Chile's pension system matures
| Author | Chris Faulkner-MacDonagh |
| Position | IMF Western Hemisphere Department |
| Pages | 301-314 |
Page 301
Nearly 25 years ago, Chile replaced its public pension system with one based on individual accounts managed by the private sector. The new system has enjoyed impressive growth and served as a model for a number of other countries, but a new survey suggests that assumptions about workers' saving behavior may have been overly optimistic. It now seems that changes will be needed to ensure that workers reach retirement age with enough assets to stop working.
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Chile's pioneering pension reform-which replaced its public system with one based on individual accounts managed by the private sector-has served as a model for other countries across Latin America and the rest of the world. How is it doing after nearly a quarter century in operation?
Using the findings of a comprehensive household survey, a recent IMF Selected Issues Paper takes stock of progress and concludes that changes, including a broadening of the old-age social safety net, may be required.
Under Chile's pension regime, it is the individual-not the state-who is responsible for saving for retirement.While working, participants in the system contribute 10 percent of their wages to an individual retirement account each month and pay additional fees-averaging around 2 percent of wages-to private pension fund administrators (Administradoras de Fondos de Pensiones, or AFPs) to manage these accounts and invest in financial assets. The retirement age is set at 60 for women and 65 for men.
From the beginning, Chile's reformers realized that retirees would face a substantial risk of outliving their assets. To limit this risk, they created rules that barred retirees from withdrawing all of their money immediately upon retirement.
Funds would have to be withdrawn slowly over time or used to purchase an annuity that would provide a guaranteed stream of income for life. The reformers also created a social safety net that would provide a minimum pension guaranteed (MPG) to all participants who contributed to the system for at least 20 years. Currently, this minimum pension is set at around US$140 a month and is indexed to inflation to help protect retirees' purchasing power.
Since its introduction, the privatized pension system has grown rapidly.With around two-thirds of all workers participating in the system...
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