Chile’s Debt to Its Elders
The weeks ahead are decisive for one of the emblematic reforms of President Boric’s government: pension reform. After more than 18 months of tense debate in Congress, the ruling party’s great obstacle is its minority in both chambers. And the main issue can be boiled down to competing visions of solidarity.
But, before untangling the knot, let’s go back a bit to understand how we got here. The worldwide commemoration last year of the 50th anniversary of the 1973 coup d’état in Chile reminds us that this institutional rupture was not simply a change in power but a political, economic and social counterrevolution. Before the dictatorship imposed its new pension experiment, the Chilean state had spent decades building and improving its social security system.
Social security can be traced back to the anti-socialist German Otto von Bismarck who skillfully implemented the first version of social security in the second half of the 19th century. He did so not because workers’ rights were in his political program’s DNA, but out of pure political instinct and pragmatism. Faced with trade unionist growth, the specter of communism and the advance of the social democratic party, he sought to dampen the revolutionary mood with laws that raised the living standards of workers, reducing uncertainty about illness, accidents and poverty in old age.
The fundamentals of the German social security system served as an inspiration to many countries, including Chile. However, after the coup this pragmatism was not shared by those who gave political support to the military junta. Their social and economic ideas came from an altogether different source: the Chicago School of Economics, led by the free-market economist Milton Friedman. In addition to macroeconomic reforms, the so-called “Chicago Boys” delivered a series of proposals to completely transform social laws in the areas of labor, education, health and pensions.
They sought to eliminate the solidarity concept inherent in the country’s social security systems. In the new system, all workers would contribute ten percent of their salaries to individual accounts. These contributions would be administered by private companies (called Pension Fund Administrators or AFPs) and the resources would be invested in the capital market so that pensions would not be the burden of the state, but would be “self-financed” by savings and their capitalization in the financial markets.
Notably, the generals in charge of the junta were not convinced by this incredible promise: both the Armed Forces and the Carabineros maintain their old social security systems. In fact, after reviewing the Chicago Boys’s proposal and prior to authorizing its implementation, Pinochet warned the junta that “it should not appear that we are an exception, that we include all the people in the system but we do not enter it.… [We] have to give it a wording that conceals what we are going to do, otherwise we are going to appear very bad to the citizens.”
No one can deny that the generals gambled well by keeping their own system. According to consolidated figures for the year 2023, the Chilean treasury allocated about $1,180,000 pesos (USD$1,300) per capita per month to the pensions of uniformed personnel, while for the rest of the pensioned population the amount allocated per capita was less than $250,000 pesos (USD$275) per month.
The difference between uniformed and civilian pensions was in fact worse before the reforms introduced by the first government of President Bachelet (2006-2010) which created the basic solidarity pension and the solidarity pillar contribution, an important step forward in terms of returning to the principles of social security, particularly for women. But these reforms were insufficient. In 2016 the streets exploded in anger over pensions’ inadequacy, and the AFPs attracted a particular rage. It seemed that people were sick of the individually funded system.
More was to come. On October 18, 2019, hundreds of thousands took to Chile’s streets in massive demonstrations known as the Estallido Social (social outburst). Highly critical of the AFPs, the protestors demanded improved pensions, fewer inequalities and more solidarity—agitation which later led to the plebiscite on a new constitution. Then came the pandemic, which, as in many parts of the world, revealed the unforeseen precariousness of the system. The absence of governmental responses proportional to the social need led to immediate solutions through various parliamentary initiatives—one of which would counterintuitively lift the terrible reputation of the AFPs.
Workers were allowed to make an extraordinary withdrawal of ten percent from their pension funds to cover the immediate needs of their families. Although it solved urgent needs, the measure had several negative consequences. Given its high popularity, what was conceived as an exceptional act was ultimately repeated twice more, which quickly raised domestic consumption, ultimately generating an upward push in inflation by the end of 2021 and a good part of 2022. Furthermore, the structure of current and future pensions was weakened. Despite these consequences, the widespread perception that one’s own savings alleviated an immediate crisis legitimized the individual accounts and the ownership of those funds in a way that no media campaign by the AFPs could have done.
Chileans went to polls in December 2021. Just weeks before the runoff, President Piñera’s ailing second government (2018 to 2022) had taken a pragmatic page from Bismarck’s playbook by introducing a proposal we in opposition had long pushed for: a Universal Guaranteed Pension (PGU). The gambit failed to win them the election, and Boric became president. Congress swiftly passed the PGU, which was an evolution of the universal basic pension created in 2008: the amount, the coverage and the operating structure were all increased.
However, the movement to greater equality and solidarity soon received a setback. In a September 2022 national referendum Chilean voters overwhelmingly rejected a new, progressive constitution that included a more flexible and mixed pension system. The right wing successfully framed the results as a rejection not only of the new constitution, but of President Boric’s mandate for reform in general.
All this is the prelude to how the Boric administration came to present a proposal that sought synthesize of all the signals sent by the citizenry during the last 5 to 8 years. It proposed (1) to maintain the ten percent contribution that went as savings to an individual account, introducing important reforms to the industry to prevent abuses; (2) to create a new six percent contribution charged to the employers, which would be destined to a social insurance with benefits for current and future pensioners; and (3) to increase the universal guaranteed pension by nearly 20 percent to $250,000 per month (USD$275).
However, following defeat of the constitutional reform proposal the opposition hardened its position. At the end of 2023, the bill was approved in the Chamber of Deputies, but with important modifications, the most relevant being the halving of the social security system, thus allocating only three percent of this new contribution to individual savings. Conservative opposition parties currently control the Senate. Even the second exit plebiscite—which was a defeat for the right wing—was not enough to pave the way for the kind of cross-party understanding necessary for action.
Right now, the major disagreement between the government and the opposition is the distribution of the additional contribution to pensions. While the government moved from a “10-6” (that is, ten percent to individual savings and six percent to social security) to a “13-3” scheme, the opposition remains unconvinced. They claim that with the PGU the replacement rates of those with medium or low incomes will be very high, which would imply that there would be no need to supplement the pensions of these groups with social security and that therefore, all the contribution should go to individual savings.
The problem with only looking at the replacement rate is that another fundamental criterion for assessing pensions is not accommodated: sufficiency. If the replacement rate in the face of low salaries, intermittence and labor informality is higher than 60 percent, this does not mean that the sufficiency problem has been solved. President Boric’s goal was to end poverty in the population of people over 65 during his term of office and at the same time recognize the contributions of those who contributed with their work to the development of Chile, improving their pensions. Today this is in doubt.
Another problematic aspect of moving all the new savings into retirement accounts is the timing of the benefits. Only those who start contributing in 8-10 years will see the full potential of the promise of this new contribution 40 years later. Those who are retired or close to retirement will not receive an increase in their pensions, which makes this a political, economic and social problem, to say the least: nothing more than a pension reform that doesn’t significantly improve the situation of pensioners today.
At the same time, the grand objective of social security is solidarity between generations, between genders, and between classes. Without social security these ideals would be impossible to realize; the opposition responds that solidarity should only be provided through general taxes, which is unfeasible. The problem lies in the fact that this solution is much more expensive to implement, not to mention that, for more than a year and a half, the opposition has also opposed any progressive increase in taxes.
The Opposition’s Dilemma
As the economist Eduardo Engel pointed out in a recent column on pension reform, the opposition knows that the government will never give its support to a system whose contributions go entirely to individual capitalization. In other words, taking refuge in 16-0 implies denying the possibility of reform, at least during this administration. It would be gambling everything on the next government.
Along the same lines, a more optimistic and strategic reading—going back to Bismarck—of some in the opposition could be that this is an opportunity for those who want to consolidate a mixed system with a high predominance of individual savings, even more so legitimized by a progressive government. That is to say, to cede solidarity in 3 points out of 16 in order to give political sustainability and stability to the individual savings system.
So why not vote in favor of the reform and claim such consolidation? Here I am afraid there are two purely political obstacles that run parallel to the technical discussions mentioned above.
The first is the presence of the ultra-right, and their base’s dogmatic resistance to “giving in.” What they often forget is that a couple of years ago, after the Estallido Social, a proposal presented by their own government included a contribution scheme similar to 13-3. In other words, there are technical considerations that may not be insurmountable, but what really prevents any progress in the first place is the possibility that ultra-right voters will frame any agreement as weakness, which tends to scare off the center-right camp.
The second obstacle has to do with the approval of President Gabriel Boric. Everything indicates that the economic and social results will consistently deliver good news for the remainder of the government. The right wing could be thinking that if to these good tidings is added a substantial improvement in pensions, that is to say in the material life of more than one and a half million people, it could lend unstoppable momentum to the progressive project of this government. However, this is a risky move because it is becoming clearer today that the reasons for the opposition’s refusal to play ball are not consistent and, therefore, hide political calculations whose costs are ultimately borne by the elderly.
Instead of acting pragmatically as Otto von Bismark did a century and a half ago, what we are now seeing is that a predominant part of the Chilean right wing is betting “all in,” leaving hundreds of thousands of pensioners without an answer. For some of them, the only goal it seems is to regain the government in 2026 with parliamentary majorities. On our side, there are many of us who hope that there will be those that understand the need to combine elements of individual savings and solidarity, and see the need for a lasting agreement that will repair the debt owed to those who built the foundations of the Chile we live in today.
