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FIAP > Destacados Boletines > Interview with the President of FIAP: “In Chile’s pension reform, inheritance is at loggerheads with solidarity, as if defending inheritance were not a form of solidarity”
11 August, 2022

Interview with the President of FIAP: “In Chile’s pension reform, inheritance is at loggerheads with solidarity, as if defending inheritance were not a form of solidarity”

The former Chairman of the Association of AFPs is ‘a staunch supporter of multi-pillar systems,’ who believes that support for those who fail to meet the necessary contribution requirements, must come from taxes.

The former Chairman of the Association of AFPs and current head of the International Federation of Pension Fund Administrators (FIAP), Guillermo Arthur, examined with DF the main aspects being discussed in the Government’s pension reform, and how they could affect Chile’s position among the social security systems worldwide.

Proponent of a multi-pillar system financed by general taxes and not contributions, Arthur criticized the proposal for intergenerational contributions to a collective fund, from the new contributions to be proposed by the Government. ‘We are being generous at the expense of our grandchildren,’ he said.

‘We are clearly going against the current. In recent years, 46 countries have adopted individually funded systems, including the three leading countries in the Mercer ranking: Denmark, the Netherlands and Australia. Nobody switches from individually funded to PAYGO systems, except Argentina,’ he said.

– Could a public PAYGO coexist with an individually funded system, as a compromise?

– Compromises entail mediocrity. You may be able to improve the pensions of 2 million pensioners with that 6% additional contribution, but there will be more pensioners next year, and the money will no longer suffice. So, we are being generous to retirees at the expense of our grandchildren. That seems wrong to me.

– But keeping things the way they are, would not appear to be politically or socially viable.

– I am a faithful supporter of multi-pillar systems because it is impossible for the financing of a pension to depend on individual savings. But for those unable to meet the pension requirements, that financing must come from the taxes paid by all.

Let’s not forget that there are ceilings in pension systems (…) big businessmen are excluded. And there is one very important issue, namely that we have tried to degrade inheritance from a solidarity standpoint. Inheritance has been put at loggerheads with solidarity, as if defending inheritance had nothing to do with solidarity.

– It has been proposed that the focus of the reform should be to improve pensions and not inheritance…

– Inheritance is a fundamental part of an individual’s reason for saving. People save for their pensions, but also to know what they are going to leave to their children, especially those who do not have great savings capacity.

Is it selfish for a woman to be fighting for the inheritance of her pension fund when she has a daughter who is turning 24 and she’s just out of college? Since 2004, 35% of pensioners were granted a survivor’s pension and 24% inherited their pension. Let’s improve pensions, but not necessarily at the expense of inheritance. The issue of leaving no inheritance will also encourage lower contributions.

– How do you see Chile in the international pension ranking with the coming changes?

– We still do not know the final terms of the reform. It is up to the government and the lawmakers to decide whether we want a system closer to the Danish or the Argentinian system. In the latter country, 53% of the people who had their funds expropriated received no pension, nothing.

– Do you think that will happen in Chile?

– No, but it is important to expose the risks of creating collective mechanisms. 60% of contributions will be destined to a PAYGO system. Well, that’s going to cause poverty, because the advantages of individual funding and reasonable returns will be lacking.

The PAYGO system

– Even if the State manages this investment through private companies?

– Individually funded systems are always more profitable, because return on capital is higher than wage and employment growth. I did not say this, Thomas Piketty did. He believes that pensions should be financed via individually funded systems, precisely for this reason.

PAYGO systems failed the test. Today, more than 60 countries with PAYGO systems increased the retirement age and reduced pensions, and nearly 80 countries raised the contribution rate.

– What role will the AFPs play in this scenario, with a greater State presence?

We have to wait and see. What is the reason for insisting on the establishment of a government agency – except for an ideological issue, trench warfare – which will entail double fund management fees, and what will the government do for the account?

– Isn’t it equally ideological to insist on allocating everything to individual accounts? The diagnosis is that the system in place does not provide good pensions.

– There is something that has not been considered, namely, to raise the contribution rate and the retirement age. In Mexico, a country governed by the left, the contribution rate rose to 15%. Let us try to find solutions to the problems facing us, otherwise we will destroy everything that has been built to date.

Source: Diario Financiero, Chile.

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