Chile pension system

The Chile Pension system (Spanish: Sistema Previsional) refers to old-age, disability and survivor pensions for workers in Chile. The pension system was changed by José Piñera, during Augusto Pinochet's dictatorship, on November 4, 1980 from a PAYGO-system to a fully funded capitalization system run by private sector pension funds. Many critics and supporters see the reform as an important experiment under real conditions, that may give conclusions about the impact of the full conversion of a PAYGO-system to a capital funded system. The development was therefore internationally observed with great interest. Under Michelle Bachelet's government the Chile Pension system was reformed again.

A social security system was introduced in Chile in the 1920s, which included a PAYGO pension system. By 1973 the funding of the pension fund was low, though 73% of all Chilean workers paid into the system. The reason for this was that almost all workers contributed only the statutory minimum contribution, and many successfully evaded pension contributions. The poor payment record is attributed primarily to the fact that individual contributions had little correlation with anticipated pension benefits.

On November 4, 1980, under the leadership of José Piñera, Secretary of Labor and Pensions under Augusto Pinochet with the collaboration of his team of Chicago Boys, the PAYGO pension system was changed to a capital funded system run by investment funds. José Piñera had the idea of privatizing the pension system for the first time when reading the book Capitalism and Freedom from Milton Friedman There have been implemented several (private) pension funds the so-called Administradoras de Fondos de Pensiones (AFPs). For all citizens who are legally defined as workers, employers must pay a proportion of the earnings to a pension fund. Workers who had already paid in the old system, got an option to continue to pay into the old system. But the statutory minimum contribution to the new private pension funds was set 11% lower than the contributions to the old pension system, therefore most workers changed to the new pension system.

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