Everything about Chile Pension System totally explained
On November 4, 1980,
Chile, under the leadership of
José Piñera, Secretary of Labor and Pensions under
Augusto Pinochet, implemented with the collaboration of his team of
Chicago Boys (a group of
libertarian economists influenced by the
Chicago school of economics of
American economist
Milton Friedman) the first comprehensive change of a state-run, defined-benefit
pension scheme to a defined-contribution system managed entirely by the private sector (by pension management companies called "AFP"), under the supervision of a dedicated government agency, the Superintendency of AFP.
The Chilean system of personal retirement accounts started operating on May 1, 1981. Civilian workers covered under the previous defined-benefit plan had the choice of opting-in to the new system or of remaining under the previous system, such election being irrevocable. Workers hired after Jan. 1, 1983 must join the new system. Today 97% of civilian salaried workers are officially in the private system. According to the Superintendency of AFP, the system had accumulated USD $100 billion at October 30, 2007, an amount equivalent to 70% of the GNP of Chile.
The Chilean system provides that all civilian salaried workers must contribute 10% of their salary to a privately run
pension fund, that sum being remitted on their behalf by their employer. The worker can choose one of six private pension administrators and change at will. Self-employed individuals may contribute voluntarily, and salaried workers can also enhance their pension through additional voluntary contributions. The
Chilean armed forces and
police remained cover by separate defined-benefit plans.
The Chilean pension "model", which has both supporters and critics, has to date been implemented by 30 countries although many of them have combined this new defined-contribution system with their former state-run, defined-benefit pension schemes. Among these 30 countries are:
Mexico,
Colombia,
Peru,
El Salvador,
Poland,
Hungary,
Slovakia,
Romania,
Kazakhstan,
Sweden, and
Hong Kong.
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