Chile’s Senate Approves Pension Reform, Setting Up Crucial Votes

(Bloomberg) -- Chile’s Senate approved a long-sought reform to raise pensions for current and future retirees, advancing the legislation to a crucial phase in the lower house before it would become law.

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The bill passed both a general vote and then item-by-item votes with large majorities early Tuesday following days of arduous talks in the Senate’s finance and labor committees. The lower house will take up debate on the proposal on Wednesday, according to a statement from the Finance Ministry.

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Chile is moving forward on the wide-ranging bill that, after many failed attempts, would finally address retirement payouts that often fall short of the poverty line and which helped to drive mass unrest in 2019. For investors, pension funds are important given that they form the bedrock of the nation’s capital markets. Still, the proposal has changed significantly since it was introduced by the leftist government, and any disagreements between Senators and lower house deputies risk extending debate deeper into an election year.

President Gabriel Boric’s initial plan called for drastically curtailing the private pension fund managers, known as AFPs, and obligating new employer pay-ins to go entirely to a solidarity fund. According to the current text, not only would the AFPs continue to exist, but they would also manage more money.

Under the plan, employer contributions for pensions would reach 8.5% of workers’ salaries. The pay-ins would rise to that level over nine years.

Of that total, 4.5% would go directly to each individual’s savings accounts. Meanwhile, 1.5% would temporarily go toward increasing payouts for retirees who need extra money now, with those funds later being returned to current workers when they end their careers. Part of the remaining percentage would go to women, who are disadvantaged under the existing system.

The proposal also entails raising basic, state-backed pensions to 250,000 pesos ($253) per month.

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There are still risks ahead. Any discrepancies between the text that the Senate approved with the version that the lower house eventually backs would send the legislation to a mixed committee to resolve the differences.

Such an occurrence is possible, and it would would risk stalling debate after congressional recess in February. From that point on, political attention will start to focus more intensely on this year’s presidential election.

Roughly 60% of voters believe Congress should pass the current reform, while 33% want it rejected, according to a Cadem public opinion poll published Jan. 26.

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