In 1993 Peru became the first nation to follow in Chile's footsteps in reforming its pension system. Peru used a similar conceptual framework, including individual accounts invested in real assets, "recognition bonds" for retirement credits earned under the old system and private institutions dedicated exclusively to managing the private funds. In addition, the system provides disability and survivors benefits administered by insurance companies, and old-age pensions can take the form of either scheduled withdrawals or life annuities. However, unlike Chile, Peru's new system has no minimum benefit, and social assistance - welfare - is the only backup.

Peru's system has some unique features - mostly concessions made for political reasons - that have hindered its implementation. Most important, workers are allowed to continue joining the old pay-as-you-go system, thus conveying the message to Peruvians that the old system, with an implicit social security debt of about two-thirds of gross domestic product, is valid and sustainable, which it is not.

A second problem is that Peruvian policymakers gave in to the temptation to tax the new system. This resulted in employers being required by law to pay more per worker into the private system than they were paying under the old system. Also, individual workers had to pay more under the new system. Logically, employers discouraged shifting to the new system, slowing its implementation considerably, and workers had no incentive to move into what they perceived as an expensive alternative to the old system. As a result, by late 1994 the new system had only 950,000 participants, less than half of initial projections.

In July 1995 the error was corrected by a law making contributions to both systems equal, and by September 1997 the total number of participants had risen to 1.7 million, or about 44 percent of the formal workforce. At that point, the number of participants in the old system had dropped below one million.¹⁶

The average age of participants in Peru's new system is 25, substantially younger than that of participants in most other Latin American countries' privatized systems. More than 50 percent of the participants are under age 30 and only about 15 percent are over 40.¹⁷

One major challenge for any retirement system in Peru is that as much as 51 percent of the workforce is in the informal economy, covered by neither the old nor the new system.

Argentina reformed its pension system in 1994, creating individual capitalized accounts administered by companies known as Retirement and Pension Fund Administrators (AFJPs). The AFJPs operate somewhat differently from the AFPs of Chile and Peru; the retirement component, the "J," reflects several important conceptual differences.

The new Argentine system is a mixture of the old government-administered system and an individual retirement account program administered by the AFJPs. There is interaction between the two systems. The pay-as-you-go system provides basic, universal old-age coverage (known as PBU) for all workers who reach retirement age and who have contributed for at least 30 years to either the old system, the new system or a combination of the two. It also provides a compensatory payment (PC) designed to recognize the contributions each worker made to the old system prior to reform. Then, to the combination of the PBU and the PC, each worker adds funds - to the AFJP if the worker chooses the individual retirement account program, to a Payment for Additional Permanence (PAP) if the worker chooses to remain under the old system.

Beyond the names for the payments, the major difference from Chile is that Argentina has retained the pay-as-you-go system. Workers must contribute 11 percent of their pay to either the new or the old system, depending on which they have chosen. Regardless of whether workers participate in the private or public system, employers must pay 16 percent of the workers' pay to the public system. Nonsalaried workers must pay the full 27 percent.

From an income distribution perspective, leaving the old system in place is regressive because the government still is financing a portion of the wealthiest Argentines' pensions. And unlike Chile, where the government contributes only to the minimum pension of the poorest workers, Argentina provides a flat benefit to all retirees who have contributed for 30 years.

Refusal to break with the old system creates the pernicious illusion that a pay-as-you-go system can operate soundly. Before the change, the implicit social security debt in Argentina, like that in Peru, was estimated at about two-thirds of gross domestic product.¹⁸ The Argentines who chose not to move into the new individual capitalization system believe that a "new" pay-as-you-go system somehow will be more effective.

Further, in a blatantly statist move, the government authorized the federally owned Nacion bank to create and operate one of the AFJPs. Initially, the bank had a significant advantage over its private competitors: it guaranteed returns in U.S. dollars, a sensitive issue in a country threatened with the devaluation of its overvalued currency. No private institution could offer the same.

Guarantees in U.S. dollars have been dropped, but Nacion continues to guarantee real, positive returns on investments in local currency. No private institution can responsibly offer a similar guarantee over the long term in a privately capitalized system in which benefits are not clearly defined. Still, Nacion ranks only sixth in assets and number of participants among the 18 Argentine AFJPs.

Another important difference from the Chilean system is that in Argentina collections are centralized and are handled by the General Tax Service, whereas the AFPs themselves handle collections in Chile. (This Argentine innovation has been copied in other countries, including Mexico.)

Two flawed systems coexist in Argentina. Worse yet, participation in either is highly discretionary, undermining the whole premise of social security. In a nation of approximately 36 million citizens, only a little over six million participate in the two systems combined.