Chile's pension system out of whack

Together, I estimate these policies have effectively pushed returns down by more than 2 percentage points in most cases as suboptimal asset allocation choices with significant practical implications. Note that a mere 1.5 per cent difference in annual returns over a 35-year period can lead to a 30 to 40 per cent reduction in pension payouts. Additionally, there are three more critical issues to consider.

First, the initial design mandated an insufficient 10 per cent contribution from a worker’s salary. Studies suggest that a 15 per cent to 17 per cent contribution is necessary to obtain an acceptable pension. But there has been political reluctance to increase this figure, which would require workers to sacrifice their current take-home pay for future benefits.

Second, about 30 per cent of Chile’s labour market operates informally, and many workers frequently shift between formal and informal employment. Unfortunately, during informal periods, they seldom contribute to their pension accounts.