PRIVATE, BUT FUNDED FOR THOSE NOT WORKING:

Being economists, we recently had the opportunity to serve on a presidential panel to examine the issues involved and offer advice on improvements of Chile's retirement system.

The assignment was an important one, since Chile's pension system has been touted as "best practice" by policymakers and researchers around the world. The nation's funded and regulated private pension funds called Administradoras de Fondos de Pensiones (AFPs) and financed by workers' mandatory 10% contributions, has now accumulated over $160 billion in privately-managed accounts. AFPs cover about 10 million affiliates, and provide retirement benefits to more than a million retirees.

Chile's system, however, is not perfect. Many workers retire with no or very low pensions, mostly because their participation into the formal labor market had been occasional and their contributions low. This is particularly true for women. For this reason, in 2008, a means-tested pillar called Sistema de Pensiones Solidarias, financed out of general tax revenue was introduced. It has greatly reduced poverty among the elderly.

The Bravo Commission, on which the three of us served, recently submitted our report to President Michelle Bachelet containing three alternative proposals for revising Chile's retirement system. The majority of economists including ourselves favored "Proposal A," a plan that would build on the Bachelet's previous system revision by enhancing solidarity benefits and reducing the cost of converting lifetime saving into retirement income.

Proposal A embodied a sustainable, efficient, and transparent way to strengthen retirement security in Chile. It paid close attention to the importance of saving for growth and productive investment, and the welfare of future generations of Chileans. It achieved these goals by guaranteeing a better pension to the many workers outside the formal labor market, while at the same time giving these workers incentives to get and keep formal sector jobs. Our proposal would also improve women's retirement benefits and increase competitive pressure on the AFPs to reduce costs and raise pensioners' income streams. The improved solidarity pillar and increased antipoverty measures would be financed through general taxation.

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