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8 November, 2022

FIAP Declaration – Chilean government pension bill goes against the current

In view of the draft pension reform presented by the Chilean Government, which among other matters establishes that the 6% gradual increase in the contribution rate will be allocated to notional PAYGO accounts, the International Federation of Pension Administrators (FIAP) declares:

1.- The individual savings systems have clearly demonstrated their advantages with respect to the PAYGO systems, both in terms of the financing of workers’ pensions, and from the perspective of the economic development of countries.

In fact, in all the countries in the region where these systems are in place, the historical return on investment has averaged a real 7% per annum, which means that workers’ savings have doubled, and sometimes tripled.

The investment of such savings has made a significant contribution to the economic development of countries. GDP growth is largely explained by the process of saving and investing workers’ funds (Mexico, Colombia, Chile, Peru, Dominican Republic).

2.- On the contrary, due to their financial vulnerability caused by population aging, the PAYGO systems have not been able to fulfill their promise to grant defined benefits (DB) and have been forced to make parametric changes: in the last 26 and a half years, 82 countries increased the contribution rate, 64 increased the retirement age, and 67 froze or decreased pension amounts.

Despite the above, the governments of the countries that still have PAYGO systems have had to incur considerable implicit debt for social security purposes (Spain owes 2.5 times its GDP, Greece 9 times).

3.- Hence, most of the countries with PAYGO systems are incorporating individual savings mechanisms. In 1999, 17 countries had individual savings systems, growing to 46 in 2022.

4.- It is surprising that in the face of this reality that demography has imposed on us, the Chilean government has decided to go against the current and move towards a failed system, like the PAYGO system.

5.- We do not see in what way the transfer to a monopolistic state entity of contribution collection, administration and management of accounts, and payment of pensions, currently carried out by the Pension Fund Administrators (AFPs), with a huge investment in economic and technological resources, contribute to the improvement of pensions.

6.- We hope that in the Congressional debate rationality will prevail over ideological and populist criteria, which, far from improving the pensions of workers, will destroy a system that could be improved by increasing the contribution to workers’ individual accounts and adjusting retirement ages, all of which are necessary to address the increase in life expectancy and to mitigate the pension gaps that largely explain pension amounts. On the other hand, the solidarity that society demands for the most vulnerable sectors, must be achieved through a strengthening of the solidarity pillar, financed by general taxes, without taxing work.

International Federation of Pension Fund Administrators (FIAP)


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