Hundreds of thousands of people on August 21 took to the streets of Santiago, Chile to demand an end to Chile’s privatized social security system and to replace it with a public pension plan.
Similar demonstrations took place in other parts of the country. Organizers of the protest estimate that 1.3 million people took part in countrywide demonstrations against the AFP, the country’s privatized social security system.
“We pledge that we will not rest until our retirement savings are no longer serving the economic elite, but are once and for all placed in the service of those who are its rightful owners–working men and working women.” said Luis Messina , coordinator of the group that organized the mass protest NO AFP.
AFP has not lived up to its promises.
In 1981, Chile’s dictator Augusto Pinochet scrapped the country’s social security system, and replace it with AFP, a collection of private individual retirement savings accounts, administered by banks and other financial institutions.
Workers were required to contribute 10 percent of their salaries to AFP. Employers who had been required to contribute to the former social security fund were no longer required to make contributions.
AFP administrators invested the money from the individual accounts in capital markets, and of course charged fees for services provided. Any losses resulting from the investments were borne by individual account holders not the administrators.
At the time that AFP was established, Pinochet relying on expert advice, estimated that private retirement savings accounts would provide retirees with between 70 percent and 75 percent of their final salary.
That has not turned out to be the case. The average replacement income for Chile’s retired males is 38 percent and for women it’s 33 percent.
The result has been that a substantial number of Chilean retirees are living in or near poverty.
The Wall Street Journal reports that “From 2007 to 2014, almost 80 percent of Chile’s pensions were less than the minimum wage and 44 percent were below the poverty line.”
“We just spend on food. We don’t buy clothes, we don’t buy shoes,” said Nora Guerrero, a 71-year-old retiree to the Journal.
Pinochet’s privatization of the country’s social security system was the brainchild of Chilean economist José Piñera, an acolyte of Milton Friedman, an American Nobel Prize winner in Economic Sciences who pioneered work in the economic theory called Monetarism and was the prominent professor at the Chicago School of Economics.
Piñera’s plan was hailed as a model for other countries to emulate by the World Bank and other international financial institutions.
But AFP’s problems became apparent as soon as people started retiring under it.
For his book Social Insecurity (Beacon Press, 2014), a critique of private retirement savings accounts, James Russell traveled to Chile to learn how AFP was working.
He reports that a study conducted by the National Center for Alternative Development (CENDA, its Spanish acronym) found that real growth rates for AFP accounts were much lower than had been originally forecast and that “retirees under AFP were receiving less than half of what those who retired under the old INP (the former public social security system) . . . received.”
But while retirees weren’t doing so well, the financial institutions that managed their private accounts were doing just fine. The CENDA report found that “the corporations managing the private accounts were pocketing one of every three pesos deposited and accumulated in them,” writes Russell.
Because of the problems created by AFP, the government in 2008 made some reforms, but did not completely abolish AFP. Doing so argued the government would undermine capital markets because the accumulated funds in AFP had become a huge source of investment.
In essence the individual savings plans, which failed to provide retirement security, had nevertheless, become a “source of capital accumulation for businesses,” writes Russell.
Today, AFP funds have grown to $176 billion and according to Bloomberg, they underpin Chile’s capital markets.
Chile’s retirement insecurity problem has forced the government of President Michelle Bachelet to propose further reforms to Chile’s retirement system, but NO AFP is calling for the abolition of AFP and a return to a public social security system.
The public also appears to be fed up with AFP.
The Wall Street Journal reports that “Chilean opinion pollster Cadem found that 84% of Chileans want an overhaul (of AFS), while a University of Santiago survey said 61% want to return to a public pension system.”
After the large turnout at the latest NO AFP demonstrations, the organization, which was founded by a group of trade unions, said it will continue to pressure the government.
Speaking at the Santiago demonstration, Carmen Espinoza spokeswoman for NO AFP told the audience that if the government “doesn’t listen to the workers, who are the owners of these funds, then the way forward is a national strike on November 4.”