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Chile
Index
Chile was one of the first countries in the Americas to
establish state-sponsored social security coverage. In
1898 the
government set up a retirement pension system for public
employees.
In 1924 the government approved a comprehensive set of
labor laws
and established a national social insurance system for
workers. In
large part, the authorities were responding to pressure
exerted by
the growing number of worker organizations and strikes. At
the same
time, a separate social-insurance system was set up for
private
white-collar employees, and the one for public employees
was
reorganized. The pension system for workers was known as
the
Workers' Security Fund (Caja del Seguro Obrero) and was
modeled
partly on the system pioneered by Otto von Bismarck, first
chancellor of the German Empire (1871-90). The fund
(caja)
was established administratively as a semiautonomous state
agency
that received income from employer and worker
contributions, as
well as from state coffers. The systems for private and
public
employees provided higher benefits than the workers'
caja,
and they were financed in the same manner, except that the
state
acted as the employer for public employees as well. The
armed
forces had a separate pension system.
The Workers' Security Fund was reorganized in 1952,
becoming
the Social Insurance Service (Servicio de Seguro
Social--SSS).
Until its demise under the military government, the SSS
served as
the primary agency for the state-run social security
system. SSS
coverage expanded over the years. By the 1960s, in
addition to
providing old-age pensions to its main beneficiaries, it
gave, at
their death, pensions to their widows (but not their
widowers) and
to minor children, if any. It also paid flat monthly sums
for each
immediate family dependent, income payments for qualified
illnesses
and disabilities, and several months of unemployment
insurance,
albeit all at very low levels.
Although the fund originally was meant to meet the
needs of
miners and urban blue-collar and service workers,
including
domestics, over the years the number of occupational
groups that
participated in what became a system of different
semiautonomous
state funds increased greatly. By the early 1970s, there
were
thirty-five different pension funds (although three of
them served
90 percent of contributors) and more than 150 social
security
regimes for the various occupational groups. This
expansion led to
many inequities because the newly incorporated groups
demanded and
obtained by law special treatments and new benefits that
had been
denied to original participants, even when these new
groups'
programs were added to existing funds. There was not even
a
standard retirement age for all groups. Funding for the
various
pension programs became extremely complex because the
state's
contributions were drawn by law from different tax bases.
This
pattern of growth of social security institutions is
typical of
countries in which the system is not conceived from the
very
beginning on a universal basis but rather is established
for
particular categories of employment. Because coverage
continued to
be conditioned on the employment history of the main
beneficiary,
it was never extended to all Chileans, even during its
heyday in
the early 1970s.
The military government initially hoped to rationalize
what had
become an unwieldy system, but eventually it changed the
whole
system completely. It decided not to continue with a basic
organizational principle of most social security systems,
the payas -you-go system, whereby benefits are paid out of funds
collected
from those who are still contributing. In addition, the
government
decided to privatize the organization and management of
pension
funds and to discontinue the state's own contributions to
them.
Thus, the military regime enacted the legal basis for the
creation
of privately run pension-fund companies, stipulating that
all new
workers entering the labor force had to establish their
accounts in
the new pension companies. Moreover, the government also
created
incentives for people in the semiautonomous, state-run
system to
transfer out of that system by reducing the proportion of
each
employee's paycheck that would be deducted under the new
system to
about 15 percent of gross income, instead of the prior 20
percent
or 25 percent, and by permitting a transfer of funds based
on the
number of years individuals had paid into the system.
The new privately run pension funds are based on the
notion of
individual capitalization accounts. Pension amounts are
set by how
much there is in the individual account, which is
determined by the
total that has been contributed plus a proportional share
of the
pension fund's investments. In any event, by law no
pension is
allowed to fall below 70 percent of an individual's last
monthly
salary. If there are insufficient funds to generate the
required
pension levels in the account, the pension fund company
must make
up the difference. If the company is unable to meet its
obligations, the state, which guarantees the system, has
to cover
the shortfall.
Employees are allowed to choose the pension-fund
company that
will handle their account, and those who are self-employed
may also
elect to establish individual accounts. This choice is
intended to
stimulate competition among pension-fund companies in
order to keep
the administrative fees charged to account holders at a
reasonable
level, and to encourage the companies to invest the money
they
accumulate so as to generate the highest yields. Employers
no
longer contribute to employees' pensions under the new
system.
Disability and survival pensions are paid out of an
account funded
by a 3.8 percent share of the 15 percent the account
holders
contribute, leaving the remaining 11.2 percent to build up
the
pension-generating account. The 3.8 percent share is
contracted out
by the pension funds to life insurance companies, many of
them
newly created to meet the enormous increase in demand for
their
services. Individual account holders are also permitted to
make
payments in excess of the obligatory minimum. The
retirement age is
set at sixty-five years for men and sixty years for women,
although
individuals who accumulate enough funds to obtain a
pension equal
to 110 percent of the minimum pension may retire earlier.
The new system took effect in 1981, and the great
majority of
the contributing population opted to change to it.
Deciding not to
make substantial changes in the social security system,
the Aylwin
government increased the minimum pension paid by what
remained of
the state-run social security system by about 30 percent
in real
terms. By December 1990, there were about 3.7 million
people, or 79
percent of the labor force, with accounts in fourteen
pension-fund
companies, called Pension Fund Administrators
(Administradoras de
Fondos de Pensiones--AFPs). A large proportion of the
uncovered
population consisted of self-employed people; only 3
percent of the
total accounts came from that group. The funds gathered
large sums
of money relative to the size of the national economy. By
the end
of 1992, the pension and life insurance companies had
accumulated
an estimated US$15 billion. The state regulates and
oversees the
pension-fund companies through a newly created office that
issues
strict investment guidelines.
This radical departure from past institutional
practices in the
pension system is unique, and it drew considerable
attention from
experts in other Latin America countries also facing
looming
financial crises in their own social security systems. By
generating large amounts of capital in the private sector,
the new
system energized the previously anemic Chilean capital
markets.
Because it has operated only for about a decade, however,
it has
yet to meet the test that will occur when the new pension
funds
have to pay out in benefits what would correspond to an
actuarially
normal load. Most of the nation's retirees and older
workers have
stayed in the state-run social security system, now called
the
Institute of Pension Fund Normalization (Instituto de
Normalización
Previsional--INP). By the end of 1990, the private pension
companies were only paying out benefits to 2.3 percent of
their
affiliates
(see Economic
Results of the Pensions Privatization
, ch.
3).
Data as of March 1994
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