Pension Reform in Chile Revisited

The paper describes Chile’s pension reform of 1980, which replaced the existing pay-as-you-go public pension programs by a new funded pension program managed by private companies (the “AFP´s”). It comments on the main results of this reform so far, and identifies the current challenges faced by the country’s pension system. The paper also describes the changes introduced to Chile’s pension system in March 2008 and assesses their potential impact. The Chilean case shows that parametric reforms preceding the creation of a funded program can reduce political resistance to structural pension reform. Chile’s experience also suggests that the consistency of opinions among the economic, social security and labor market authorities responsible of designing and conducting a pension reform process can help to sell the reform to the political authorities. If the decision is to replace an existing pension program by a new one, it also seems necessary to have specific rules that, in some particular circumstances and for a limited period of time, allow discontented workers to go back to their former pension program. Chile’s experience also shows that the quality of pension programs micro design is relevant since individual decisions and portfolio managers investments decisions are shaped by regulations. Results so far suggests that the reform has been successful in improving the long term sustainability of Chile’s pension system; in creating a more fair system; in promoting the development of capital markets; and in removing some distortions to the operation of labor markets. On the other side, there is some room for the new program operational costs and prices to go down, and expectations about an increase in second pillar coverage have not been met. While some regulatory changes could improve the extent and quality of the funded pension program coverage, the long-term solution to the economic problems of retirement involves the labor market. To improve future pensions more jobs in the formal sector of the economy should be created; unemployment must be reduced; and working lives should be extended.