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Chile
Index
Chile's pensions system, which started to operate in
May 1981,
is based on individual capitalization of funds
(see Social
Security
, ch. 2). This system determines a minimum basic
contribution equal to 10 percent of disposable income and
makes the
benefit a function of an individual's contributions during
his or
her active life. Benefits for incapacity and survival are
financed
by complementary insurance with financial reserves. Decree
Law
3,500 of 1981 institutes a social security system that
make
contributions obligatory for dependent workers who joined
the labor
force after December 31, 1982, and makes them voluntary
for
independent workers and those who had already contributed
to the
traditional pension funds. The old pay-as-you-go system,
which was
being phased out, covered all those workers who had
entered the
labor force in 1982 or earlier and who chose not to
transfer to the
new capitalization system. The reform responds to a need
that has
been recognized before, when the old system had entered a
phase of
serious financial difficulties.
In the reformed system, the state now plays a
fundamental role
in regulating and monitoring operations and guaranteeing
"solidarity in the base" through a minimum pension. All
workers,
after contributing a minimum amount (15 percent of their
gross
income annually), have the right to a minimum pension of
85 percent
of their minimum salary, even if their life-time
contributions to
the system result in a smaller benefit. The new system
brought
about an increase in coverage, with the proportion of
independent
workers covered increasing from 58 percent in 1985 to 79
percent in
1990. The proportion of dependent workers covered
increased from 79
percent in 1985 to 92 percent in 1990.
Article 28 of Decree Law 3,500 establishes that the
numerous
Pension Fund Administrators (Administradoras de Fondos de
Pensiones--AFPs) are authorized to charge a fee to cover
their
administrative costs. The most important restriction is
that, with
a few exceptions, fees have to be the same for all
affiliates in a
given AFP. After a relative increase in the fees between
1981 and
1983, competition resulted in a steady decline in the cost
to
individuals. In 1990 the cost for an "average contributor"
was 33
percent lower in real terms than in December 1983.
Commissions fell
from 5 percent of taxable income in 1985 to about 3.2
percent in
1990. In 1992 the AFPs were charging about 0.9 percent of
salary in
insurance premiums and 1.8 percent in commissions, for a
total of
2.7 percent.
Strict norms regulate the investment of pension funds.
Only
certain instruments may be used, and there are clear
limits on the
distribution of investments by type of instrument. The
dynamism of
the Chilean capital market since the early 1980s has
forced
constant revisions of these norms. Pension funds are the
largest
institutional investors in the capital market,
representing 26.5
percent of GDP in 1990 (compared with 0.9 percent in
1981). The
average real return to investment of Chilean pension funds
between
1981 and 1990 was 13 percent. In 1992 AFPs were authorized
to
invest up to 3 percent of their portfolios abroad, double
the
previous maximum.
Data as of March 1994
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