Chile was the first country in Latin America to create a Social Security System, at the beginning of the 20th century. Over the course of the years, various pension schemes were created and these were differentiated according to type of activity or occupational group, with different rules and benefits.

This is how 52 "Cajas" or Social Security Institutions came to coexist under the pay-as-you-go scheme, meaning that the contributions of the active members were funding the pensions of the passive members. The continued existence of the System was therefore conditional upon the "worker/pensioner" ratio existing in the population at any given moment of time.

During the early years of the system' s existence, the proportion of workers was enough to finance the benefits of the pensioners. However, demographic changes, which were reflecting a steady decrease in the birth rate and an increase in life expectancies, reversed this ratio, leading to severe erosion of the System' s assets.

While there was 1 pensioner for every 12.2 workers in 1955, by 1980 there was 1 pensioner for every 2.5 workers. In other words, the cost to the contributing workers increased almost 5 times in only 25 years.

What made the problem of financing even worse was the high degree of social security evasion, since it was more economical for workers and employers to contribute at the legal minimum rate and to contribute at real values only for the last few years of the worker' s active life, when the contributions were counted for pension purposes. This situation obliged the State to raise contributions, which encouraged even more evasion and so on successively.

Added to this was the fact that the State tended to grant benefits with insufficient funding, and this accentuated the problem described, giving rise to a growing fiscal deficit equivalent to 28% of expenditure in the decade between 1970 and 1980.

The Old System was also characterized by its unfairness. Since there was no direct relation between the contributions paid by the workers and the benefits received, there were notable disparities between the many group that were covered. This situation was maintained by the power of the politicians to define who was to receive benefit and how much, and it was quite obvious that greater concessions were granted to groups which exerted more pressure.

In fact, in 1965 (1), Chilean manual labourers, who represented 70% of contributors and whose incomes were the lowest, received pensions that were equivalent in absolute terms to half those obtained by private employees and 1/14 of those obtained by public employees, these being higher income-groups. At the same time, the contributions paid by these workers in the same period (2) was equivalent to more than double that made by public employees and only 10% less that that of private employees.

The need to introduce changes to the Social Security System had been present in our country for a long time. Various reports were prepared back in the 1960s on the failings of the old system of Chilean Social Security, proposing profound changes. In 1968 the President of the Republic, Eduardo Frei Montalva, and his Finance Minister, Andrés Zaldívar Larraín, tried to reform the old system, sending a Draft Law to the National Congress, but this was finally rejected.

The erosion of assets and the unfairness of the pay-as-you-go scheme gave rise in 1980 to D. L. 3,500, ushering in a Social Security reform which created a New Pension System based on Individual Capitalization and managed by private institutions called Pension Fund Administrators (AFPs). The old System continued to function, mainly through a single entity known as the Instituto de Normalización Previsional (INP), which amalgamated the main Social Security Funds (Cajas).

The State assumed the responsibility for financing the contributions paid into the Old System by those people who changed to the New System. They did this by creating financial instruments called Recognition Bonds, representing the periods during which contributions were paid. These are converted into cash for the worker when he/she retires or dies.

The Recognition Bond is readjusted according to the variation in inflation and accrues interest of 4% per year in real terms. This is capitalized every year.