THE WRONG WAY FOR US TO CATCH UP TO CHILE:

Chile’s Pensions Under Fire (Alvaro Vargas Llosa, Independent Institute)

Almost 25 years ago, Chile’s salaried workers were allowed to opt out of the pay-as-you-go pension system and place part of their money in personal savings accounts managed by fund administrators of their own choosing. The majority of workers chose to become the owners of their own assets. Thanks to José Piñera’s reform, Chilean workers have seen their pensions earn an annual return of 10 percent. The cumulative pool of capital now amounts to $85 billion, if one includes the $15 billion that some retired workers have used to buy annuities from insurance companies—almost 90 percent of the nation’s GDP!

Chile’s pension system is much less restricted than other countries’. There are no barriers to entry, which is why six companies are competing in that market as opposed to fewer in other Chilean markets. Commissions have been coming down. If more Chileans decide to participate, they will go further down.

The principled objection one can raise is that in a free society there should not be mandatory savings for salaried workers. True. But even the mandatory aspect, which applies to a fixed sum of pesos, is diluting with time because real wages have tripled since the reform was implemented. In any case, the privatized system is a great leap forward compared to the previous system that had no connection between workers´contributions and their benefits, and when they could not dream of owning savings accounts with an average 10 percent rate of interest. So many Chileans have become used to assuming responsibility for their own retirement that it is politically conceivable that a future leader will one day dare let salaried workers, just like independent workers do today, decide whether they would rather invest in a retirement account or do something else with their money.

The current objections against Chile’s private pensions, however, have nothing to do with this argument. Rather, they charge that half the Chilean workforce will not get a decent pension. But guess what: those are people who either have no job at all, have a part-time job, or who have chosen, as independent workers, to invest their money otherwise. Not to mention those who are simply part of the underground economy.