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Chile: 20 years of Liberal Experiments in Social Protection



After 20 years of experiments with liberal Social Protection (SP) schemes in Chile, the virtues and especially the serious limitations and absences of such schemes, have started to become more by now. Broadly speaking, the main disadvantage of the private SP schemes seems to be that they have remitted their benefits to the upper quarter of the population. And even for them, they pose some quite serious problems. Regarding the vast majority of the population, on the other hand, the private SP schemes have proved, in fact, to be quite ineffectual indeed.

On the other hand despite the fact that strategies like focalisation on the poorest have allowed improvement in general quality of life indicators, the growing differences in income has resulted in persistent and even increasing equity gaps.


In Chile, during the last decade, a substantial effort has been pushed forward on the recovery of the undermined and under funded welfare institutions.

The great cut in public social spending during the dictatorship, in particular in health an education, resulted in a general detriment of the services and on an even worst impact over the salaries of the civil servants involved in this sectors.

Despite the efforts, the public spending -as per capita or related to GDP- has not been recovered yet and on the contrary this is still probably the main problem of the sector and its workers, even considering the need for a modernisation of the Institutions.

The situation around Pensions has been different. Great amounts of public resources have been poured into the sector to compensate the deficit created with the introduction of the private schemes, coming to figures much higher than the previous system while responsible for the biggest proportion of the overall public social spending.

Unemployment in Chile is the worst-off area within the Social protection components.

The public resources allocated to the unemployment schemes have been scarce even during the present economic crisis, where besides, reduction on eligibility criterias have been put in place.

On the other hand, the new private unemployment schemes have introduced some improvements with respect to the traditional time-related ones, as well some elements of solidarity. However, though a sign of improvement, the private unemployment schemes have proved to be not effective enough for periods of massive unemployment like the current.


After this 20 years, the liberal models for SP schemes have risen concern around basic issues on Social Protection, namely: Universal coverage, Equity, Quality, as in other areas such as: Efficiency Cost containment, and Regulation.

However, there seems to be enough evidence to analyse, and over which to built a different approach to the co existence of the public and private systems, that considers not only the imperfections of the traditionally conceived public system, but also the serious failures of the private sector in the funding and the provision of the welfare benefits.

Perhaps it would be reasonable to develop more towards a more regulated development of the sectors in the aim of a universal, equitable and high quality protection system.

On the other hand it seems inevitable to attend the issue of the size of the public spending dedicated to SP, out of which the major part goes to financing the deficit resulted from the private pension schemes. This leaves Chile below the average of more developed LA countries, and far from the developed countries.

Considering that today the public social expenditure absorbs a great proportion of the overall national budget, the discussion leads inevitably towards the level of Public Spending and hence the Taxation system as supported by the recent affirmations of the Minister of Finance.

‘ With the current tax rate? It is only possible to enforce a social policy for the poorest quintile, yet the second quintile is also extremely poor...also middle class has to be satisfied [in their needs], but that is impossible with the current Tax rates. For full university grants, adequate pension retiring schemes, a different Tax rate. Is needed.’

The SP will not improve out of the imposition of risk prevention models, or other technocratic strategies.

The improvement of the SP system is part of the historic evolution of our society, and as such they should be approached.


Until the decade of 1970 and that was considered in LA for its good level coverage and quality.

The liberal SP schemes were imposed in Chile under the military dictatorship in the context of the integration of the country to the process of liberal globalisation.

The changes in SP took place in the middle of a period characterised by political turbulence and social and economic changes, throughout which the Chilean society suffered deep sociological transformations.

The social and economic structure in Chile changed from its traditional agrarian self dominated by the latifundia to a rather ‘modern’ social structure still developing. During this process, the traditional landowner/peasant social relations have become almost inexistent -with a work force as a proxy that changed from 40% in the 1960s to 13% today and still decreasing one percentage a year-. At the same time, the protected industrial sectors ended, and the public sector of the economy has been reduced.

On the other hand, the salaried employment in private business has increased more than in the rest of LA, even though a great proportion of them are temporary jobs, with high degrees of unstability.

As a result of all this transformation processes the economic and social structure in Chile has changed, and with it, the needs for Social protection.

The political situation has faced a deep transformation as well.

The last decade of "transicion a la democracia" can be understood as the institutionalised system of multiple subsidies designed to protect the political representation and grasp on to power of the country’s upper social groups. Until now the population had accepted with growing disgust the "Transicion" institutions in part because of the reasonable fear of a return to the military rule it had to fight for so long and hard.

However, one of the basic sustains of the period has been quite shattered lately by the detention of the former dictator in London in 1998 and subsequent trial in Chile.

In the Political discussion today there appears to exist a consensus in the need to complete the process of democratisation of the political establishment, and the characterised over representation of the privileged sector mainly military and Business.



In this context, the idea of a new social contract underpinned by full democracy, a more effective regulation of the economy, a more equitable distribution of wealth, decent work, and an adequate SP for everybody, appears as a good alternative.


In what follows there is a brief review on some of the subjects involved in Social Protection.


The main limitation of the so-called AFP private pension system, in it’s present state, is that half of the population will get no retirement coverage what so ever out of the system. To be entitled to the state guaranteed US$100 minimum monthly pension, a person must contribute to the system during at least 20 years, goal that will not be achieved by at least half of the present workforce. On the other hand, half of the half that will manage to achieve that minimum entitlement will never get more than the state subsidised minimum pension, because their wages are so low. That leaves roughly one quarter of the workforce as real beneficiaries of the AFP system, as it is today. That quarter of the workforce is also quite unsatisfied with the system, though, because the oligopoly (one firm holds 40% of the market) that controls the AFP market, charges very high administrative commissions, in the order of 2.5% of wages in the 20 years passed; profits outrageously from the business, with AFP profits soaring during the past several years despite the crisis, to reach an average rate of return of 26% over equity in 2001; and grossly manipulates the power it gets over boards of companies where part of the funds are invested. Furthermore, half of the state employees are presently fighting to get back to the old pay-as-you-go system they were forced to abandon back in 1981. Their motive is quite simple: pensions from public servants who retire from the AFP system today, are one third or less, of the pensions received by the public employees who steadfastly stayed in the old system. On the other hand, the increasing number of persons who, forced by necessity, apply to early pensioning may see their pension fund evaporate by a third or more, and their pensions shrink by 1/10 for each year they advance their retirement, all in the benefit of the firms and commissioners that offer such a "benefit". All the above mentioned problems, though, have a rather substantial chance to be solved, since public funding, earmarked for pensions, derived from general taxation, is huge in Chile, reaching almost one third of the total government budget and over 6% of GDP. The reason for this high level of public expenditure in pensions is that, since the reform that privatised the system back in 1981, all pension contributions go to the new AFP system, while most of the existing pensions are paid by the state through the old system. The military pensions are also paid by the state, since the military did not affiliate its personnel to the private pension system their government imposed upon the rest of the population. As both these outflows tend to decrease in time, public funding for solving the above mentioned problems should become available.



: Health care in Chile is provided mainly through a semi-decentralized, state financed, public system, that serves 80% of the population. Parallel to it, a private health system has emerged out of the liberal health care reform, providing a wide and rather high quality health network, through which the upper income 20% of the population, that is affiliated to the so called ISAPRE insurance system, receives health care. The private ISAPRE system has been loosing it’s affiliates, though, who in this case may freely return to the state health system, at such a high rate, that it has lost fully one quarter of them since 1997. After this drain, the private health system coverage is now back to 20% of the population, down from its 26% peak, attained in 1997. The private system’s costs have in the meantime soared for the ISAPRE affiliates, up 10.3% in per-capita health expense just in the last year, in inflation adjusted terms. Meanwhile, the companies that control the market have also seen their profits raise, despite the crisis. Serious problems also arise from the fact that, in the private system, there is no compensation between low risk segments and high risk groups such as fertile women, elders and so called "catastrophic’ illness. Expenditure by beneficiaries of the private system that, as has been said, account for one fifth the population, amounts to around one half of total health expenditure, overall expenditure that, as of 2001, reaches up to around 5.5% of GNP. Public health expenditure, on the other hand, amounts for the other half of total health expenditure and most of it is focused on the lower 80% of the population. It is financed by general taxation and taxation upon wages of affiliates and other, roughly half-and-half. Law obliges all wage earners, since 1981, to contribute at least 7% of their wages into the health system, are it a private ISAPRE or the public FONASA fund. Transfers of public funds to beneficiaries of the private system, though lowered lately, remain high, in the order of 7% of public health expenditure, stemming mainly from government payments for maternal leaves. Reform of the system has focused on establishing a fund from which, money can be re-distributed from low risk to high-risk affiliates and creating a minimum health "basket" assured for everyone. The government has the idea of partially using this compensation fund to redistribute resources from affiliates in the private system down to lower income users of the public system. The private, ISAPRE, insurers for their part, while accepting a fund for risk compensation and minimum health package, reject the idea of transferring resources to the public system. On the contrary, they are pressuring to obtain access to the public, highly subsidised health infrastructure, for their affiliates. On the other hand, there is widespread discussion over government proposals that pretend to introduce a general insurance driven demand for health service, from private ISAPRE but also from public FONASA, to be attended by competing providers, also public and private.


: Public expenditure in education, that topped up to 7.5% of GNP back in 1972 was slashed down by half by the incoming dictatorship (teachers wages were slaughtered down to one third), who maintained it almost constant in real, inflation adjusted, terms up to 1990, by when it had slumped down to 2.6% of GNP. Democratic governments have since then more than tripled their educational expenditure in constant money terms, up to 4.2% of GNP in 2000. That is only part of the picture, though, because since 1981 the dictatorship privatised a mostly state run educational system, into a system where today one out of every two students and teachers study or teaches in a privately owned school, at all levels of education, and the rest have been transferred to local governments. The state, though, subsidises demand quite completely in schools, both municipal and most private schools, where 91% of the students in basic and medium level attend, and about 30% of all university fees. Family out of pocket expenditure in education has soared up to 43 pesos out of every 100 pesos in overall educational expenditure which, accounting for the private expenditure, has once again reached the 7.5% of GNP levels. Private expenditure in education, though, concentrates in the 9.1% of basic and medium level students who attend private, non-government subsidised, schools, and students coming from high-income families in universities. Parallel to all that, enrolment in all levels of education grew at a very fast rate during the sixties and the early seventies, under Allende, peaked in 1974, actually decreased after the military coup during the seventies, recovered very slowly during the eighties and increased again rapidly during the nineties, up to a 96.5% coverage in basic, 83.6% coverage in medium and 33% coverage in higher, levels if education. Quite surprisingly, the surge in enrolment and coverage during the last decade has been achieved without significant loss in the quality of education, considering that all the increase comes from low income and low education families.


: This area of Social Protection is perhaps the weakest in Chile as of now. Unemployment benefits in Chile have traditionally included severance funds provisions. In agreement with a "unemployment insurance" law approved this year 2001, starting next year severance fund provisions will have to be deposited monthly by employers in individual worker accounts, in a proportion of 2.4% of wages. The workers themselves will contribute another 0.6% of their wages to these forced savings accounts, to be tapped during five months in the event of unemployment, at a decreasing rate of one half of the last wages during the first month and one third of them in the fifth month. One third of the employers’ contribution will go to a "solidarity" fund, together with a negligible (10 million dollars a year) government contribution, to complete minimum unemployment benefit to low wage earners. This system will be able to provide some protection starting on 2005, when accounts will have money accumulated for minimum benefits. On the other hand, an unemployment subsidy has been in place for decades, but during most of the time it has been so low that only a few unemployed people care to ask for it. Presently it amounts to US$25 per month, plus some health benefits and only some 11.000 out of 700.000 persons officially recognised as unemployed (12.3% of the workforce, including people in emergency government employment plans) have cared to ask for it. Finally, because of the present crisis, the government has decided to dedicate some funding to special programs for the unemployed, that include "emergency" employments in municipal governments, subsidies for new employment, etc. that presently benefit some 150.000 unemployed persons. The current year 2001, the government has earmarked for these purposes some 150 million dollars, less than 1% of the current budget and less than one fifth of a percentage point of GDP. There is widespread conscience that Chile will have to cope with two digit unemployment rates for the next two or three years and perhaps the time may become ripe to establish decent unemployment benefits of the kind most developed or more developed countries than Chile have had place in some cases for decades.





Printable version of this document in PDF Santiago Workshop, project. Santiago Workshop, draft agenda Santiago Workshop, Draft participants list Chile, 20 años de experiencias liberals en proteccion social. Full report, in Spanish. Chile, 20 años de experiencias liberals en proteccion social. Summary, in Spanish. Chile, 20 años de experiencias liberals en proteccion social. Presentation speech, in Spanish.










Manuel Riesco,
Aug 24, 2012, 5:25 PM