Social Security Privatization in Latin America

By Kritzer, Barbara E. | Social Security Bulletin, January 1, 2000 | Go to article overview

Social Security Privatization in Latin America


Kritzer, Barbara E., Social Security Bulletin


The new, partially privatized social security system adopted by Chile in 1981 has since been implemented, with some variations, in a number of Latin American and old-world transition economies with either a single- or multi-tier system. That alternative to a pay-as-you-go system is sometimes advocated as a desirable model for solving problems in developed systems, such as that of the United States. This article describes the new programs in Latin America, their background, and similarities and differences among them.

Summary

The new, partially privatized social security system adopted by Chile in 1981 has attracted attention in many parts of the world. Since then, a number of Latin American countries have implemented the Chilean model, with some variations: either with a single- or multi-tier system, or with a period of transition to take care of those in the labor force at the time of the change. The single-tier version consists of a privatized program with individual accounts in pension fund management companies. Multitier systems have a privatized component and retain some form of public program.

This article describes each of the new programs in Latin America, their background, and similarities and differences among them. Much more information is available for Chile than for the other countries (in part because Chile has the oldest system), enough to be able to evaluate what, in most cases, is the most accurate information. That is often not the case for the other countries, especially when dealing with subjects such as transition costs and net rates of return (rates of return minus administrative fees).

No country has copied the Chilean system exactly. Bolivia, El Salvador, and Mexico have closed their public systems and set up mandatory individual accounts. Argentina has a mixed public/private system with three tiers. In Colombia and Peru, workers have a choice between the public and private programs. Uruguay created a two-tier mixed system. Costa Rica has a voluntary program for individual accounts as a supplement to the pay-as-you-go program and has just passed a law setting up mandatory accounts containing employer contributions for severance pay.

All of the countries continue to face unresolved issues, including:

* High rates of noncompliance-the percentage of enrollees who do not actively and regularly contribute to their accounts-which could lead to low benefits and greater costs to the governments that offer a guaranteed minimum benefit;

* Proportionately lower benefits for women and lower earners than for men and higher earners;

* A minimum required rate of return among the pension fund management companies (in most of these countries) that has resulted in similarity among the companies and the consequent lack of meaningful choice; and

* High administrative fees in most of these countries, which reduce the individual's effective rate of return.

To what extent these issues can be mitigated or resolved in the future is not yet clear. In general, a definitive assessment of the Chilean model and its Latin American variations will not be possible until a cohort of retirees has spent most of its career under the new system.

Introduction

In 1981, Chile became the first Latin American country to privatize its social security system. Chile switched from a defined-benefit, pay-asyou-go (PAYGO) system to a defined contribution system of individual accounts managed by private companies.

Although the Chilean model has attracted worldwide attention, the model was developed for a country that shares many characteristics with other Latin American countries. Most of the countries in the region have younger populations, which sets them apart from aging nations such as the United States (Table 1). The Latin American pension systems have also had similar problems, including inequitable benefits based on occupation and political clout, mismanagement of programs, high rates of evasion, low coverage, promises of higher benefits that could not be sustained, and high rates of inflation. …

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