Pinochet’s Pension Scheme

Rafael Herrera is a seventy-five-year-old retiree. According to La Tercera, he receives a monthly pension of 140,000 pesos (approximately $175) and spends 180,000 pesos (approximately $225) paying off medical debts accrued after a car accident. To cover the difference (and his monthly living costs), he depends on what sporadic work he can find — despite his back problems — and support from his son. When asked why he went out on the streets and joined the protests, he explained his reasons as follows:

I know an eighty-year-old old man in a wheelchair, and his pension is miserable. He says that if he had a gun, he would kill someone out of pure rage. I wouldn’t do that, but my anger is the same. To be living halfway. It just won’t do anymore.

Herrera’s story is the story of an entire generation of Chileans who saw their plans of a dignified old-age crash against the reality of Chile’s dismal pension provisions. In 1980, when Herrera and his generation were in their thirties, the minister of work and social welfare, José Piñera (brother of the current president, Sebastián Piñera) engineered a reform to replace the existing pay-as-you-go collective pension schemes, removing all elements of solidarity and social security. In this new scheme, each worker would contribute 10 percent of their wages, to be claimed upon retirement. Private companies, the so-called Pension Funds Administrators (AFP), would invest the money and oversee its administration (for profit).

It was a way to bring market logic into the pension system and inject a massive tranche of fresh resources into capital markets. As has recently come to light with the release of the dictatorship’s secret minutes, Pinochet’s reaction was at once encouraging and somewhat skeptical:

I find the system wonderful; I think that it is necessary to implement it and that it is urgent to do so, but I have always stated the following, and I think you have heard it several times: who will administer the money? This makes me feel ill, because I also know that there are several gentlemen who are becoming millionaires in this country, who have sent people to study the system because they want to operate in it . . .

This admission may help explain why the Armed Forces kept their own social welfare scheme during the dictatorship, separate from that of the general population.

The private pension system has ended up exacerbating the inequalities of the Chilean labor market. Half of Chile’s workers receive a monthly salary of $437 or less, while the country’s richest 1 percent earn 33 percent of the country’s income. Most workers barely make it to the end of the month. The idea that they could, on top of that, put aside 10 percent of their wages for their retirement has been proven ludicrous.

With 50 percent of civil retirees receiving a pension of $200 or less — while retirees from the Armed Forces receive an amount approximately five times the size — this system is now being roundly rejected. AFPs are widely despised, and 80 percent of Chileans are in favor of a state-run pension system.

As is the case with most of the country’s contemporary institutions, Chile’s pension system was never agreed upon by those who bear the effects. It was imposed from the top down. When Austrian economist Friedrich Hayek urged British prime minister Margaret Thatcher to adopt a program of reforms like in Chile, she delivered a cool response in a now famous letter:

I was aware of the remarkable success of the Chilean economy in reducing the share of government expenditure substantially over the decade of the 70s. The progression from Allende’s socialism to the free-enterprise capitalist economy of the 1980s is a striking example of economic reform from which we can learn many lessons . . . However, I am sure you will agree that, in Britain with our democratic institutions and the need for a high degree of consent, some of the measures adopted in Chile are quite unacceptable. Our reform must be in line with our traditions and our Constitution.

Thatcher’s reticence points to the impossibility of replicating Chile’s economic model in the UK. This is not to say that Thatcher was any less extreme in her pro-market ideology. Rather, her letter shows that Chile’s radical free-enterprise economy could only be implemented thanks to the dictatorship; Britain’s democratic institutions, its reliance on some degree of “consent,” would cause roadblocks. The reforms of the Pinochet era could only be imagined in the context of a government whose only true constituency was the Armed Forces. A government oriented toward the broader public, however imperfectly, would have found itself accountable to that public, and so limited by its various interests, traditions, and regulations.

But if democratic rule is not compatible with several aspects of Pinochet’s economic regime, how did they manage to survive the thirty years of democracy that followed his fall in 1989?

Locking Down Inequality

Since its return to democracy in 1990, Chile has been characterized by a delicate (if tense) institutional balance, maintained through its entrenched bureaucracy, market incentives, and the Chilean Constitution conceived under the dictatorship — plus a strong dose of inertia.

One of the constitution’s key authors, Jaime Guzmán, has provided perhaps the best description of the legal and institutional constraints inscribed in the country’s constitution. These were designed to ensure that if reformists ever came to power, they would be forced to maintain the status quo, because the margin of alternatives was sufficiently reduced. In the pension system, but also in education, health, housing, and almost every other aspect of the state system, constitutional locks and the institutional legacy of the dictatorship have worked to prevent any structural modification that might divert the course from neoliberal orthodoxy.

While extreme poverty fell dramatically in the first two decades after dictatorship — the number of Chileans living under the poverty line dropped to less than 20 percent of its 1990 figure — Chilean democracy was marred by a broader legitimacy crisis. Reports showed declining levels of electoral participation and a general mistrust of politics — with political parties the least trusted political institutions in the country. Similarly, both the army and the police force have been shown to be incredibly unpopular institutions, with net support of negative 49 percent and negative 37.6 percent, respectively.

This widespread mistrust of state institutions seems to stem from the growing consciousness of a crippling political inequality. Major studies have shown that high-earning Chileans tend to have greater faith in the authorities, while poorer people are more likely to be of the opinion that the authorities do not care about “people like them.” While this legitimacy crisis has hit traditional institutions, few alternative organizations remain: those few social organizations that did survive the dictatorship were dismembered in the thirty years that followed.

As extreme poverty has become less prevalent since 2010, tolerance for political and economic inequality has waned dramatically. New generations have become politicized in fragmented protests, marked by cathartic moments of social explosion. The last decade in Chile has seen the emergence of various student movements, feminist organizing, and the fight against the private-pension system.

These movements have expressed a growing unease with the idea of the so-called “emerging middle class” — the designation referring to those children of the working class who, thanks to new access to technical and vocational training, have avoided extreme poverty. In a radically neoliberal social order, they recognize the vulnerability of their positions, where they lack a basic social safety net and where public services are administered by private enterprise.

The neoliberal assault on the social fabric has brought about the need for non-traditional forms of organization: few of these new social actors are unionized, let alone active in political parties.

In post-dictatorship Chile, democratization occurred alongside neoliberalization. Their co-implementation has resulted in two seemingly contradictory tendencies. On the one hand, access to consumption and credit has brought about individualization that distances people from community or collective projects. On the other hand, and in contrast to this, this twin historical process has led to a mass democratic force that has been pushing for greater civil and social rights, especially since the student protests of 2011.

Chile Wakes Up

Simmering frustration with the status quo finally exploded last month when the government imposed a relatively modest increase in subway fare prices. A new difficulty arises now: seeking to respond to the social explosion, an important part of the elite is opening up to the idea of a new social pact, but it is extremely hard to find a counterpart that can organize the malaise into a clear set of demands. Simply appeasing the movement through minor changes in social spending will not be enough. This is a leaderless movement, without any clear structure, but with one overwhelming motto: “Chile has woken up!”

Chile has woken up, and the country is enraged by an imposed social order that holds little legitimacy in the eyes of most of the population. The main challenge will be finding a way to expand social rights in such a way that ensures that everyone feels they receive a fairer share of the fruits of economic growth. Trust will need to be restored in the democratic process and electoral representation.

Only by ensuring these most basic minimums of social justice can a lasting social peace be achieved. An important attempt in this respect has been the recent announcement of a process that may lead to a constitutional assembly. Such an assembly will hail the end of Pinochet’s constitution, but much more is required.

The central role of trade unions, neighborhood associations, and generally organized civil society needs to be restored and their voice heard and included in the political system. At the same time parties need to regain their legitimacy as intermediaries between society and the state.

All this will not be easy. and someone like Rafael Herrera will likely distrust any new social pact at first. But it seems that the country that was once considered the beacon of neoliberalism may now in fact hold some important clues for neoliberalism’s demise. As Rafael Herrera summed it up, living halfway just won’t do anymore.