A "Great Example" of Pension Damage

September 25, 2007

George w. bush’s “political capital” is rapidly being spent on his controversial Social Security privatization initiative. Grasping for positive examples of privatization, the President and his supporters are now looking to Chile, whose system Bush recently called “a great example.” A chorus of supportive voices has praised Chile’s supposed success with privatized pensions, including José Piñera, the original pinochetista designer of private accounts and now co-chairman of the Cato Institute’s Project on Social Security Choice—the leading proponent of the Bush plan. Despite these accolades, even a cursory inspection shows that Chile’s experience with privatization falls short of the hype. In reality, the private accounts system in Chile has enormous coverage shortfalls, excessive fees, lack of competition and even a failure to reduce the state’s contributions to the system.
The plan, enacted by Piñera and Gen. Augusto Pinochet in 1981, eliminated the traditional publicly administrated pay-as-you-go fund in favor of a system of competing private mutual funds, known as pension fund administrators (administradoras de fondos de pensiones, AFPs). Initially, workers were given a one-time choice of joining an AFP (contributing 10% of their salary) or staying in the old system. Currently, there are six AFPs doing business in an oligopoly setting; all salaried workers are obligated to use their services and the funds can pretty much charge what they please. The only sector of Chilean society exempt from the private system is, not surprisingly, the military.
A recent study by the Superintendency of Pension Funds found that, based on their own contributions, about half the affiliates in the private pension system will never be able to achieve even a minimum pension, which pays out about $130 dollars a month. Another study found that about two-thirds of current affiliates will never be able to save the minimum. Even though the investments of the AFPs have been incredibly well-performing, averaging a 10% annual return, half the affiliates can only afford to put in $30 dollars a month or less, not enough to purchase a minimum annuity and share in the funds’ profitability. Workers whose contributions are insufficient can get a minimum pension annuity from their AFP or take up the meager government assistance option (about $55 dollars a month). But few qualify for either of these options. Government assistance, for example, is only for the extremely impoverished. Owning a color television could disqualify someone from receiving it.
“Most everyone agrees that the minimum safety net is useless,” says Manuel Riesco of the Santiago-based National Center for Alternative Development Studies (CENDA), an independent policy think tank. “The crisis is not tomorrow, or in the future,” he says, “it is today. The vast majority of the workforce is being left with no pension at all. Apart from withdrawing their savings, half of which have been eaten up by fees, they will have nothing.” And since only half of the adult working population participates in the system (Chile has an immense informal sector), private accounts have actually only been successful for a small portion of the population—the most wealthy.
Given that so many Chileans now find themselves short of the minimum pension, an association of about 200,000 people affected by “pension damage” has formed to collectively petition the government for reform. They are suing the government for having used false advertising and malicious propaganda in its public relations campaign back in 1981 to get workers to switch to an AFP; some, they say, were even threatened with the loss of their job. As it stands now, if one considers two workers of the same age, at the same job with the same salary, the one with the old public pension will receive double what the worker with the private account will receive—a reality considerably different than what was promised.
Since privatization has failed to reduce public spending on pensions (6% of GDP, just as it was in 1981), even the World Bank and the Economic Commission on Latin America and the Caribbean (ECLAC) now doubt that a purely privatized system is sufficient, and that private accounts should, at most, only be complementary to a well-funded public system.

About the Author
James T. Kimer is an editorial assistant at NACLA Report on the Americas. He recently completed a Joint Masters in Latin American Studies and Journalism at New York University.


Like this article? Support our work. Donate now.