The Chilean pension system is currently providing pensions that do not meet people’s expectations. The increase in life expectancy and the reduction in the interest rates used for calculating pensions (see graphs below) are the reasons that the pensions granted by the AFPs have dropped to half of what they used to be.

FIAP’s Pension Simulator was used for calculating pensions and replacement rates, considering the life expectancy and the interest rates that existed in each one of the periods. The purpose of this simulator is to estimate the pensions and replacement rates that the members of an individually funded system could receive. The results (see the graph below) show that pensions dropped by 51% and 46%, for men and women, respectively, throughout the period considered.

The significant difference in pension amounts between men and women is mainly due to the different retirement ages. If a woman retires at 65, the amount of her pension increases by almost 50%, corresponding to approximately 90% of a man’s pension.

The parameters of the pension system have remained unaltered for 35 years, without considering the persistent drop in pension amounts and the low Chilean contribution rate, which is half of the average in OECD countries. This assay makes it advisable to establish an independent technical body that regularly assesses changes in the variables that affect pension amounts, and proposes the necessary parametric changes to the system.

To review this FIAP Pension Note in detail, please download it here.