The Chilean retirement income system scored 68.3 on the 2022 Mercer CFA Institute Global Pension Index and a B grade in overall index value after evaluating the retirement income system’s adequacy, sustainability, and integrity. Chile’s retirement income system comprises poverty prevention programs at the national level, employer-sponsored pension plans (APVCs) at the occupational level, and Mandatory Individual Accounts at the individual level.
National Level
Poverty prevention programs are funded by general government revenues and are available to citizens 65 and older.
The Basic Solidarity Pension is the basic pension, which provides benefits to those who pass a means test (earnings lower than three times the legal monthly minimum wage), but have not contributed to individual accounts during their working lives.
The Pension Solidarity Complement is available to those who pass the means test and contributed to individual accounts during their working lives but whose pension benefits fall below a set monthly level (PMAS)
However, these programs are in the process of being phased out in favor of a new, more comprehensive and wide-reaching program; the Universal Guaranteed Pension (PGU), enacted by the new government in late January 2022.
Like its predecessors, PGU will be paid to all long-term residents aged 65 or older; have at least 20 years of residency in Chile since age 20, including at least 4 of the last 5 years before the pension is claimed; and have monthly base pension income below 1 million pesos (US$1,248.81). However, PGU will expand its scope to include 90% of that population, rather than the 60% that was covered by its predecessors. All those who were enrolled/ qualified for the current programs will be automatically eligible for PGU; moreover, all those enrolled in the current programs will receive PGU up until August 1 (when the phasing-in of the program is expected to be complete) without registering. For the poorest individuals, the full monthly benefit amount will be 185,000 pesos (US$231.03), which will decrease proportionally as the individual’s monthly base pension income rises.
Occupational Level
Mandatory Individual Accounts are a fully funded system constituting the second part of Chile’s retirement system. A worker is required to contribute 10 percent of earnings and a 1.25% administrative fee to an individual account and employers may contribute voluntarily; the self-employed contribute the same amount as other workers. The maximum monthly earnings used to calculate contributions are 80.2 UF (as of 2021). This ceiling is adjusted annually based on changes in real wages in the previous year. They are free to choose an Administradora de Fondos de Pensiones (AFP) to manage their accounts, for which they pay administrative charges besides their mandatory contribution, and may switch to another AFP at any time for a fee. AFPs are government-regulated private companies that exclusively manage and administer pension funds. Contributions are tax-deferred. Benefits can be collected at the normal retirement age, which is 65 for men and 60 for women. Early retirement is available if an individual’s account can achieve a 70% replacement rate and equals 80% of the Pension Solidarity Complement.
There are several withdrawal options:
Programmed withdrawals allow the worker to retain ownership to the account while receiving a monthly annuity. Any remaining balance can be left to heirs.
A life annuity allows a life insurance company to take ownership of an individual’s account, with the individual receiving an inflation-adjusted monthly annuity.
Temporary income with deferred life annuity is a combination of the previous two types; temporary programmed monthly withdrawals are made until the life insurance starts to pay a life annuity, allowing the worker to retain ownership of the assets in the account until the life annuity begins.
Immediate annuity plus programmed withdrawals is another hybrid, where a portion of the account is used to purchase an immediate annuity and the remainder is paid as programmed withdrawals.
APVC (Ahorro Previsional Voluntario Colectivo) is an employer-sponsored, collective voluntary pension plan. It includes major tax benefits and subsidies for employers to motivate employers to offer more retirement pension options for their employees. The plans contain different investment, coverage, and contribution features.
Individual Level
Voluntary savings opportunities are also available through employers or financial firms. Different plans can take contributions using pre-tax or after-tax income for tax-deferred or tax-free withdrawals, respectively. The government also offers tax incentives for employers to promote employer-sponsored voluntary pension plans.
Summary Sources
Bnamericas. “Regulators Soften Rules on Employer-sponsored Pension Plans.” April 12, 2011. Accessed 01/27/2021.
Congressional Research Service. “Chile’s Pension System: Background in Brief.” Shelton, Alison M. R2449. March 28, 2012. Accessed 01/27/2021.
International Social Security Association. “Country Profiles: Chile.” July 2019. Accessed 01/27/2021.
Kritzer, Barbara E. “Chile’s Next Generation Pension Reform.” Social Security Bulletin 68(2). 2008. Accessed 01/27/2021.
OECD. “Pensions at a Glance 2019.” November 27, 2019. Accessed 01/27/2021.
OECD. “Pensions at a Glance 2021: Country Profiles – Chile.” December 8, 2021. Accessed 03/28/2022.
Social Security Administration. “International Update.” February 2022. Accessed 03/28/2022.
Swiss Life. “Chile: Collective Voluntary Pension Saving (APVC) Plans Broaden Cruz del Sur’s Employee Benefits Programme.” September 6, 2009. Accessed 01/27/2021.
Current Issues
Legislation allowing retirees with annuities to access 10 percent of their occupational level pensions was approved by Chile’s Congress and signed into law in late April 2021 following legal challenges brought to the Constitutional Court by President Piñera. This was the third such approved withdrawal, following two measures in July and November of 2020 that each allowed withdrawals of 10 percent. The passage of the measure in July 2020 saw withdrawals of $19 billion. The second round of withdrawal in May 202 totaled nearly $15 billion. Following the third round of withdrawals and as of late 2021, the total amount withdrawn totaled over $48 billion, or 25% of pre-pandemic assets from the pension fund. These measures follow protests in recent years that criticized the current occupational level pension system for charging high fees and providing inadequate benefits – about 80 percent of retirees currently receive less than the minimum wage. While the government has pledged a $29 billion (close to 12% of GDP) economic stimulus package to include spot payments, it has been criticized as insufficient.
Debates about a fourth round of withdrawals continued through the general and presidential election season in October and November of 2021. The proposal ended up being struck down in December due to general discontent with the pension system, the criticism it received from the Chilean central bank, and opposition from the newly-former President Piñera and his government, despite the fact that President-elect Boric largely supported the scheme and he now will continue these discussion as he begin his new term of office.
In February 2022, President Boric’s government extended its commitment to reforming the pension system and replacing the current, private system with a public one. According to Finance Minister Mario Marcel, the driving force behind this reform are the problems plaguing the current arrangement, including a very low level of contributions from employees and employers alike. The reform is now in its consultation process, which is expected to last some months.
Finally, on March 11, Chile’s government enacted an amendment expanding social security coverage and other employment protections to workers employed through digital platforms – a growing class of contract workers who will now be reclassified as either formal employees or self-employed. This reform will affect around 189,000 workers in Chile, which represents about 2.2 percent of the country’s labor force.”
Summary Sources
Aislinn Lang and Natalia A. Ramos Miranda. “Chilean lawmakers help pensions withdrawal plan over first hurdle.” Reuters. November 10, 2020. Accessed 01/27/2021.
Benedict Mander and Michael Stott. “Chile’s famed pensions system faces an existential crisis.” Financial Times. November 15, 2020. Accesssed 01/27/2021.
Bnamericas. “Chile annuities withdrawal bill advances, govt says will challenge.” January 8, 2021. Last accessed 01/27/2021.
Bnamericas. “Citing expropriation risk, Chile lawmaker supports 100% pension withdrawal.” June 04, 2021. Accessed 07/08/2021.
Fabián Andrés Cambero. “Chile plans to reform controversial pension program next year.” Reuters. March 22, 2022. Accessed 03/28/2022.
Fabián Andrés Cambero. “UPDATE 1-Chile Congress rejects fourth pension withdrawal bill.” Reuters. December 3, 2021. Accessed 03/28/2022.
Malinowski, Matthew and Valentina Fuentes. “Chile Pension Furor Grows Over Third Round of Withdrawals.” Bloomberg. April 22, 2021. Accessed 07/08/2021.
OECD. “Pensions at a Glance 2021: Country Profiles – Chile.” December 8, 2021. Accessed 03/28/2022.
Sebastian Boyd. “How Chile’s Pension System Became a Covid Piggy Bank.” October 29, 2021. Accessed 03/28/2022.
Sherwood, Dave, and editing by Steve Orlofsky. “Chileans drain $10 bln more from pension funds as pandemic drives withdrawals.” Reuters. May 12, 2021. Accessed 07/08/2021.
Social Security Administration. “International Update.” February 2022. Accessed 05/13/2022.
Source: Georgetown University’s Center for Retirement Initiatives
Last Updated 5/13/22