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World: Chile's Private Pension System Held Up As Model

As countries around the world face the limitations of state-run "pay-as-you-go" pension plans, attention is turning to the example of Chile. That country has been running a private pension system for almost 20 years, with great success. In the final part of our three-part series on pension reform, RFE/RL correspondent Anthony Wesolowsky talks to experts about the pros and cons of the Chilean example.

Prague, 9 September 1999 (RFE/RL) -- The publicly funded "pay-as-you-go" pension programs are being criticized for being too costly. Under those plans, the government taxes workers each year and uses that money to pay the pensions of retirees.

As countries look around for alternatives to that system, many experts are invoking an example from South America. Chile made headlines in 1981 when it scrapped its state-run pension system and introduced a Pension Savings Account (PSA) system. The innovation was the work of then 30-year-old Labor Minister Jose Pinera, who is now seen by many of his supporters as a kind of pension prophet. Other countries in Latin America, including Argentina, have instituted similar pension reforms along Chilean lines.

Under the plan, all Chilean workers must contribute a percentage of their income every month to one of several private investment companies, which usually invest in bonds and Chilean stocks.

Pinera says pensions now are much higher than they were under the old system, with pensioners receiving nearly 80 percent of their previous annual income. Others, however, are wary of labeling the Chilean model a success.

Officials at the International Labor Organization (ILO) in Geneva, for example, say such private pension funds can work well for people who have earnings to invest. But they say that for many of the working poor, a lack of financial means will make them tiny players in the private pension schemes. ILO officials say pension systems modeled on the Chilean system risk widening the gap between rich and poor.

Mike Tanner is an expert on pension privatization with the conservative U.S. think tank, the Cato Institute. Tanner says the Chilean model gives workers more power to control their retirement income:

"That type of system which was pioneered in Chile allows individual workers to take their payroll tax and to save it in real investments, in bonds and stocks and other market type investments, and that is what forms the basis for their retirement benefits."

Tanner says Chilean payroll taxes have dropped about 50 percent since the system began 18 years ago. At the same time, Tanner says, benefits have skyrocketed by 80 percent. Workers are paying less out of their salaries now but receiving higher annual incomes when they retire.

But other pension experts are more skeptical of the Chilean model.

Lawrence Thompson studies worldwide pension issues at the Washington-based Urban Institute. He is also the author of the book "Older and Wiser: The Economics of Public Pensions." He says Chile -- and other Latin American countries that followed its lead -- have not privatized their pension systems as much as they claim.

"Even in the Latin American countries, which are famous for their privatizations, it turns out that most of those countries either have done it the way Poland has done it, where they've split the benefit, or they've created some additional government guarantee to keep people out of poverty. So, there would be a real concern if you had an honest-to-God privatization. There would be a real concern that the lower-wage elderly would lose and lose badly. But mitigating that is the political systems in most of our countries have more sense than to do that sort of thing."

But the Cato Institute's Tanner says the poor are most likely to benefit from privatized pension schemes.

"Well, the fact is that a privatized social security system actually helps the poor most. It is those individuals who benefit most from the chance to own real wealth, to accumulate assets and have an ownership participation in the economy. That's something that doesn't exist under the old pay-as-you-go system, where your benefits, in effect, depend on politics rather than markets."

Thompson of the Urban Institute says that as the baby boom generation reaches retirement age, even private plans will have trouble providing adequately for all those who need pensions. Thompson says those advocating a privatized approach to funding pension systems are missing a key point:

"Now, however you organize a pension system, when it's all said and done, the people who are not working have to be supported by the people who are working. It doesn't make any difference whether the government runs it or the private sector." He says most of the pension reform debate is fueled by greed, and that advocates of private accounts are valuing personal gain over the welfare of the elderly poor.

One thing is certain: Whatever the merits of the Chilean system, the current state-run pension plans are not proving adequate for Eastern Europe. Several countries in the former Soviet bloc have taken the Chilean system as a model for their own pension systems.

Hungary and Kazakhstan have hybrid pension programs that adopt some aspects of the Chilean model, and Poland instituted a similar system this year.