Chile: Strengthening social security and increasing labor costs

Employer Action Code: Act

Law 21,735 aims to improve retirement outcomes for workers, primarily by significantly increasing employer contributions over time and encouraging greater competition among service providers. In Chile, social security retirement, survivors’ and disability benefits are based on compulsory individual defined contribution (DC) accounts managed by private fund administrators (Administradoras de Fondos de Pensiones – AFPs). Accounts are funded primarily by employee contributions at 10.0% of covered pay. The increases are to start April 1, 2027 (under an earlier version of the legislation, the increases were expected to start in 2025).

Note: Contributions and benefits are based on accounting units (Unidades de Fomento – UFs), the daily value of which is determined by the Central Bank based on changes in consumer prices in the previous month. As of March 1, 2025, the value of a single UF was CLP 38,663.05 (about USD 40).

Key details

• Starting from April 1, 2027, employer contributions will gradually increase over nine years, from the current 1.5% of pay (up to 87.8 UFs) to 8.5% in 2036.
• The additional contributions (7.0%) will be allocated as:
• 4.5% to the individual DC accounts
• 1.0% to a new social security fund for survivors' and disability pensions and for improving pensions of women. This includes a minimum additional pension of 0.25 UFs per month for female employees, to help equalize the benefits received by women and men retiring at age 65 with similar savings and family structures (given the longer life expectancy of women)
• 1.5% to a fund managed by the social security institute (Instituto de Prevision Social), which will finance a new retirement benefit for eligible members. The new monthly benefit will equal one-tenth of a UF multiplied by the number of years of contributions (capped at 25 years). To be eligible, women must have at least 10 years of insured employment (15 years from 2035) and men must have at least 20 years
• New regulations for AFPs are intended to increase competition by requiring that the AFP services for 10% of participants will randomly be put up for auction every two years and awarded to the AFP with the lowest fees (guaranteed for at least five years)
• The five investment funds currently offered by AFPs (based on risk level, from aggressive to conservative) will transition to 10 target retirement date funds with investment strategies appropriate for each cohort

Employer implications

Reforms have been needed for years due to the inadequacies of the AFP system and the small size of the market for private company or individual pensions. Only 10% of employers surveyed by WTW offer company pensions. According to the government, 85% of current social security female pensioners have income below the minimum wage (72% for men), and one in four are below the poverty line. Employers should review their benefit provision in light of the reforms and prepare for the increases in labor costs.