FIAP

Press Releases

FIAP > Press Releases > Chile: Schmidt-Hebbel: “There is a need to increase the full retirement age to 67 years and contributions to 13%”

Chile: Schmidt-Hebbel: “There is a need to increase the full retirement age to 67 years and contributions to 13%”

18 January, 2013

Source: www.pulso.cl

Increase pensions and the replacement rate due to higher life expectancy, is the main objective of the 3 proposals carried out by the economist.

Periodically, the debate about a new social security reform is reopened. In the middle of last year, a plan to increase the full retirement age to 67 years was recommended by the OECD. Today, the Banco Central adviser, Joaquin Vial is warning about the following: “about 60% of the active contributors who entered into the system in 1981 have accounts with balances of less than $20 million; this involves working towards a retirement pension of $150 thousand”.

In this context, the economist from Universidad Catolica and AFP Habitat director, Klaus Schmidt – Hebbel, launched three proposals that can help to increase the pensions of people and improve the replacement rates (see tables). The first of them is a plan that people’s current 10% mandatory contribution rate will gradually increase to 13% from their taxable salary. This gradual approach would take 3 years and a rise in the rate could be financed by the employer or the employee. “That means 3 points more than taxation contribution which someone has to pay. Economists know that they will get about the same amount in a long-term period. What we really do know is that if it hurts employer’s pocket, there will be a short-term effect on labor costs and demand for labor. If this increase hurts the worker’s pocket, there will be a decrease in his short-term net salary by 3%. Schmidt- Hebbel suggested that this proposal will be submitted to the authorities, open to political debate, recommending that in order not to generate harmful effects, the 3 extra points could be a joint contribution. The second proposal is a plan to increase the full retirement age to 67 years for both women and men. Today in the case of women, the economist explains that Chile has the retirement age lower than OECD countries (60 years), and in the case of men, Chile uses the average age (65 years).

“In this point we are equal, but still have an unfair system, because the life expectancy for men is lower in 6 or 7 years than that of women”, and he adds that people older than 55 years should be excluded, for them not to suddenly have the need to work 7 years more in the case of women, and 2 years more in the case of men.

In addition, the expert proposes a gradual increase of the normal retirement age for women, in half a year of retirement age for each calendar year. Similarly for men, but beginning in the 11th year of transition for women, so that both groups complete their transition to the year 14.

Another alternative, explains Schmidt Hebbel, would be a gradual increase in the minimum retirement age for women and men setting up a year of retirement age for each calendar year. He also indicated: “The first two reforms significantly increase the voluntary pension saving, which leads to a higher replacement rate of women and men”.

And the third and final proposal is to make all income taxable, including the current non-taxable 18%. Also, a plan will gradually increase the maximum limit of 70 UF to 80 UF.
In conclusion, Schmidt-Hebbel confirms that the 3 proposed reforms, according to evidence of empirical studies on saving behavior of households and private companies at a global and Chilean level, would increase national savings between 1 and 2 percentage points of the GDP, over the long term (10-20 years).

In addition, he confirms that would reduce State pension liabilities, by significantly increasing proportion of the pension that is self-financed by the low-income workers.

In this way, the economist thinks about the demographic transition that is happening in Chile, “A population that grows less, with older, healthier and better educated people,” he explained. In this sense, he insists that Chile has a window of opportunity to implement essential reforms in the social security system to increase the labor force participation, savings and pensions of mature workforce. Schmidt-Hebbel determines: “As the implementation of these reforms will be probably gradual and it will have long-term effects, it will be promptly necessary to implement these recommendations”.

RELEVANT FIGURES:

  • A rise of replacement rates of 80% in men, increasing the retirement age and contributions percentage.
  • According to OECD, 27.7 years will be the life expectancy of Chilean women after retirement in 2050.
  • Implementation of a reform for raising the contribution rate from 10% to 13 % should have a delay of 3 years. These 3 points should be paid by the employer or the worker.
  • National saving might be increased in 1-2 points of the GDP, given the three proposals are carried out according to what Schmidt-Hebbel said.
See all Press Releases
Suscribe to the Fiap International Newsletter Sign up here