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Contributions to the AFP by affiliates (blue line) and the Treasury (red line) almost triple benefits paid (orange line), with a surplus (green area) of slightly less than two thirds of the former.
The surplus is similar to forceful contributions by affiliates, and fiscal contributions are similar to benefits paid, which proves that almost all contributions are deviated by the AFP to financial markets, meanwhile the State funds almost all benefits paid.
The surplus is appropriated by the AFP and related insurance companies, or transferred to third parties in the form of loans and equity, mostly to a few large financial groups, including the owners of the AFP in the first place.
The above shows that the AFP system is not really a pension scheme but a forced savings mechanism, because only about one third of the contributions is used to pay pensions, meanwhile the major part is deviated to capital markets. The whole area in green represents the huge surplus that the AFP system has transferred in this way.
The forceful contributions (blue) double the amount of benefits paid (orange) and grow faster, at a rate that in the last seven years was higher than 10 per cent per year. Contributions will continue to grow very fast, at the rithm of the labour force and salaries, which grow rapidly in an emerging economy with favourable demographics such as Chile.
In addition to the above, the proportion of contributors to social security in the workforce will increase with the formalisation of the labor market, which is still precarious. In the average, workers contribute to the AFP every other month. Individual contributors rotate constantly, as they are continuously hired and fired from short term formal, salaried, jobs. In between, they work as informal self employed or remain unemployed. Women constantly move in and out of the workforce. This “rotating formality” will necessarily improve with better labour legislation and the general development of the economy.
Meanwhile, expenditure in benefits will continue to diminish its growth rate, which in the long run must adjust to the growth in the number of the elderly. In Chile, the number of persons above 65 years old currently grows 3,6 per cent per year, rate that will diminish to average 2,7 per cent a year during the first half of the century.
As a result, the surplus –which is the difference of total contributions by affiliates and the State, minus benefits paid by AFP and insurance companies–, grows nearly as fast as forceful contributions by affiliates. During the last seven years, surplus has been growing at 10,5 per cent a year, on the average.
All the above proves the feasibility of re establishing the PAYG scheme, because the sole contributions by affiliates are enough to fund all pensions, including those paid by AFP and related insurance companies, and grow increasingly faster.
The amount of pensions could be doubled and still there would be a surplus. In addition, the State would save significant cash subsidies to the AFP, which currently amounts to almost two thirds of benefits paid by the AFP system.
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