Retired School Teacher Challenges $217 Billion Industry in Chile

(Bloomberg) --

A socialist is lecturing Chile’s business elite on private property rights in a court case that threatens to disrupt a $217 billion industry.

Fernando Atria wants Chile’s constitutional court to rule that people can withdraw funds from their personal retirement accounts when they wish. The private pension system, set up during the dictatorship of the late Augusto Pinochet in 1980, says that would undermine an industry that forms the bedrock of Chile’s capital markets.

“Our aim is to show the fundamental contradiction at the heart of the private pension funds,” Atria, a law professor and former presidential hopeful, said in an interview. “This is a system of forced savings, so that money belongs to the individual. It is not a social security system.”

The court case is part of a broader campaign to overhaul the private pension industry set up by so-called Chicago Boys, or disciples of Nobel laureate and University of Chicago economist Milton Friedman. Atria and his colleagues want the system to redistribute wealth to the poor, while the pension funds, or AFPs, want more, not less money, going to individual accounts.

The government is trying to find some middle grown, backing a bill that would force employers to contribute to individual savings accounts, while boosting the minimum state pension. For Atria, that is wholly inadequate.

Economic Success

Retirement savings have provided much of the funds that fueled four decades of economic growth, turning Chile into South America’s wealthiest nation. Early withdrawals would slow and even halt growth in the funds.

At the center of all this is Maria Angelica Ojeda, a retired school teacher. She wants to withdraw money from her account to repay her mortgage. Her AFP refused and said her savings of about 40 million pesos ($56,000) give her a monthly pension of 185,000 pesos, or about 60% of the minimum wage. A local court asked the Constitutional Court to weigh in.

Atria’s Casa Comun organization is backing her case. What’s more, the pension system’s united opposition may be weakening. Under certain circumstances an early withdrawal of funds makes sense, “particularly in cases that involve health expenses,” said Ricardo Guerra, CEO of newly formed AFP Uno, in an interview with Pauta Bloomberg radio on Oct. 2.

Alfonso Swett, president of Chile’s largest industry group, told CNN Chile that it would be “logical” that someone be allowed to withdraw the funds to pay down mortgages, but only after retiring. The pension industry as a whole disagrees.

“We are convinced that the purpose of these funds should go exclusively to paying pensions,” Fernando Larrain, CEO of Chile’s AFP association said in a phone interview.

Property Rights

It is a comment echoed by the government.

“If people are allowed to spend on other things they won’t have any money left to survive on at the moment they retire,” Finance Minister Felipe Larrain told reporters Oct. 3.

Atria is scornful of that argument from a right-wing government in a country where property rights are held as sacred.

If Ojeda wins the case, her request goes back to the appeals court, which could grant her wish to withdraw funds and open the flood gates to tens of thousands of similar requests. Should she lose, Atria is preparing other cases to bring before the courts, confident the tide is turning in favor of the campaign for change. A court in the southern city of Punta Arenas has already asked the Constitutional Court to review another such case.

It seems that the industry will be arguing for limits to property rights for months or years to come.

--With assistance from James Attwood and David Papadopoulos.

To contact the reporter on this story: Eduardo Thomson in Santiago at ethomson1@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Philip Sanders

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