprise or issuing invoices for the provision of independent services. Unpaid family workers are considered informal employment.
Source: Labour Informality Statistics, INE 2021-2024
Even before the pandemic, informality rates were persistently high, averaging 28.5% between 2017 and 2019. Post-pandemic, dropped sharply during the pandemic but has gradually rebounded. As of 2024, it remains below pre-pandemic levels, indicating only a partial recovery in informal employment. Women are slightly more likely to work informally than men (Figure 6.3), even if the overall female employment rate is low in Chile compared to the OECD average. Informality is also higher among the elderly, the young and the less educated (Figure 6.4). Informality is also higher among self-employed workers and among lower-income households. Agricultural, construction, retail, hotel, and restaurant workers are also more likely to be informal.
Note: Figures are 12-month averages.
Source: Labour Informality Statistics, INE 2021-2025.
Source: Own calculations based on Labour Informality Statistics, INE 2021-2022.
Chile has one of the most comprehensive social protection systems in Latin America. Although public social spending has constantly increased over the last decade, it remains one of the lowest among OECD economies in 2022 (Figure 6.5), although it increased during the pandemic. Around 40% of social spending is allocated to the social protection system, according to the Budget Office. 50% of this social protection spending is allocated to pensions and less than 13% to social assistance programmes supporting the poor and the vulnerable. Furthermore, social protection coverage is relatively low, as access is mainly determined by a worker’s employment status and ability to regularly contribute to a social insurance scheme. As a portion of the Chilean workforce is employed in the informal sector or circles back and forth between formality and informality, there are significant social protection coverage gaps. Even though access to contributory social protection in Chile is largely tied to formal employment, an expanding set of non-contributory programmes targets workers without formal jobs. These include the Family Subsidy and Maternity Subsidy, which provide monthly cash transfers to low-income families without social security coverage, as well as the Chile Seguridades y Oportunidades programme, which offers financial support, psychosocial assistance, and access to services to promote economic autonomy for individuals and families in extreme poverty.
Percentage of GDP, 2022
Note: Social spending with financial flows controlled by General Government (different levels of government and social security funds), as social insurance and social assistance payments.
Source: OECD Social Expenditure Database (SOCX) via www.oecd.org/social/expenditure.htm.
The existence of separate contributory and non-contributory systems results in inefficiencies and inequalities in the social protection system, with informal workers being particularly disadvantaged. Informal workers are excluded from most contributory social security programs, such as pensions, unemployment insurance and health coverage. They are not entirely without support, however, as they can benefit from the public health system (FONASA), the universal basic pension, and targeted social assistance aimed at the most vulnerable if they meet means-tested requirements and residence conditions. In this social assistance system, which was created to provide insurance to those left out of the contributory social security system and is generally financed from general tax revenues, Chile has managed to achieve universal access to healthcare and pensions. Many informal workers, however, have incomes above the poverty line, which generally precludes them from accessing cash transfer benefits or unemployment insurance. Informal workers also have less access to training and more unstable earnings. This duality has led to a low coverage of social protection, particularly among certain groups such as the unemployed, although social protection coverage is higher than in other Latin American countries. The public health system is often underfunded and overstretched. Given the low rate of participation in the labour market of women, a gender gap is also present in the social protection system. Women receive lower pensions, as they earn less, live longer and contribute less than men driven by maternity and other family care responsibilities. This is beginning to change with the 2023 pension reform, which introduced a public social insurance pillar and a strengthened solidarity component aimed at narrowing gender gaps in pension outcomes.
Formal workers, on the other hand, have access to better social protection systems through contributory schemes. This social protection system is characterised by a large participation of private actors, such as private pension and unemployment funds, based on savings in individual accounts. The main branches of contributory social protection are health, workplace health and safety, family and children benefits and subsidies, employment protection and pensions. Government top-ups complement workers’ or firms’ contributions to increase benefits of the most vulnerable formal workers. Although employee and employer social contributions seem not high when compared to other OECD countries, they can prevent low-income workers, particularly around the minimum wage, from accessing formal jobs. Evidence shows that reducing social contributions in Chile could help low-income and vulnerable workers escape informality (Box 6.1).
Chile has currently a number of programmes to promote formalisation of vulnerable groups, mainly in the form of employment subsidies targeted to the youth and women of the 40% most vulnerable population covering around half of the total social contributions to be paid to the worker (Table 6.1). Earlier evaluations suggest that these employment subsidies have been successful in increasing employment and reducing informality among vulnerable groups in Chile (Henoch and Troncoso, 2013[3]; Bravo and Rau, 2013[4]; Centro de Microdatos, 2012[5]; SENSE, n.d.[6]). However, coverage of these programmes has been low in limiting the impact on overall informality. Furthermore, in recent years, the effectiveness of these subsidies has weakened. While programmes such as the Youth Employment Subsidy (SEJ), the Female Employment Bonus (BTM), and others were initially designed to provide benefits equivalent to 20% or more of the minimum monthly income, their real value has eroded significantly. Current estimates suggest average benefits have dropped to around 5% (for workers) and 3% (for employers) of the minimum, wage, substantially reducing their incentive power.
Evidence for other emerging market economies, such as Türkiye, shows that employment subsidies covering employers’ social contribution costs have a positive impact on employment, particularly in small firms, and this is driven by the positive effects on formalisation of existing workers more than creation of new jobs (Aşık et al., 2022[7]). The experience with these programmes demonstrates the importance of reducing the cost of formal employment to encourage the formalisation of vulnerable workers. Targeted subsidies for social contributions can support formalisation when adequately designed and provide sufficient incentives.
Note: * 0.3% of population aged 18-35.
Source: OECD calculations based on SENCE, Finance Ministry, and DIPRES.
Chile’s pension system is the cornerstone of social protection and has been a central issue in Chile’s recent elections and political debates. The system has three components: a non-contributory first tier, a mandatory contributory second tier of individual accounts, and a voluntary third tier. The system has been the subject of significant debate because pension benefits are low, particularly for women and the middle-class, leading to public dissatisfaction. Moreover, low trust on the pension funds managers and the impact of the pandemic induced early pension withdrawals raising concerns about the long-term sustainability of the system. As a result, the system has undergone recent adjustments, and a major pension reform passed in Congress in January 2025 (Box 6.2).
A long-awaited reform of Chile’s pension system, strongly demanded by the population and stalled in political negotiations for a decade, was issued as law on March 2025. The reform introduces a new 7% employer contribution, gradually phased in over nine years, complementing the existing 10% employee contribution and the 1.5% employer contribution, bringing the total contribution to 18.5%. The reform also increases the universal pension, eliminates gender gaps through a special bonus for women, provides a bonus for existing retirees, and overhauls the pension fund industry.
Of the 8.5% employer contribution, 6% will be allocated to individual savings accounts. This includes a direct contribution of 4.5% and a 1.5% temporary “Protected Return Contribution” (Cotización con Rentabilidad Protegida) to provide benefits based on years of contribution that will be phased out gradually after 30 years, and 1% for a permanent compensation to address gender-based differences in life expectancy. The remaining 2.5% will go to a new Social Insurance (Seguro Social) administered by the Fondo Autónomo de Protección Previsional (FAPP). To enhance equity, the reform introduces a minimum monthly benefit for women aged 65+ (0.25 UF - USD 9.7), regardless of their savings, to offset their longer life expectancy. The eligibility threshold for contribution-based benefits will also be more accessible for women (starting at 10 years of contributions and rising gradually to 15) while 20 years for men. Independent workers will benefit from simplified and automatic contribution mechanisms.
The reform also increases the universal pension (PGU) to CLP 250,000, to be phased in over 30 months. This new amount aligns with the national poverty line and will remain indexed to inflation. Coverage will continue to target the bottom 90% of older adults based on an affluence test.
Several new measures aim to increase contribution densities. These include a new insurance scheme to cover pension contributions during unemployment, paid from the Unemployment Solidarity Fund; a simplified fixed monthly payment scheme for self-employed workers with automatic bank deductions; and the option for individuals to contribute voluntarily on behalf of family members. The Pension Superintendency will define simplified contribution methods using digital tools to calculate equivalent months of contributions. Unpaid contribution collection will be centralised under the Treasury to improve enforcement and recovery.
The AFP industry will be overhauled to reduce fees and increase competition. A biennial auction will allocate 10% of affiliates to the AFP offering the lowest commission. New entrants will be allowed to compete, and the capital requirement (encaje) will be reduced to 30% of fee revenues. Generational funds with performance-based benchmarks and reserve requirements will be introduced to improve returns while protecting against market underperformance. Investment rules will be relaxed to allow greater allocation to alternative assets.
Together, these measures aim to improve coverage, equity, and efficiency in Chile’s pension system while addressing demographic and social challenges.
6.4.1. Chile’s pension system
First Tier: Solidarity pillar
The non-contributory pension system, introduced in 2008, aimed to provide a social safety net and alleviate poverty. Before recent reforms driven by social unrest in 2019 and the pandemic, the government provided this pillar to individuals who lacked sufficient pension savings to meet a minimum retirement income threshold to ensure a basic level of income in retirement. The pillar included two components: the basic solidarity pension (Pensión Básica Solidaria), a mean-tested benefit for the poorest 60% of the population aged 65 and older who did not participate from the pension system, and the pension solidarity contribution (Aporte Previsional Solidario), which supplemented income for individuals whose pension savings fell below a certain level, to boost their income to a more liveable standard. In response to widespread protests and calls for greater equity, the government increased the benefit amount by 50% between 2020 and 2022 to address adequacy concerns, as the benefits provided were previously below the poverty line.
In January 2022, amid ongoing public pressure about low pension benefits and in the context of lingering social unrest and the impact of the pandemic, the government replaced the solidarity pillar with the guaranteed universal pension (Pension Garantizada Universal, PGU), substantially increasing coverage and significantly expanding benefits. The PGU provides coverage to 90% of individuals aged 65 and over, excluding only the highest-income decile, with at least 20 years of residency (including four out of the previous five years) in the country prior to the claim, and having a self-financed pension below to CLP 1,210,828 (around USD 1,200) in 2025. The benefit was initially established at a monthly CLP 185,000 (USD 217) and adjusted by inflation afterwards. The benefit increased to CLP 250,000 (USD 247) in 2024 following the latest pension reform. This amount corresponds to approximately 100% of the national poverty line and about 45% of the minimum wage. Both the amount of the PGU and the thresholds are adjusted annually based on the consumer price index (CPI).
The introduction of the PGU generates stronger incentives for labour formalisation and to contribute to social security. This is because, below a certain threshold, the amount of the PGU does not depend on individuals’ pension savings, and therefore it eliminates the implicit tax on pension contributions that characterised the previous solidarity pillar. While there remains an incentive to underreport income to qualify for households in the top deciles, near the threshold, the reform can reinforce formalisation incentives if individuals understand that the PGU is guaranteed and that contributing further improves their replacement rate. The system is also easier to administer as the means-testing mechanism applied for the solidarity pillar has been replaced by an affluence test based on household income that seeks to identify and exclude the 10% most affluent households.
Pension replacement rates have significantly improved with the introduction of the guaranteed universal pension, particularly for low-income workers. Expected pension adequacy has improved substantially with the introduction of the universal guaranteed pension, but it remained below OECD averages in 2022 (Figure 6.6). The OECD estimates for 2022 put the net replacement rate, including both PGU and the self-financed pension, for an average worker entering the labour market at age 22 and retiring at age 65 is 47.5% up from 37.3% in 2018, compared to an OECD average of 61.4%. The net replacement rate for the low-income worker is higher, at 60.1% in 2022 up from 36.2% in 2018, but lower than the OECD average of 73.2%. These estimates, however, are based on projections made before the 2025 pension reform. The 2025 reform introduces a gradual increase in employer contributions and solidarity benefits, which are expected to further improve adequacy, especially for women and low-income workers. According to calculations of the Superintendency of Pensions (2025[8]), for new retirees in 2025, the median replacement rate is projected at 65.2% with the reform, compared to 50.9% without it, with stronger gains for women and low-income workers.
Note: Main assumptions: full career defined as entering the labour market at age of 22 and working until the normal pension age (65), real rate of return 3%, real earnings growth 1.25%, inflation 2%, and real discount rate 2%. OECD refers to the unweighted average of latest available data of its member countries.
Source: OECD Pensions at a Glance 2023.
Second Tier: Individual Accounts
The second, mandatory individual accounts, tier was introduced in 1981 as a Defined Contribution (DC) replacing the previous state-run pay-as-you go system. The system individual capitalisation accounts are managed by private companies (Administradoras de Fondos de Pensiones, or AFPs) and provides old-age, disability, and survivorship pensions. The amount of the pension depends on the total contributions made, the returns on investment, and the life expectancy of the retiree.
Until the 2025 reform, replacement rates have been low for the average worker even for those who contribute for a full career (Figure 6.6). This is partly due to contributions rates to the savings accounts that are among the lowest in OECD countries (Figure 6.7). Numerous gaps in the numbers of years a person contributes into the pension system have led to very low pensions. Average contribution density, that is the total number of years that a worker contributes in relation to the potential active life, is around 60% for men and 45% for women (Evans and Pienknagura, 2021[9]; Benavides and Valdés, 2018[10]). There is significant heterogeneity across pensioners with only 10% of pensioners having contributed over 30 years (Figure 6.8). These contribution densities vary significantly by income, ranging from 24% for low-income earners (16% for women and 32% men), to 50% for the median income earners (41% for women and 60% for men), to 77% for high income earners (72% for women and 82% men). Women tend to receive lower pensions, the median replacement rate for women is 12.0%, compared to 33.0% for men, due to lower contributions, longer life expectancy, lower lifetime earnings, and longer periods without contributing, because of childcare and other social responsibilities.
Persistent informality and self-employment, together with frequent unemployment and inactivity gaps, explain the low number of years a person has contributed and low coverage of the contributory pension system. Moreover, the system parameters have not adapted to decreasing global interest rates that have affected returns on pension assets and the retirement age has not changed following demographics. Moreover, adjustments to the mortality tables to take into account increased life expectancy had also led to lower pensions as a consequence.
Note: Year 2020. Sum of the contributions of the employee and the employer. Effective rate on average earnings. The contribution rate for Chile includes the commission paid to private funds.
Source: OECD Pensions at a Glance 2019, Pensions at a Glance: Latin America and the Caribbean; OECD Pensions at a Glance 2021.
Note: Data refers to December 2019.
Source: (Cabezón and Larraín, 2021[11]).
Three extraordinary pension funds withdrawals approved by Congress as a response to the pandemic, between June 2020 and April 2021, added to the challenges of the pension system. These have led to smaller self-financed pensions of current affiliates and lower replacement rates. Close to 4.2 million people, 36.5% of affiliates, depleted their account balances via the withdrawals, 62% being women. The measure was badly targeted as the possibility to withdraw was not based on individuals’ specific and exceptional circumstances and it benefited mostly households in the upper quintiles of the income distribution, who are able to save more for pensions (Fuentes, Mitchell and Villatoro, 2023[12]). Replacement rates are expected to decline by about 3 percentage points for the average male worker, and by 1.5 percentage points for female workers (Evans and Pienknagura, 2021[9]), with larger effects among older cohorts who have less time to save (Fuentes et al., 2021[13]). Additionally, these pension funds withdrawals create potential future contingent liabilities, as pensions will be lower creating high pressures for more public expenditure in pensions.
Third Tier: voluntary savings
The third, voluntary tier of the pension system covers both employees and self-employed workers. It is a fully funded individual account scheme, with savings managed by pension funds, insurance, and mutual fund companies, banks, and other private entities authorized by the Financial Market Commission. Funds withdrawn before retirement are subject to taxation, while funds withdrawn after retirement are not.
6.4.2. Improving incentives to formality while ensuring sustainability of the pension system
First Pillar
Further adjustments to the first pillar of the pension system were made with the 2025 pension reform, which increased the benefit to USD 272 per month (CLP 250,000), aligning it to the national poverty line. This increase is expected to cost 1.2% of GDP per year once fully implemented. The reform aims to improve poverty alleviation and provide better consumption smoothing at retirement. For current minimum wage earners in 2025 (excluding self-financed pensions), the PGU corresponds to a 50% replacement rate, near the 55.6% OECD average for low-income earners. Considering a male worker entering the labour market now at age 22 and retiring at age 65, an inflation-adjusted PGU would deliver a replacement rate of 34% for low-income workers (excluding self-financed pensions) (Table 6.2).
Second Pillar
The 2025 pension reform increases employer contributions by 7 percentage points, bringing the total contribution rate to 18.5% when including existing employee contributions. The reform introduces a mixed allocation: part of the new contributions are directed to individual accounts, while another share funds a solidarity-based public component that improves benefits, particularly for women and low-income earners. These changes aim to improve pension adequacy and address equity concerns (Box 6.2).
To illustrate the potential impact of such reforms, previous OECD simulations projected that a 6-percentage point increase in rate contributions going fully to individual pension funds, replacement rates would exceed OECD averages for full-career workers. A male worker entering the labour market at age 22 and retiring at 65 could achieve replacement rates of 84% for low-income earners and 67% for average-income earners, combining inflation-adjusted PGU benefits and contributions (Table 6.2).
For pensions to replace at least 60% of pre-retirement earnings, a smaller contribution increase—around 4 percentage points—would suffice for average workers, assuming a full career beginning at age 22. However, if contribution patterns are in line with current contribution densities, i.e. 30% for men and 20% for women and women retire at the age of 60, replacement rates for low-income workers would be below 50%, at any increase of the contribution, particularly for women (Table 6.3). Implementing intra- and inter-generational solidarity in the contributory system, as the new reform does, could help mitigate these issues (Huneeus et al., 2024[14]), but probably leaves replacement rates still below OECD averages, although some measures were implemented to raise contributions densities (Box 6.2).
A potential consequence of the 2025 reform is that higher mandatory contribution rates could discourage formal employment, especially for low-income workers who may opt to stay informal to avoid higher contributions, even if the benefits outweigh the costs in the long term. This risk is particularly pronounced around the minimum wage and low-income workers, where formalisation incentives are most critical. The basic universal pension (PGU) already significantly boosts replacement rates and achieves strong redistributive effects. While intra-generational solidarity could, in principle, encourage low-income and female workers to formalize by offering them benefits that exceed their contributions, workers often prioritise immediate needs and face financial constraints, making informality a more attractive option. Reforms to increase contribution densities for workers and reducing informality will be key to attain adequate replacement rates while ensuring the pension system remains sustainable. While the statutory retirement age was maintained in the 2025 reform, aligning retirement ages for men and women and linking them to life expectancy remains an important pending reform to ensure both adequate pensions and the financial sustainability of the system.
Note: Contribution rates represent the total percentage of income contributed by both employers and employees. The PGU is adjusted yearly by inflation. The estimation is based on the OECD Pension at a Glance (2021) methodology adapted to incorporate the PGU and other assumptions when appropriate. The main assumptions are the following: 2% annual inflation rate, 1.25% real earnings growth, 3% real financial return and 2% discount rate. Male participant who enters the labour market at age 22 and retires at age 65. Full career workers are considered unless is defined otherwise, and monthly average earnings are equal to CLP 856,628. The calculations assume that increased contribution rates are fully allocated to individual accounts. They do not consider any intra-generational or inter-generational redistribution components.
Source: Own estimation based on OECD Pension at a Glance (2021) methodology.
Note: Contribution rates represent the total percentage of income contributed by both employers and employees. The estimation is based on the OECD Pension at a Glance (2021) methodology adapted to incorporate the PGU and other assumptions when appropriate. The main assumptions are the following: 2% annual inflation rate, 1.25% real earnings growth, 3% real financial return and 2% discount rate. Monthly average earnings are equal to CLP 856,628. Contribution densities are assumed based on individual level data for contributors to the pension system. The calculations assume that increased contribution rates are fully allocated to individual accounts. They do not consider any intra-generational or inter-generational redistribution components.
Source: Own estimation based on OECD Pension at a Glance (2021)
A more effective approach would involve progressive contribution rates, with lower rates for low-income workers, particularly near the minimum wage, to reduce informality and increase contribution density. For higher-income earners, gradually increasing contribution rates would help ensure sustainability. These contributory pensions would complement the universal PGU, which benefits all workers. In effect, the system would resemble the design of a progressive personal income tax, with contribution rates calibrated to ensure it delivers adequate replacement rates for all income levels. This approach would balance redistribution, reduce informality, and improve contribution densities across income groups.
Further efforts to boost formality and labour force participation, particularly for low-income workers, the middle class and women, will be key to increase the number of years they effectively contribute. The provision of quality childcare and early childhood education has the potential to significantly increase female labour force participation and will also promote more equitable education opportunities for children from disadvantaged backgrounds (OECD, 2025[15]; OECD, 2022[1]). Improving access, affordability and quality of long-term care services would also boost female labour force participation as women are usually informal carers. Labour market reforms that reduce the high firing costs leading to a high share of temporary contracts and the resulting frequent gaps of unemployment and inactivity in the Chilean labour market, as already suggested in previous OECD Economic Surveys (OECD, 2018[16]), would also increase the number of years workers contribute. Moreover, boosting firm productivity, particularly in SMEs, is critical to make formalisation more viable. Policy priorities include streamlining regulations, such as permitting and trade standards, facilitating access to digital tools, finance and skills upgrading, and promoting innovation adoption and technology diffusion, particularly among smaller firms (OECD, 2025[15]).
Third Pillar
The coverage of voluntary pension savings in Chile is low. Just 15% of those with a pension, mostly high-income workers, have a voluntary savings account. Total savings in voluntary plans represent barely 2% of total assets under management. Data from other countries suggest there is significant scope to expand voluntary savings systems and benefits associated with doing so. In OECD economies, voluntary savings improve replacement rates by 25 percentage points, on average, for the middle-income worker (OECD Pension at a Glance 2021). In ten OECD member countries, private voluntary schemes cover more than 40% of the economically active population.
Behavioural economics strategies can be employed to significantly increase coverage and participation in voluntary schemes. Automatic enrolment, with opt-out options, for example, has already substantially increased take-up rates in many countries, including the United States, United Kingdom, New Zealand, and Turkey, particularly for middle income workers. Contribution rate increases, linked to wage adjustments, or the minimum wage, could also be automated to boost savings for higher wage earners workers, as well as re-enrolment after a certain “opt-out” period has passed. In the long term, further incentives could be implemented to increase voluntary savings, including financial incentives for employer matching and providing education on financial issues and pensions in the workplace (Nest Insight, 2019[17]).
Chile’s health system has seen significant improvements in coverage over the last decade, achieving almost-universal coverage at 95.7% of the population, close to the OECD average of 98.0%. However, key challenges remain, including inefficient structures, high financial burdens on households, and inequity in access to care. Public perception of the health system is also low, with a satisfaction rate of just 39.0%, compared to the OECD average of 71.0% (OECD, 2021[18]).
The structure of Chile’s health system is characterised by two parallel and separate insurance schemes a public and private insurance one. The public health system is administered by the National Health Fund (Fondo Nacional de Salud - FONASA). Around 80% of the population is covered by the public system (FONASA). Enrolment in this scheme is open to all residents irrespective of labour status or income. The fund operates based on a solidarity scheme, financed through a combination of general taxation and formal worker contributions, which amount to 7% of taxable income. Formal dependent workers, pensioners in the upper 20% of the income distribution, and, as of 2018, self-employed workers who issue invoices, are all required to contribute. Others can contribute voluntarily at regular or sporadic intervals, with benefits dependent on the number of months of payments. Contributors can access healthcare through either the public institutional system or the private “free choice” system. FONASA covers hospital and emergency room treatment, access to generalist doctors and a limited coverage of specialist doctors and high-cost diagnosis and treatments.
Another 12% of the population is enrolled with one of several private insurers (ISAPREs), serving predominantly households in the upper income deciles (Figure 6.9). Users can choose among affiliated private providers, including hospitals, clinics, and independent practices, based on individual contracts, with pre-negotiated fees. Health plan coverage and cost depends on individual characteristics, including gender, age, pre-existing health conditions, and income. Health plans under this system tend to be more expensive for those needing more protection, which encourages low-income and less healthy individuals to use the public scheme.
Source: OECD, Health at a glance 2021 and (Morales and Olate, 2021[19]).
The dual nature of the system leads to significant inequalities with respect to healthcare quality, with FONASA generally providing lower-quality services while ISAPREs do not participate of the risk sharing in the health system. These quality differences are particularly pronounced with respect to waiting lines (OECD, 2022[1]), which may limit the effective coverage of lower-income individuals to certain healthcare services. Because public primary care services are administered by municipalities, geographic inequities also exist depending on municipality budget capacity. Primary care services also suffer low resolution rates, leading to a high rate of referrals to public hospitals, which oftentimes do not have the resources to respond sufficiently to the referral (Goldstein, 2018[20]).
One policy that partially mitigates these inequalities is the Explicit Health Guarantees (GES) programme, introduced in 2004. GES guarantees timely access, quality, and financial protection for a defined set of high-impact health conditions, and was financed by a 1 percentage point increase in VAT. GES applies to both public and private providers, reducing disparities across the two systems. Evidence suggests that GES contributed to a 0.4-year increase in life expectancy in Chile (Menares and Muñoz, 2025[21]). The programme exemplifies a well-designed social protection mechanism financed from general revenues and offering equal benefits regardless of formal employment status.
Another weakness of the current dual system is the high out-of-pocket spending for healthcare, which is amongst the highest in the OECD and disproportionately affects the poor and the elderly. Although Chile spends approximately 9.4% of GDP on health, above the OECD average of 8.6% of GDP, just 3% of GDP is public spending, compared to the OECD average of 6.3%. Out-of-pocket health expenditure in Chile is high, at 33.9% of total health expenditures, making households vulnerable to health shocks (Figure 6.10).
Total health expenditure, % of GDP, 2022 or latest year
Source: OECD, Health Expenditure and Financing database.
6.5.1. Improving access to quality healthcare benefits while reducing informality incentives
The parallel structure of private and public health systems creates inefficiencies and inequalities. While 80% of the population is covered by the public system, just 64% of the population with relatively higher incomes actually pay contributions and copayments, effectively subsidising the healthcare benefits of the poorest 16%. Those with the highest incomes, however, tend to use the private scheme, where they pay risk-adjusted premiums and therefore do not contribute to a redistributive mechanism. Overall, this amounts to a redistribution from middle-income households to low-income households. Not having high-income earners in the redistribution mechanism embedded in the public system reduces the funding available for FONASA and increases the burden on public healthcare contributions, besides being a missed opportunity for increased risk pooling. Furthermore, the design of the current health system generates incentives for informality, as informal workers have limited incentives to contribute to a health system that provides low-quality services that they can also access for free if they remain informal (Levy and Cruces, 2021[22]).
To address these problems, resources across the public and private system could be pooled into a national health fund that collects all resources for healthcare and redistributes them to existing insurance schemes based on the number of subscribers and their health risks. Public and private insurance schemes could in principle continue to co-exist under such a set-up, albeit with stronger regulations and higher quality standards. By pooling resources, compulsory health contributions of workers in both FONASA and ISAPRE, together with higher state contributions from general taxes, would be sufficient to reach a public health expenditure of at least 5% of GDP, as calculated by the Chilean Medical School (2020[23]); (OECD, 2019[24]).
Another option is to take resource-pooling a step further and create a single, unified healthcare system with universal access for the entire population and a common basic set of high-quality healthcare benefits, as proposed by the OECD (OECD, 2022). Such a universal basic healthcare scheme could be exclusively financed by general tax revenues and supplemented by regulated voluntary private insurance schemes to top up benefits and reduce out-of-pocket spending. For those with higher incomes, mandatory social contributions could be replaced by a commensurate increase in personal income taxes. This would reduce the cost differential between formal and informal employment by 7 percentage points, particularly for low-income workers, incentivising formalisation, and increase redistribution by pooling resources.
Such a reform would build on recent advances such as the “Copago Cero” policy implemented in September 2022, which eliminated co-payments in the public health system and guaranteed free access to AUGE/GES treatments, emergency care requiring hospitalisation, medicines, prostheses, dental and mental health treatments, and special programmes (e.g. bariatric surgery, in vitro fertilisation). By improving the quality and equity of public services, and aligning financing mechanisms, such a reform would strengthen incentives to formalise and enhance risk pooling.
Over the past few decades, Chile has expanded social assistance programmes aimed at poverty alleviation. These programs tend to target specific vulnerable populations, such as women, children, the elderly, the disabled, and the unemployed. Although there is some support to low-income formal workers, most are designed to protect those left out of existing social security schemes, commonly informal workers in poor households. While conditional cash transfer programmes have contributed to reduce poverty (Cecchini, Villatoro and Mancero, 2021[25]; Focus, 2016[26]) and coverage has increased in the last decades the main cash transfer programmes have not reached all those in need and benefits are low even in regional comparison (Figure 6.11).
According to the CASEN 2022 survey, cash transfers have played a significant role in household incomes in Chile, particularly among lower-income households. In the lowest income decile, where poverty is most concentrated, monetary subsidies increased by 60% in real terms over five years. Specifically, the average monthly subsidy per household rose from CLP 100,103 in 2017 to CLP 160,073 in 2022 (Obach, 2023[27]). This substantial increase in cash transfers has contributed to a notable reduction in poverty rates. As of 2022, 62% of households in the social registry (Registro Social de Hogares) received some form of cash transfer (Dipres, 2024[28]). Among these, almost 80% of the most vulnerable 40% of households received transfers, with coverage reaching nearly 100% for households with either elderly members or children under 18. These numbers include the Ingreso Familiar de Emergencia (IFE), which was a significant temporary cash transfer introduced during the COVID-19 pandemic. The IFE substantially increased the reach and impact of cash transfers, providing near-universal support at its peak. The IFE was discontinued in 2022, which likely led to a reduction in both the coverage and generosity of cash transfers in Chile.
Chile has three primary social assistance programs:
Ethical Family Income (Ingreso Ético Familiar): This programme is part of the Chile Seguridades y Oportunidades system and focuses on providing conditional and unconditional cash transfers alongside other benefits to address poverty comprehensively. It targets households in extreme poverty with conditional cash transfers linked to health, education, and employment behaviours. Actual benefit amounts depend on specific household circumstances. It cost 0.03% of GDP on average between 2012 and 2022 (0.03% in 2023) and covered 2.6% of the population in 2022. The maximum benefit of this programme per household is around USD 108, which is equivalent to 23% of the poverty line for a reference family. The Bono Logro Escolar, a component of the programme targeting students from low-income families with high academic achievement, had its benefit amounts increased in April 2024.
Single-Family Subsidy (SUF): Targeted at households in the poorest 60% without income, SUF provides cash transfers conditional on children’s education and health check-ups. It reached 866 thousand households in 2021, costing 0.17% of GDP. The SUF aims to alleviate short-term poverty and promote long-term investments in children’s development. In December 2023, an automatic version of the SUF was introduced for the poorest 40% of the population. This reform uses administrative data to proactively identify eligible households and deliver benefits without requiring an application. It also increased payment levels by nearly 24%, strengthening the reach and effectiveness of the social protection system.
Family Allowance: This monthly transfer supports formal workers with dependent children earning less than 2.2 times the minimum wage. Payments vary by income and number of children, covering 895 thousand households in 2021 at an annual cost of 0.04% of GDP. It incentivises formal work by providing benefits to low-income formal workers.
Ingreso Mínimo Garantizado: A wage subsidy designed to supplement the income of formal workers earning close to the minimum wage. It ensures that low-income workers receive a minimum guaranteed income.
Note: Data are for 2022, except 2019 for Argentina. Family allowances=Asignaciones familiares, Single family allowance=Subsidio Único Familiar, Ethical Family Income=Ingreso Ético Familiar; Permanent family allowance=Aporte Familiar Permanente.
Source: World Bank, Atlas of Social Protection: Indicators of Resilience and Equity (ASPIRE) 2025.
6.6.1. A single cash transfer programme for the vulnerable
Cash transfer programmes are fragmented, with weak coordination among different managing institutions and a lack of consistency with regards to eligibility criteria. Over the years, increased coverage has mostly been achieved by creating new benefits operating alongside existing ones (World Bank, 2021[29]).
Since 2024, Chile has initiated a substantive modernisation process through the Ministry of Social Development and Family. This reform has expanded coverage by leveraging administrative records and digital technology. Notable advances include the automation of the Single-Family Subsidy (Subsidio Único Familiar) for children and adolescents in the most vulnerable 40% of households, and the launch of the Social Single Window (Ventanilla Única Social), an online platform where the State takes an active role in informing households about the benefits they are potentially eligible for according to their socio-demographic profile.
Enhancing regular monitoring and evaluation of social programmes would support social spending efficiency. There have been significant recent efforts to improve the information on beneficiaries, monitoring and evaluation of social programmes. The main challenge now lies in translating these findings into policy decisions that effectively address identified duplications and overlaps.
Protection against poverty and income loss could be improved by unifying and integrating existing cash transfer programs into a single poverty alleviation scheme. This would avoid overlaps in target populations and increase program efficiency and transparency. The primary goal of the new scheme would be poverty alleviation, but it could also be designed to increase investment in human capital in the form of higher educational attainment and health outcomes for young people, and higher rates of adult formal employment.
The selection of beneficiaries could depend on a comprehensive set of household indicators including income levels and needs, based on the Social Household Registry from the Ministry of Social Development and Family. The cash transfer amount would depend on household income, with transfers gradually decreasing to zero as household income increases to a specified threshold. An assessment should be performed to define benefit and subsidy amounts and corresponding income thresholds to effectively increase household economic wellbeing without creating incentives to reduce other sources of income. While the primary cash transfer would be unconditional, additional conditional benefits could be defined to motivate increased investment in human capital and employment, in line with the secondary objectives of the programme. Incentives for employment are particularly important for women, as evidence suggests that women’s reservation wage is often above the statutory minimum wage due to the additional costs associated with leaving the household. Policy design should avoid locking women into inactivity, as paid work provides not only income but also empowerment and social inclusion.
These suggestions align with the 2022 OECD Economic Survey (OECD, 2022[1]) proposal for a guaranteed minimum income for those under 65 years of age and living in poverty. The minimum income cash transfer would serve to cover the gap between an individuals’ income and the poverty line. Not only would a universal minimum income improve upon existing poverty alleviation mechanisms, but it would also provide a backstop for the unemployed, as discussed below.
Chile is one of the few countries in Latin America with unemployment insurance for formal workers (Box 6.3). The number of affiliates and beneficiaries of the unemployment benefit system has increased constantly since its creation, and particularly in recent years, but remains low (Figure 6.12). Between 2010 and 2020, the percentage of employed people who contributed and are covered increased from 50% to 60%, because of a decrease in informal and self-employment. As of 2023, the number of affiliates surpassed 11.5 million, while the number of beneficiaries grew to nearly 1.2 million, up from 730,000 in 2021. However, according to the Superintendencia de Pensiones, only 42% of the employed were affiliated and contributing in 2022, and just 27% received benefits when unemployed.
The low coverage reflects frequent informality and self-employed jobs, but also short duration of employment contracts and their high turnover (Huneeus, Leiva and Micco, 2012[30]; ILO, 2019[31]). Only 50% of employees that terminate a contract each year have enough contributions in their accounts to access benefits. Moreover, 50% of workers with fixed-term contracts had non-contributing periods lasting more than three months from the same employer in 2015, which impedes their access to the Solidarity Fund (Sehnbruch, Carranza and Prieto, 2019[32]). Hence, the unemployment benefit system protects workers with higher income levels and more stable jobs much better than it protects vulnerable workers, who are also much more likely to become unemployed (Sehnbruch, Carranza and Contreras, 2020[33]).
The system has undergone significant reforms in recent years. In response to the 2019 social unrest and the 2020 pandemic, Chile expanded unemployment insurance by loosening eligibility, increasing benefit amounts, and creating the Employment Protection Law. This law allowed job suspension or reduced working hours with partial wage compensation funded by unemployment insurance, protecting over 3 million workers between April 2020 and October 2021. Domestic workers were incorporated into the unemployment insurance system, improving their benefits and access to solidarity fund support. In 2023, the unemployment insurance system underwent a significant reform. This reform increased coverage by relaxing eligibility requirements, extended benefit profiles for fixed-term contracts financed by the Solidarity Fund, and improved benefit amounts. It also introduced an automatic adjustment mechanism for benefits and coverage in the event of catastrophic events, enhancing the system’s responsiveness and sustainability. For example, the minimum contribution requirement to access the Solidarity Fund is reduced from 10 to 8 months, benefit durations can extend from 5 to 7 months, and replacement rates can increase by up to 10 percentage points. These adjustments are predefined and triggered automatically, enabling rapid response without new legislation.
The Chilean unemployment benefit system, in place since 2002, is based on individual accounts with complements from a solidarity fund. While individual accounts are financed through mandatory contributions from dependant workers and its employers, the solidarity fund is financed by employer’s contributions and complemented with general taxation. In this system, workers need to fulfil certain requirements to withdraw money from the unemployment individual savings accounts or accessing the solidarity fund related to number of months that they have been contributing (Table 6.4). Workers on permanent contracts have also the right to severance payments. The legal severance pay is an amount equal to one month of salary for each year worked, with a maximum of 11 months. The severance payments are relatively high with respect to the average OECD country, and also in Latin America (OECD, 2018[16]).
One advantage of individual unemployment savings accounts over other unemployment insurance systems is that they significantly limit the risk of moral hazard (ILO, 2019[31]; OECD, 2011[34]; OECD, 2018[35]). By allowing workers to run down their personal savings during periods of unemployment, workers internalise the cost of unemployment benefits, thus strengthening the incentives of the employed to prevent job loss and of the unemployed to return to work quickly. Individual unemployment savings accounts can also strengthen incentives for working formally since social security contributions are less perceived as a tax on labour and more as a delayed payment (OECD, 2018[36]). Additionally, contributions accumulated during the employment career are not withdrawn by the worker, any surplus could be credited in the form of pension entitlements upon retirement, which could be also perceived as savings for retirement. The disadvantage of individual unemployment savings account system is that generally individuals with lower contributory capacity, who also tend to have a higher risk of unemployment, tend to receive insufficient protection. This is partially addressed by the Solidarity Fund that can be accessed once the individual accounts have been exhausted and it is financed by worker’s contributions and general taxation.
Source: OECD Secretariat.
Despite these measures, informal and self-employed workers were largely excluded, leaving significant gaps in income protection. The pandemic highlighted relying solely on unemployment insurance is insufficient in a labour market with high informality. Complementary mechanisms are necessary to provide a minimum income floor for precarious workers during crises.
Note: 2025 refers to January to April.
Source: Own calculations based on INE and Pension Regulator data.
6.7.1. Improving income protection for dismissed workers
Implementing the single cash benefit programme for the vulnerable, as discussed in the previous section, could improve the income protection for dismissed workers from vulnerable backgrounds. This would serve as a first layer of protection against unemployment for the most disadvantaged groups, and support dismissed workers in precarious, informal, or short-term jobs who are excluded from traditional unemployment benefits. In practice, for workers earning the minimum wage, a cash benefit equivalent to the poverty line would imply a replacement rate of around 50%. To implement the single cash benefit programme, it will be crucial that the targeting system and the Household Social Registry become more agile and able to detect, or at least verify, changes in workers’ labour market status and income without long delays. Beneficiaries of the cash transfer programme and the unemployment insurance system would need to be automatically registered with the labour market intermediation services to support the search for employment and training.
The existing unemployment insurance system could complement this non-contributory component by proving top-up benefits for those able to contribute more regularly to provide consumption smoothing and maintain living standards for higher-income dismissed workers. This second component would be financed from individual savings accumulated by workers.
Illustrative simulations, based the 2022 Economic Survey (OECD, 2022[1]) and on microdata from a Chilean household survey (CASEN) for 2017, allow comparing costs and benefits of reforming social protection in Chile, by estimating the likely fiscal cost of different reforms and gauging the impact on poverty and inequality. While poverty has declined significantly since 2017—from 8.5% to 6.5% in 2022 (CASEN)—the 2017 dataset remains useful for illustrative purposes, especially for simulating structural policy impacts. The cost estimates can only provide an upper bound for the short run, as they are based on the current status quo and do not account for the medium-term benefits from improvements in labour incomes, inequality and productivity derived from formalisation. The latter are notoriously hard to estimate in a reliable way, but they are the ultimate reason why such a reform should be undertaken.
A cash transfer programme as described in section above, that would supplement incomes of those below 65 affected by poverty and lift their incomes to the poverty line would cost 1% of GDP (Table 6.5). The cost is calculated with 2017 pre-pandemic data and is a reasonably conservative medium-run cost estimate. After replacing existing cash transfer programmes, the net cost would be 0.7% of GDP. This is an upper bound of the estimated costs, as a profound revision of all existing social programmes should be undertaken to eliminate those without the desired impact, which would create more savings than those calculated here.
Note: The calculations imply subtracting from household income the existing programmes, such as Ingreso Ético Familiar, Subsidio Único Familiar y Asignaciones Familiares, and replacing them by the new proposed programme.
Source: OECD Secretariat calculations based on DANE-GEIH data.
Alternative financing mechanisms for employee contributions to the contributory health scheme would imply funding needs equivalent to 0.8% of GDP, based on 2017 household data. Workers with higher incomes, i.e. above 1.5 minimum wages, accounted for 90% of those enrolled in the private system, whose contributions are equivalent to 1% of GDP, and for these workers, the current social contributions could be simply replaced by personal income taxes of the same amount. From those enrolled in the public system, 70% have earnings below 1.5 minimum wages, leaving a remainder of around 0.8% of GDP to be financed from general taxation revenues instead of labour charges, as workers with incomes close to the minimum wage are unlikely to become subject to personal income taxation in the near future.
The proposed reforms in this chapter together would have a long-term net cost of 1.5% of GDP (Table 6.5). This takes into account the expected savings in spending on current cash transfer programmes. All the calculations in this section are an illustrative exercise, with the final cost depending on many details of the reforms and its implementation. The implementation of such reforms can be gradual and should be accompanied by a comprehensive fiscal reform to achieve higher tax collection and progressivity (2022 and 2025 Economic Surveys). This calls for broadening the tax base—particularly through reductions in VAT exemptions (notably services) and eliminating inefficient tax expenditures. Increasing progressivity through broadening the personal income tax base, higher property tax revenues, increased environmental taxes, lower diesel exemptions and tobacco taxes, alongside improvements in tax administration via digitalisation, enhanced risk analysis, and transparency, could increase tax revenues and finance social spending preserving fiscal sustainability.
The universal guaranteed minimum pension and the proposed cash transfer scheme would significantly reduce poverty and inequality (OECD, 2022[1]). Lowering social contributions would permanently increase formal employment by reducing the cost of formal work compared to informal employment and capital. These changes would encourage firms to hire more formal workers and motivate the self-employed to formalise, boosting productivity and economic growth. Higher formalisation and growth would, in turn, increase tax revenues to help fund the reforms. Additionally, structural reforms to enhance productivity, as outlined in the 2022 and 2025 Economic Surveys of Chile, would further raise employment, individual incomes, and tax collection.
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