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Chile takes first step towards reforming private pension system

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The lower house of Chile’s Congress has provisionally approved a reform of its private pension system presented by leftist President Gabriel Boric, in a rare breakthrough for the country’s polarised politics.

Representatives voted 84 to 64, with three abstentions, to advance a bill that would redesign the pension system. However, they later rejected several of the government’s proposals in an article-by-article vote, leaving the shape of the reform largely in the hands of the Senate, which will take it up after a February recess. Boric’s leftist coalition has a minority in both chambers.

Pension reform has been high on the political agenda in Chile for more than a decade. The pension system, in which workers pay into individual accounts managed exclusively by private investment funds, forms the backbone of capital markets that have helped the country become one of Latin America’s most developed economies.

But the meagre incomes it generates for the working and middle class, with 72 per cent of retirees receiving less than the minimum wage, have been a central complaint in disruptive mass protests.

Rightwing and leftwing leaders have clashed over how to protect the benefits of the pension system while resolving social discontent. Proposals put forward by Boric’s two predecessors were rejected.

Advancing the legislation “is a very important step towards taking care of both those challenges”, said Eduardo Engel, a professor of economics at the University of Chile. Final approval of the bill by the Senate would maintain individual accounts, while adding a redistribution component, he noted, leading to a “significant increase of national saving capacity”.

Boric had proposed that employers pay a new pension contribution of 6 per cent of workers’ salaries, on top of the 10 per cent of salaries workers must currently set aside.

Lawmakers narrowly rejected Boric’s plan for that 6 per cent to be split evenly between workers’ individual accounts and a solidarity fund to top up smaller pensions today and in future.

The government will need to restart negotiations on the split and other topics in the Senate, where debate will probably begin in March.

The government is also seeking to raise the minimum guaranteed pension paid out to poorer people, and replace the deeply unpopular private pension administrators with a public administrator. Crucially, under their plan, Chileans will still be able to choose private funds to invest their pensions in, though a state-run investing alternative will also be created.

Chile’s politics have become increasingly stagnant over the past decade, with the fragmentation of Congress, polarisation between the hard left and right, and a failed four-year long effort to rewrite the constitution leaving lawmakers unable to agree significant reforms.

Boric has failed to win approval for the two central planks of his agenda: pension reform and tax increases to fund social programmes. He was forced to back down from his original proposal to send the full 6 per cent additional contribution to the solidarity fund.

Patricio Navia, a political scientist and professor at New York University, said outright rejection of the pension bill, which would have prohibited the government from introducing legislation on the topic for a year, would have been hugely damaging to Boric as he approaches the midpoint of his presidency in March.

“Now he is still in the game, he could still achieve pension reform, which is something his predecessors weren’t able to do,” he said. “It won’t be the pension reform he wants, it will be one that confirms the free market model, but it is a pension reform.”

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