Chilean pension model

Inherent weakness in the pay-as-you-go system and political expediencies, which contributed to the problems in the pension system, necessitated pension reforms in 1981. Since, then this model has been attracting much interest across the world.

Problems In the existing system, active workers finance the pension of retired or inactive workers through obligatory contributions or premiums. Any shortfall in the payments is made good by the state. The system experienced financial strains due to unfavourable dependency ratio and loopholes in rules and regulations.

New System Workers can open individual accounts with newly created private fund management companies, which is similar to a savings account. The contributions had two components: mandatory (tax free) and voluntary.

Each worker was allowed to have one account with one AFP, and each AFP was allowed to operate only one fund. AFP is allowed to invest only in low risk domestic instruments.

Competition among the AFPs themselves was an integral part of the plan. 

1981:12 AFPs 1994: 21 2003: 07