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Tax Exemptions And Military Pension Fund Cost Chile Over US$5 Billion In 2005

(Sept 22, 2005) In an effort to reduce government spending, government officials reopened two controversial debates in Congress this past week: tax shelters for business development in the extreme regions of the country and the apparent insolvency of the military pension plan.

Fundamental problems with the pension plan and tax exemption laws will cost the state over US$5 billion in incomethis year. Speaking to Congress, Chile’s Minister of Defense Jaime Ravinet called the military’s pension deficit “absurd” and asked Congress to take immediate action to fix the bankrupt pension plan.

Finance Minister Nicolás Eyzaguirre called for a review of the myriad tax breaks and incentives originally designed to promote development in the mineral-rich north as well as the under-populated south. Last Wednesday, Eyzaguirre told Congress that these tax incentives were not achieving the desired results.

As early as 1966, Chile began to subsidize development costs in the extreme regions of the north and south of the country. In 1975 Chile enacted the “Zonas Extremas” law, which provided tax credits of up to 40 percent for business investments in these areas. More than six other tax exemption laws have been enacted in the last 30 years, the last one in 2003.

Eyzaguirre asked Congress to create a formal mechanism to systematically evaluate all of the tax exemption laws after a recent World Bank report found that the development incentives were no longer achieving their desired results.

Following on the heels of this request, Eyzaguirre and Ravinet criticized the Armed Forces for its totally insolvent pension plan. Citing a US$1 billion loss in 2005 and projecting worse conditions in the future, the two ministers urged Congress to do something about the plan that is estimated to consume 1.3 percent of the Gross Domestic Product (GDP) by 2010.

Defense Ministry reports show that in 2005 Chile will spend more money on retired soldiers and their families than it will on active-duty personnel. A recent swell of retirements in the 1990s put the pension plan in the red and currently, there are not enough soldiers contributing to the plan to keep it afloat.

Adding to the problem are the high number of non-military beneficiaries. In 2002, a third of those collecting money under the plan had never served in any branch of the armed forces.
Under current law, retired military personnel, their dependents, widows, and single daughters are all eligible to collect benefits indefinitely. Single daughters of retired military personnel received more than US$80.7 million in benefits this year, each taking in approximately US$560 monthly.

Both Ravinet and Eyzaguirre criticized abuses of the system, claiming that many take advantage of it by remaining permanently single.

“I understand the necessity of a special pension system for the armed forces, but there are problems with it that greatly increase the cost of the plan,” said Ravinet. “Many people who are benefiting from this are only indirectly associated with the military. We have to correct these problems because if we don’t, the military pension plan will collapse.”

Calls for revisions in these two areas have met with opposition and silence from many politicians and stakeholders as the country gears up for both presidential and congressional elections in December. Requests for comments on the pension plan were refused by all presidential candidates, highlighting the political sensitivity of the issues.

The defense minister was pessimistic about the chance of any action being taken in the foreseeable future, saying, “the electoral climate prevents any consensus for this reform.” Joaquín Lavín, presidential candidate for the rightist Independent Democratic Union Party, refused to speak on the subject unless “all the other candidates do, too.”



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