Pension Reform: the battle of all battles, waged and won

Chile strikes the long-awaited pension reform.

Pension reform has finally been agreed upon by the political forces represented in the Chilean Congress.  A pension reform that has taken decades to materialize ushers in the comeback of the politics of consensus, a hallmark of the post-Pinochet democratic governments, which, under Chilean President Gabriel Boric’s administration, has surged again, highlighting the legislators’ capacity to negotiate for the common good despite distinct core ideologies surrounding the capitalization of savings versus the state’s social system of distribution. As a result, Chile brokered a long-cherished reform last January that stands on the principles of equity, attempting to bridge the inter-and intra-generational gaps and, simultaneously, introducing legal and financial innovations, fuelling competition in an industry needing legitimacy and efficiency.  

During Bachelet's 2nd term, the need to move toward a comprehensive reform took shape by laying out the basic principles of equity and efficiency in the pension system, which since 1981 desperately needed efficient regulations since Pinochet’s days. Boric’s Labour Minister, Ms. Jara, navigated the seas of division but steered towards pragmatism, managing to strike a reform that has satisfied the Chilean economist who originally designed the privatization of savings by expressing on X, 'long life to the private capitalization system'  reassuring interested actors that the private system had survived. Still, for legislators alike, from left to right, a warrant for a basic universal pension of up to USD 253,00 has been introduced to help the neediest, along with social security and innovations to upgrade the system, solve the solidarity pillar issue (inter- and intra-generational gaps) through a loan which is paid back to workers at the time of retirement. The new accord will be implemented gradually, step-by-step, or roughly 8 years, with an estimated increase in capitalization from the traditional 10% from workers’ earnings to 16%.

Why is this reform so important for governance?

The pension reform was one of the most heartfelt grievances expressed in the social unrest of October 2019, which put the country on the brink of political instability and turmoil, with protests and riots erupting nationwide.

According to Chambers and Partners,  the new accord 'marks a milestone in the evolution of the pension system, introducing structural changes that redistribute responsibilities among workers, employers, and the State. This reform seeks to address the shortcomings of the individual capitalization system by implementing a tripartite financing scheme, strengthening social security, and ensuring more equitable and sustainable pensions.’  

According to FitchRatings, the reform is deemed 'neutral for Chile's sovereign credit profile.'

Chilean IPSA index rallied at the news of a pension accord, hailing the comeback of a healthy political conviviality or the traditional politics of consensus, which had characterized the post-Pinochet democratic transition. Boric’s determination to task Jara with the negotiations meant that the Government would do its utmost to be flexible and pragmatic in dealings, a key element in striking the reform. Jara and Finance Minister Marcel greeted the approval in Parliament and embraced each other with relief and joy.

Feb 26, 2025.