In 1981,it started a revolution in the Chilean retirement fund system. It changed the former system of solidarity, of multiples independent public institutions, based upon the state funding capabilities . Each segment of the labor force, had their own affiliated retirement public firm, for instance the so called white collar had different categories such as politicians, journalist, public administration staff, banks staff and so on. On the other hand, the so called blue collar were all in the same public retirement firm, based on what was know as the “ distributive system”. This meant, the monthly contribution of all workers in the labor force, added up to the total amount to be delivered to the affiliates in some previously defined proportion. The nature of this system created a gap between the contributions of workers in the labor force ,and the monthly payment requirements, because given the larger life expectancy of population , and the decrease in active labor force because of lower fertility rates, the amount of workers making contribution were lower than the amount of workers making payments claims. There was no way to avoid the State running out of cash to finance the system, making the increasing public debt the only option available.
The former public system , implied a discrimination among different groups of workers, which were discriminated by allowing the existence of different conditions to get their retirement funds. Some of them needed 15 years of working life like the politicians , others needed 30 years like public employees, aside the fact that there was not a management criteria whatsoever to deal with the use of those resources other than distribute them to the affiliates. The new system solved those constraint making all workers equals, and giving to all of them a chance of getting a professional management of their individual contributions through what it is known as the Retirement funds management companies.
The Monthly contribution of each worker(10% of gross wages), on his(her) individual retirement account, would give him(her) the needed capitalization to live once he /she was out from active labor force. The key stone of the system is the individual capitalization account of the monthly contribution made by each worker ; so the funds accumulated earnings because of the compound interest rate applied on them.-
Dependent workers are forced by law to chose a Pension Fund Firm, where the monthly individual contribution are accumulated. The Retirement Fund management Firm, cover its administration and operational costs with a fraction of workers ´s contributions ranging from 2% to 2.5% . The legal framework limits the income accountable for monthly payment to the Retirement fund management firms, up to a maximum of U$$ 1400.People with higher incomes may add voluntary and complementary contributions, under different schemes such as: Saving account, Programmed contribution with the employer approval.-
The resources accumulated are for the exclusive use of the owner, when it comes to the retirement decision, expected to be at the 65 years old.-
The interesting thing is that the amount accumulated throughout the years, will finance the monthly incomes after the individual retires from labor force. This total will depend of the amount each individual is contributing, ,the regularity of the contributions, and the efficiency in the management of the total fund .According to some calculations, with an average annuals returns for the whole period of 4%,an average affiliated with 45 years of working life, will retire from work with a monthly pension equivalent to the 60% of the latest 120 monthly average income(ten years).-