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Chile’s congress has approved a landmark reform to its private pension system whose meagre payouts fuelled disruptive mass demonstrations six years ago that roiled the politics of the prosperous South American nation.
The approval, overcoming more than a decade of political gridlock, was a badly needed victory for left-wing President Gabriel Boric in his final year in office at the helm of a minority government that was elected on the back of the unrest.
The lower house voted 110 to 38 to approve the bill, which raises employer pension contributions and fosters competition among pension funds. The bill was approved by the senate on Tuesday, meaning it will now become law.
Analysts said the deal would boost Chile’s economy, partly because it stood to increase the sums available for the country’s financial markets, which have been relatively depleted in recent years.
Chile’s pension system, which is fully administered by private funds and serves as the backbone of its robust capital markets, became a model for many leaders in the developing world when it was introduced in 1980.
But low pension payouts, which several governments tried and failed to address in the 2010s, became a main driver of protests that swept Chile in 2019. The unrest fuelled the popularity of hard-right and hard-left parties and triggered a years-long process to rewrite the constitution, which failed in 2023.
Boric’s government has struggled to pass reforms in congress to respond to the discontent. The former student leader was forced to make major concessions to his original proposal, which once included scrapping private pension administrators in favour of a partly state-run system and funnelling a large share of workers’ savings into a solidarity fund.
“It’s a reform which is not anybody’s ideal, no matter where you are on the political spectrum, but it is a reasonable reform,” said Eduardo Engel, professor of economics at the University of Chile.
“That is a major achievement given how difficult it is to reach agreements on pensions in a polarised political system.”
The bill increases employer contributions from about 1.5 per cent of salaries to 8.5 per cent over nine years. Of the extra funding, 4.5 per cent will go into individuals’ savings accounts, while the rest will be split between a loan to government to top up today’s pensions — to be returned on retirement — and a fund to address gender inequalities. Economists said the change could lead to lower take-home pay in the medium term.
The law also mandates auctions for the management of the existing stock of pension pots, in a move designed to stimulate competition between funds.
During the coronavirus pandemic, congress allowed Chileans to withdraw large chunks of their pensions early, which sharply pushed up Chile’s borrowing costs and damaged its reputation as a haven for investment.
Patricio Navia, professor at New York University, questioned whether the reform included strong enough guardrails to prevent future governments from taking short-term decisions on pensions “that have become more common in Chile in recent years”.
Still, he said, the reform would give the left a stronger message ahead of presidential elections in November, in which potential left-wing candidates are trailing the traditional right-wing bloc and far-right parties are also polling well. Boric is constitutionally barred from running again.
“People have been calling for better pensions and they can now say: we are the ones who finally managed to deliver that,” Navia said.
