View Full Version : How Chile privatized their pension system

01-12-2005, 08:22 AM
<font color="blue">Of course this will not work in the US because, according to Gayle, the US economy is "totally different than Chile's".

Or does she say that just because "Little Bushie" is pushing it? </font color>


by José Piñera
José Piñera, who as Chile's minister of labor privatized the state pension system, is president of the International Center for Pension Reform and co-chairman of the Cato Institute's Project on Social Security Privatization.

It's an honor for me to share with you some of the experiences we have had in Chile with our new private pension system. I would like to comment on how the new system works, how we were able to make the transition from the old system to the new one, and what have been the main economic, social, and political consequences of the new system. I will not explain the shortcomings of the old pay-as-you-go system in Chile. Those shortcomings are very well known because that is the system that is failing all over the world.

In Chile we accomplished a revolutionary reform. We knew that cosmetic changes--increasing the retirement age, increasing taxes--would not beenough. We understood that the pay-as-you-go system had a fundamental flaw, one rooted in a false conception of how human beings behave. That flaw was lack of a link between what people put into their pension program and what they take out. In a government system, contributions and benefits are unrelated because they are defined politically, by the power of pressure groups.


We decided that the minimum contribution should be 10 percent of wages. But workers may contribute up to 20 percent. The money contributed is deducted from the worker's taxable income. The money is invested by a private institution, and the returns are untaxed. By the time a worker reaches retirement age--65 for men, 60 for women--a sizable sum of capital has accumulated in the account.


Let me say something about the transition to the new system. We began by assuring every retired worker that the state would guarantee his pension; he had absolutely nothing to fear from the change. Pension reform should not damage those who have contributed all their lives. If that takes a constitutional amendment, so be it.

Second, the workers already in the workforce, who had contributed tothe state system, were given the option of staying in the system even though we thought its future was problematic. Those who moved to the new system received what we call a "recognition bond," which acknowledges their contributions to the old system. When those workers retire, the government will cash the bonds.
New workers have to go into the new private system because the old system is bankrupt. Thus, the old system will inevitably die on the day that the last person who entered that system passes away. On that day the government will have no pension system whatsoever. The private system is not a complementary system; it is a replacement that we believe is more efficient.


The real transition cost of the system is the money the government ceases to obtain from the workers who moved to the new system, because the government is committed to pay the pensions of the people already retired and of those who will retire in the future. That transition cost can be calculated. In Chile it was around 3 percent of gross national product.