(10/28/19 – Special post by co-host Julie Whelan Capell)

Many faithful Seniortopia listeners know that I am currently living in Chile in South America. 

For more than one week now (since October 18, 2019) the country has been under a State of Emergency as the government attempts to cope with massive marches including one involving 1.2 million people last Friday in the capital city of Santiago.  There have been acts of vandalism and looting on the part of a few groups, tear gas and water cannons turned on protestors by police and other disturbing events, but rest assured that I am in no danger as the protests are generally peaceful.

I’ve been thinking about a way to share this experience with all our Seniortopia followers. It’s an important moment in Chilean history, and it’s affecting me personally (stood in line for 1-1/2 hours the other day at a supermarket, stores closed, curfews at night) but is there any way in which this situation matters to our listeners?

After years of living abroad, I’ve realized it’s often hard to connect events in faraway places to the lives of everyday Americans, but I’ve also realized that nothing happens in the world in isolation.  We are all connected. More so now than ever before. 

So it’s worth spending a little time explaining why Chileans are protesting in record numbers. There are a surprising number of lessons America and Americans can learn from Chile and Chileans.  I’m going to focus on those that relate to people who are nearing retirement age.

Why are Chileans protesting?  Most news sources are focused on recent rate hikes on the Santiago subway system, but that was just the straw that broke the camel’s back. As shown in the graphic below, Chileans have a long list of grievances against their government, many economic in nature.

Glance down the list and you will find “pension system crisis.” You might think this graphic is just some economic wonk’s analysis of problems that ordinary folks don’t pay much attention to, but you would be wrong.  Many protestors carry signs that say “NO + AFP” which roughly translates as “no more private pension funds” and graffiti with the same slogan can be seen on many walls. A poll taken a few weeks before the protests found that 90% of Chileans agree that the pension program needs to be reformed [Click here for an English translation of the full report].

Background on Chile’s privatized pensions.  Chileans really are marching to protest the handling of their pension funds. To understand why, a little background is needed. 

  • There is no equivalent to Social Security in Chile.  Since 1981, Chile has had a completely privatized pension system.* Seven AFPs (Administradoras de Fondos de Pensiones, or “pension fund administrators”), private businesses that invest in stocks, bonds and government debt, handle the pension funds in the country. All Chileans working in the public and private sectors are required to make mandatory (pre-tax) monthly payments of at least 10% of their wages into one of the AFPs. 

  • There is a minimum pension (Pensión Básica Solidaria) given to Chileans who have no other income in retirement. It is currently set at about USD$150/month, which is about 36% of the minimum wage.  There is also a supplemental payment provision (Aporte Previsional Solidaria) that assists people whose AFP payments fall below a defined threshold that is a tad higher than the minimum wage. 

The system is a bit like the 401(k) system in the US, where you choose the company that will invest your money and they have different investment plans to choose from. The money is eventually released back to you upon your retirement, at which time it is taxed.

Problem #1: Chilean pensions are not providing an adequate standard of living The main complaint Chileans are making about their pension system is that many retirees’ monthly pension is not enough to survive. 

Most Chileans are saving only the mandatory 10% monthly, even though they are encouraged to save more.  The average monthly payout for Chileans earlier in 2019 was USD$358/month, 100% of the Chilean minimum wage.  For comparison, the average monthly benefit for Social Security is USD$1,461/month, which is about 116% of the US federal minimum wage. The OECD (Organisation for Economic Co-operation and Development) estimates that pensions in Chile yield on average a replacement rate** of 40%, compared to a rate of 49% in the US.

graphic originally published in the LA Times in 2016

The low pension amounts are made more problematic due to the relatively high cost of living in Chile. It is actually harder to get by on the minimum wage here than it is in the US. [for more on the cost of living in Chile click here]

Problem #2: Pensions for women and people working in the informal economy are extremely low Estimates are that one in three Chileans work in the informal economy.  Think stay-at-home moms, Uber drivers, housekeepers, family caregivers.  These individuals are not required to pay into an AFP and therefore upon reaching the age of retirement, find it next to impossible to get by on the Pensión Básica Solidaria.

Women retirees have lower pension-salary replacement rates than men, primarily because they spend fewer years in the labor force due to child bearing and rearing duties, and because their salaries are less then men’s salaries. If married, their husband’s pension has to cover them both. Making the situation worse, Chilean women may retire at age 60 (for men the age is 65), and since women have a longer lifespan than men and AFP funds are spread out over one’s expected lifetime, elderly women’s monthly pensions are much lower than men’s. Earlier in 2019, the Superintendent of Pensions released data showing that the average monthly pension for men was USD$442 (147% of minimum wage) while for women it was USD$265 (88% of minimum wage).

Problem #3:  High AFP administration fees and lack of transparency are eroding Chileans’ confidence in the AFP system.

On top of their 10% mandated monthly payments, Chileans pay 1.26% commission every month and an additional 1.1% for disability insurance, so the total discounted from their salaries is 12.4%.  In the US, employees pay 6.2% of their salaries for Social Security, 1.45% for Medicare for a total deduction of 7.65% (employers pay an additional 6.2%–and self-employed persons must pay the entire 12.4%).  Chileans are particularly incensed that the AFPs are allowed to continue to charge the same fees even during periods when the funds are losing money—such that the public bears all the risk in a falling market, and the AFP never loses. 

Phantom commissions” are another point of contention. The AFPs charge an additional 0.27% commission monthly on the amount each person has in their AFP account.  The AFPs control about USD$170 billion, so the amount they are earning in phantom commissions is estimated to be around USD$440 million annually. Many Chileans wonder where that money is going.

Furthermore, the AFPs have gained enormous political and economic power because the amount of capital they manage is equivalent to about 71% of Chile’s gross domestic product.  They name directors to the boards of the companies they invest in.  Those who administer the AFPs are from the same families that already run the most important companies and banks in Chile, causing many Chileans to fear that the AFPs are allowing wealth to become even more concentrated than it already is in this country of wide economic disparities between the rich and the poor. The OECD has estimated that Chile has the highest level of post-tax income inequality of all member countries.

Problem #4: Chile’s population is aging rapidly.  Privatizing pensions does nothing to alleviate the negative effects of a rapidly aging population. According to statistics from the United Nations, Chile is quickly becoming the country with the oldest population in South America.  Current estimates are that one in five Chileans will be over the age of 60 by 2025. With the elderly living longer lives, pension funds must be made to stretch further than originally envisioned by the creators of the pension system.

“The anticipated increase in longevity and resulting aging population is the financial equivalent of climate change,” says Michael Drexler, head of financial and infrastructure systems at the World Economic Forum .  This problem can be mitigated in part by raising the retirement age, a step which Chile, the US and most other countries have already begun to take. 


A large percentage of Chilean retirees are struggling to make ends meet.  You regularly see elderly people still working in menial labor like sweeping streets just to make ends meet. Get in an Uber and you are more than likely going to be driven by a retiree who needs the extra cash to supplement his or her pension. Elders are still revered here in Chile, and to see their grandparents struggling is a cause of great distress for many Chileans. Thus, millions of Chileans marching in the street.


Americans are used to hearing scary predictions that our Social Security system is going to go bankrupt. Although US streets are not filled with people angry about Social Security and their 401(k)s, we have many of the same problems faced by Chile—people not saving enough for retirement, Social Security payments that barely cover the basic necessities of daily living, fewer and fewer people working in a traditional job where Social Security payments are automatic, lower pensions for women, a rapidly aging population, and a lack of financial literacy.

Despite its problems, many in the US praise Chile’s pension system as a possible solution. Back in 2005, George W. Bush praised the “Chilean model” and his administration pushed similar privatization plans as an alternative to Social Security. In 2011, presidential candidate Herman Cain called for replacing Social Security with the Chilean system. In 2015, a Wharton economist scolded the Chilean government for initiating reforms to the system.  And as recently as 2017, in an opinion piece for the Wall Street Journal, the former managing director and chief investment officer at the Vanguard group wrote that the best way to save Social Security “is to implement a compulsory system of private retirement accounts for individuals . . . .  make 401(k) plans mandatory for every worker.” 

The stock market crash of 2008 made clear the dangers of completely privatizing Social Security.  All 401(k) values dropped precipitously.  Imagine if that were your only income stream in retirement. These values have since rebounded, but a retiree relying only on 401(k) income would have faced difficult years and difficult choices, perhaps losing their home as a result of lack of income. 

Below are a few of the solutions that have been proposed for the serious problems facing both the Chilean and the US pension systems.

  • Continue to move away from a purely privatized pension system by enhancing the basic safety net pensions for the poorest citizens.  The President of Chile, Sebastián Piñera, announced a few days ago that the Pensión Básica Solidaria will be raised immediately by 20%. That will bring it to 43% of minimum wage, still not great. The Aporte Provisional Solidario will also be raised by 20%. He announced other pension reforms to benefit retirees over age 75, women retirees, and seniors with disabilities. It’s not clear where the money will come from to pay for these changes, but it has been pointed out that Chile’s tax system could be reformed to better distribute wealth and lessen income disparities.
  • Begin to value work performed outside traditional workplaces.  This could be done by giving credit to those who step away from their careers for child rearing or family caregiving duties. 
  • Do a better job educating the public about how their pensions function, the importance of saving more, and how to better manage their money.  People’s expectations must also be managed; many have unrealistic expectations of what their pension benefits will be and this erodes confidence in the system as a whole. 
  • Incentivize people to save more. One interesting suggestion is to link savings to spending. In this system, contributions to your pension fund would be made electronically every time you make a purchase. 

Here at Seniortopia, we usually stay away from talking about the financial aspects of retirement, because neither Jeri nor I are financial experts and there is an overabundance of podcasts that cover the finances of retirement.  But finding myself in Chile at this moment of great disruption, I felt compelled to share what I am learning about the Chilean pension system.  Perhaps we can learn how to improve the US system by watching what Chile does next. 

* Beginning under General Pinochet and heavily influenced by neoliberal economic policies touted by the “Chicago Boys,” the World Bank and the International Monetary Fund, Chile also has privatized major highways, education, health and water. 

** The net pension replacement rate measures how effectively a pension system provides a retirement income to replace earnings made before retirement.  So, a replacement rate of 40% means in retirement you can expect to earn 40% of what you had been earning when you were employed. 

Thanks to blogger Scott A. Reynhout for his excellent analysis of the Chilean pension crisis, which inspired me and provided much of the background for my post.  https://www.scottareynhout.com/blog/2019/10/24/historical-background-to-the-2019-chilean-protests-part-4-pensions-explained