Chile’s Social Security Reforms: Impacts on Employers and Retirees

Chile has passed comprehensive social security reforms aimed at enhancing retirement outcomes through increased employer contributions and promoting competition among service providers. Over nine years, employer contributions will rise from 1.5% to 8.5%. New funds will support pensions, especially for women, amidst anticipated rises in labor costs, compelling employers to review their benefit provisions.

The Congress of Chile has enacted reforms aimed at revitalizing the social security system. These changes focus on enhancing retirement outcomes through increased employer contributions and fostering competition among service providers. Presently, retirement and disability benefits rely on mandatory individual defined contribution (DC) accounts, managed by private fund administrators known as AFPs. Contributions are predominantly derived from employee contributions, which currently stand at 10% of their covered wages, with further modifications expected in the coming months after the law’s publication.

The approved reforms entail a gradual escalation of employer contributions over a nine-year period, progressing from 1.5% of pay (up to 87.8 UFs) to 8.5% by 2034, possibly extending to 2036. To delineate the distribution of these additional contributions (totaling 7%), it will allocate 4.5% to individual DC accounts, 1% to a newly established fund for survivors’ and disability pensions, and 1.5% to a fund managed by the Instituto de Prevision Social that will finance new retirement benefits. This new monthly benefit will be calculated on the number of years of contributions, establishing a more equitable pension structure. Specific provisions are included to enhance women’s pension outcomes, recognizing their longer life expectancy.

Moreover, new regulations will mandate that AFP services representing 10% of participants must be auctioned every two years, awarding contracts to the AFP with the lowest fees for a minimum of five years. In terms of investment options, the existing five risk-based funds will evolve into ten target retirement date funds, ensuring that investment strategies align with the specific requirements of diverse cohorts.

Employers are encouraged to reconsider their pension offerings in light of these reforms, as they are vital for addressing the persistent inadequacies of the existing AFP system. Notably, 85% of female pensioners currently live below the minimum wage, and this figure is 72% for male pensioners. In light of these disparities, and with rising labor costs anticipated, employers should brace for adjustments in their benefit strategies and compensation frameworks.

The recent social security reforms in Chile represent a progressive step toward improving retirement outcomes for workers. The changes involve significant increases in employer contributions and establish new funds aimed at providing fairer pensions, especially for women. Furthermore, these reforms necessitate that employers reassess their benefit offerings due to anticipated increases in labor costs and existing inequalities in pension benefits.

Original Source: www.wtwco.com