Chile's Pension System: Background in Brief (CRS Report for Congress)
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| Release Date |
March 28, 2012 |
| Report Number |
R42449 |
| Report Type |
Report |
| Authors |
Alison M. Shelton, Analyst in Income Security |
| Source Agency |
Congressional Research Service |
Summary:
In 1980, Chile was the first country to replace its pay-as-you-go public pension system with a system of individual accounts. The Chilean model has been widely studied as one possible model for public pension restructuring. Chile s public pension system consists of three tiers: a poverty prevention tier, an individual account tier, and a voluntary savings tier. The poverty prevention tier provides a minimum benefit to aged persons who did not participate in the public pension system and to retired workers whose monthly pensions financed by individual account assets (the second tier) do not reach certain thresholds. Workers contribute 10% of wage or salary income to an individual account in the second tier and choose a private-sector Administradora de Fondos de Pensiones (AFP) with which to invest their pension contributions. Employers are not required to contribute to employees AFPs, although since 2008 employers have been required to pay the premiums for workers survivor and disability insurance, which are provided by private insurance companies. Upon retirement, the worker may withdraw assets that have accumulated in the individual account as an immediate or deferred annuity or through programmed withdrawals. The third tier allows workers to supplement retirement income with voluntary, tax-favored savings. In 2008, Chile approved major reforms intended, among other goals, to increase participation in the public pension system, improve competition among the private-sector individual account managers, and bolster the poverty prevention tier. There has been concern that, as a result of low participation rates and underreporting, many workers could reach retirement with individual account balances that are too small to provide an adequate pension annuity. The 2008 reforms helped address these concerns by expanding the poverty prevention tier, phasing in coverage for most self-employed workers, and providing incentives for additional voluntary saving through the system s third tier. Other provisions approved in 2008 are intended to reduce high investment management fees (administrative costs) by increasing competition among AFPs.
