The Chilean Pension System

For some time, conservatives have touted the Chilean pension system as a model to replace our current Social Security system. Several years ago, I looked at the details of the system and concluded that (i) it was primarily a way to fund investment in Chile, including the funding of public infrastructure and (ii) it would only work so long as Chile, an undeveloped country, was able to sustain high economic growth rates.

Apparently, the system is already breaking down. As reported in today's NYT, Chilean politicians are in agreement that the system doesn't work:

"There are two big issues, coverage and costs," Andrés Velasco, [the Socialist Michelle] Bachelet's economic adviser, said in an interview here. "Too many people are outside the system," he said, adding that too many of those in the system have found that "saving via the pension funds is quite expensive."

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"Chile's social security system requires deep reforms in all sectors, because half of Chileans have no pension coverage, and of those who do, 40 percent are going to find it hard to reach the minimum level," [the conservative Sebastián] Piñera said in a televised debate with Ms. Bachelet on Wednesday. "This has to be confronted now, and we agree with Michelle Bachelet and will, I hope, join forces behind this large undertaking."

Most neutral observers are suddenly beginning to see the shortcomings of the system:

At the moment, the government pays about 5 percent of gross domestic product, or more than it spends for either health or education, on pensions for the poor, payments into a separate military retirement plan and so-called transition and administrative costs. Supporters of the privatized system argue that the state's burden will diminish as older retirees enrolled in the pay-as-you-go system that prevailed here before 1981 gradually die off.

But skeptics point to another developing problem: many young people, who should be enrolling in the system early to accrue maximum benefit, are staying out or paying in very little. Some cannot afford to contribute beyond the obligatory minimum payment, which is 10 percent of wages, while others are either self-employed or have been hired by companies as low-paid independent contract workers and therefore do not have to contribute at all.

"The bottom line is that this system does not work with this labor market," said Andras Uthoff, an economist who is director of the social development division of the United Nations Economic Commission for Latin America here. If trends continue, he added, "only a small percentage of people are going to be able to finance meaningful pensions. What happens then to the rest?"

I'm waiting for the knaves who support supporters of privatizaton of Social Security in this country to take notice.