Chile: Privatized Social Security Pensions Fall Short for Chilean Retirees
Chile's system of partially privatized social-security accounts is leaving some workers and retirees scraping for other income sources while it does little to alleviate the federal government's fiscal burden. Even after almost a quarter century of private accounts, the advertised gains that administrators boasted would come have yet to materialize, and the Chilean government still pays more than a quarter of its budget to fund pension programs. The poor performance of Chile's and other nations' under-regulated private-account systems has led the World Bank, long a proponent of privatized social-security programs, to recommend a reduction in the use of private accounts there, although the bank has not backed off the idea entirely.
The system of privatized pensions that former dictator Gen. Augusto Pinochet (1973-1990) put in place in Chile in 1981 has gained international attention since US President George W. Bush announced that introducing private accounts to the US Social Security system would be a top second-term priority for him. He pointed to Chile's system as a success worth emulating. Bush's proposal has yet to be described in detail, but the US president did go on a five-city campaign-style tour to promote the yet-to-be-assembled program.
World Bank backs off unregulated privatization
A dozen Latin American countries have taken up the World Bank's pension-privatization advice in one form or another (see SourceMex, 1997-02-05, and NotiSur, 1997-05-30) hoping to relieve the burden of tax-financed pension schemes on their national budgets. In a report released ten years ago, the bank laid out a three-pillar pension-reform scheme that called, first, for a tax-financed public safety net; second, for compulsory saving by workers, generally into individual pension accounts; and third, for voluntary saving for retirement.
Chile, under Pinochet, was the first country to try the reforms, forcing its citizens to become savers after 1981. The government handcuffed the domestic spending of future administrations since it then needed as much as 7% of its GDP annually to pay off the old system. The figure is now down to about 3%.
Eleven countries followed Chile's example, implementing the reforms in different ways: Peru (1992), Colombia (1993), Argentina (1994), Uruguay (1996), Mexico and El Salvador (1997), Bolivia (1998), Costa Rica and Nicaragua (2000), Ecuador (2001), and the Dominican Republic (2003). These nations represent about half of all Latin Americans, although one persistent problem in the pension systems is that they do not cover workers in the massive informal economy.
Now a new study from the World Bank, Keeping the Promise of Social Security in Latin America, does a partial about-face on its advocacy for privatized pensions in sections like "The Benefits of Hindsight."
One major problem for the Chilean and other privatized systems is the excessive fees charged by private companies handling the investment accounts. The result has been that those with hindsight are saying the gains of the reform were oversold and are not delivering the benefits for individuals that the reformers promised. Opponents of the reforms may not regard such outcomes as hindsight but as fulfilled predictions.
The World Bank report calls for greater regulation of companies managing the accounts, some of which have charged rates as high as 20% to run pension investments. The bank also wants more attention to its first pillar, a comprehensive safety net. In Chile, about half the labor force is covered, but in most countries that have privatized the rate is typically about 20%. If coverage remains that low, the reforms may not have lasting political support, since they are not creating a comprehensive system of income security for older citizens.
In some countries, pension funds have been directed to invest heavily in government bonds, and tight restrictions have been put on investments in foreign securities. …