Notional accounts versus individual accounts

Alejandro Charme, lawyer, expert in social welfare.

Alejandro Charme, lawyer, expert in social security.

We are halfway through the year, the social dialogues on pensions were closed, the Convention made its proposal for articles to guarantee the right to social security and August is upon us, the month in which the government announced that it would present the pension reform project.

There is consensus that one of the main reasons for low pensions in Chile is the low contribution rate. If we compare it with the OECD average, Chile contributes only 2/3 of said average. Then, the great dilemma that we must face is what we will do with the additional percentage points of contribution (ppa). However, some -with a refoundational spirit- think about what to do with the total price, that is, the current 10% plus the ppa. This is how in these proposals the so-called notional accounts begin to circulate, a term little known to Chileans.

A notional account is a virtual entry of a worker’s contributions that generate a notional return that, in simple terms, is fictitious, since it is indexed to factors such as the increase in GDP, real increase in wages or others that They make it possible to counteract inequities in the world of work. This assigned return turns out to be less than the market return, given that with the contributions we must finance not only the holder’s pension but also those of his generation (intragenerational solidarity) and that of current pensioners (intergenerational solidarity). . To guarantee compliance with this obligation, the State must create a Collective Fund for the deposit and investment of these contributions, destined solely for this purpose. However, if this fund does not exist, the contributions enter the fiscal coffers without a specific protected destination and the right to a pension with a defined amount becomes a dated check or a pension promise that will depend on the fiscal income at the moment in which the person retires. Some countries, in order to comply with their obligation, have lowered benefits by modifying the notional return through a legal reform.

On the other hand, individually funded accounts offer market returns, which must be seen in the long term, the resources belong to the worker in property, so they are used entirely to pay their pension or retirement pension. survival of their beneficiaries and, if these do not exist, they are destined for inheritance.

Then, to solve this great dilemma, we must keep three relevant aspects in mind: a) people value the ownership of their savings and the recognition of their personal effort, this being an important incentive to contribute; b) the State saves public spending with the notional accounts, given that a new source of fiscal income arises – the contributions of formal workers; and c) informality in Chile is high and workers move from formal to informal and vice versa, so the solidarity given in the contributory pillar turns out to be less equitable than that provided by the nation’s general taxes, where all of Chile contributes.

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