30 November 2005

CHILEAN PRIVATE PENSION PLANS CAN’T KEEP PROMISE

(Nov. 30 ,2005) As Chile celebrates the 25th anniversary of its private pension funds, the first generation of workers prepares to cash in on the promise of a retirement free of the haunting specter of poverty. Sadly, many Chileans are finding that this promise was just more empty rhetoric from a corrupt and discredited regime.

The plan to privatize Chilean pensions was drafted by Jose Piñera, brother of Chile’s current billionaire presidential candidate. The government sold the idea as an attempt to give the worker more individual liberty and control over their own future.

Under the new plan, Chileans would invest their savings in private pension plans managed by large financial institutes with limited government oversight. Security was replaced by opportunity and while not guaranteeing any returns, the plans promised a compounded interest rate on individual investments and the possibility of substantial growth of personal savings sufficient to retire comfortably.

According to Mercedes Ezguerra, a member of the state advising committee, “workers with medium to high incomes should benefit the most from the new program, everyone else should be able to maintain a pension commensurate with the minimum wage.”

The Ministry of Labor hailed the plan as a much needed reform to protect the average Chilean from the threat of communism and poverty. “This reform drastically improves the margins of individual liberty, these, together with the participation of the social base and the economic progressives, constitute the unbreakable barriers against communism. (The reform) will solve one of the elemental aspirations of all Chilean families, security against old age.”

Because Chile did not have any legislative body, very little debate actually occurred on the proposed plan. Chile was seven yeas into a bloody military regime and political opposition was a crime often punished with death. Even so, some did speak out against the plan as a thinly veiled effort of the financial elite to gain access to new sources of investment capital.

Juan Manuel Sepúlveda, vice-president of the National Syndicate Coordinator, said, “the new funds will simply be administrative investment instruments of a privileged group of business and financial entities that will take control of the average workers’ savings.”

Sergio Férnandez Aguayo, former deputy of the Christian Democratic party (DC), was even more critical saying, “the changes to the current system that the government is pretending to introduce at the end will not benefit the interests of the Chilean worker…It would be ingenious to ignore that the principle economic groups have been given an unbeatable opportunity to organize their pension own plans, the same ones that will direct the original investments in provisional savings towards their own businesses and investments…it would seem that the system is trying to fortify the private economic concentration instead of creating dynamic social benefits.”

Initially there were government safeguards against just this eventuality. Safeguards were enacted to restrict financial institutions from using workers’ savings as source of investment in their private companies. However, after the economic and banking crisis of 1983, Gen. Pinochet authorized pension fund administrators to invest in government and private companies as a means of stimulating the nation’s economy. By the end of 1984, private retirement accounts had indeed become an easy source of capital for the nation’s largest conglomerates.

Today these pension funds are used to finance the debt of the county’s leading businesses. Chilectra, The BHC group, a XXXXXXX, controls the AFP Santa María, the Angelini group, owners of XXXX, controls Summa, the Edwards family, owners of the nation’s largest media chain including El Mercurio,

Since the initiation of the AFPs, the private funds have grown from US$400 to US$68 billion, yet the average pension has remained relatively low. For example, in 1994 the average pension was 85,590 pesos monthly with 85,205 people registered in the fund, 10 years later the average monthly payment is 89,931 pesos, with 200,000 people paying into the pension plans.

For the 320,039 medium to higher income contributors who opted for fixed lifetime payments, the group the plans were supposed to benefit the most, the average payment is 166,157 pesos a month.

To understand why the average pension has not increased commensurate with the increase in contributors, it is necessary to look at the profits that the fund managers are paying themselves. In 1984, the pension funds brought in approximately 332 million pesos, today, the funds earn more than 92.495 billion pesos a year.

Compared to the minimum wage, it is also apparent that the private system falls short of its projected results. In 1979, the minimum pension was 3,245 pesos, representing 40 percent of the minimum wage, 4,548 pesos. Today, the difference is 65 percent.

Michelle Bachelet was the first presidential candidate to take up the issue, quickly followed by right wing candidates, Joquin Lavin and Sebastian Pinera, brother of Jose Pinera, the mastermind behind the orpginal AFP plan.

Jose Pinera said at the 25 year anniversary of the pension plan

“The capital system does not promise pensions, it only says that if a person saves, they may be able to obtain this amount of money plus a compounded interest at the time of their retirement.”

“For a person that began to work at 15, the system works very well.”

Pinera also spoke about Labor codes claiming that low wages and poor job security could be fixed by eliminating “pseudo-protections.”

“Issues such as collective negotiation, minimum wages, reasons for firing workers, and employer paid childcare need to all be revised, article by article in order to see if they do or do not generate employment.