Bachelet’s Pension Reforms Expected to Cost State $1.5 Billion Annually: Government Report

By Antonio De la Jara

LIMA (Reuters) – Chilean President Michelle Bachelet has proposed increasing the pension contribution rate by 5 percentage points, which is expected to cost approximately $3.8 billion annually, with the state responsible for $1.5 billion, according to government officials on Wednesday.

Bachelet revealed her plans on Tuesday, which involve employers gradually raising the contribution rate to 15 percent over the next decade to enhance payments for retirees and ensure minimum pensions for those in need. Additionally, self-employed individuals will also be required to contribute to the system over time.

During a news conference, Finance Minister Felipe Valdes noted that each percentage point increase in the contribution rate corresponds to about 0.3 percentage points of GDP, translating to roughly $765 million. Valdes highlighted that since the state is one of the largest employers, this initiative would impose a significant budgetary burden, estimating the fiscal cost at about 0.5 percent of GDP, or around $1.5 billion.

In recent weeks, opponents of Chile’s private pension system have protested, calling for its dismantling. They argue that the system compels workers to divert their earnings to for-profit funds that do not guarantee a secure retirement for all Chileans.

Chile’s private pension system was established in the 1980s under the dictatorship of Augusto Pinochet, with six private pension funds, known as AFPs, managing around $160 billion in assets.

Bachelet’s administration aims to create a "great social pact" encompassing all stakeholders to build consensus for these proposed reforms, coinciding with a scheduled protest against the AFPs.

Rodrigo Perez, president of the Association of Administrative Pension Funds of Chile, expressed that while they welcome being part of the discussion, they caution that some suggested reforms may adversely affect pensions.

Bachelet’s proposals include requiring the AFPs to reimburse contributors after periods of financial losses, granting workers a greater say in investment decisions, and eliminating concealed fees.

For these reforms to be enacted, they must receive approval from Congress, where support for enhancing pensions is widespread.