Chile Led The Way On Social Security Privatization
August 16, 1999
It has been 18 years since Chile initiated its private pension system. If imitation is the sincerest form of flattery, Child has won out.
- Seven other Latin American countries -- Peru, Colombia, Argentina, Uruguay, Bolivia, Mexico and El Salvador -- and Poland have implemented some form of private pension reform based on Chile's model.
- Today, more than 95 percent of Chilean workers have their own private pension accounts -- as Cato Institute researcher L. Jacobo Rodriguez points out in a current paper.
- Responding to critics who charge that administrative costs are high, Rodriguez notes that costs amount to only 1 percent of assets -- a figure comparable to administrative costs for U.S. mutual funds.
- The Chilean system "has allowed workers to retire with better and more secure pensions" and enjoy an average real rate of return of approximately 11.3 percent per year -- while the country's economy has grown at an annual average rate of 7 percent per year over the last 14 years.
Chile's original government-run, pay-as-you-go retirement system -- similar in form to the U.S. Social Security system -- was initiated in 1924, the first such system in the Western Hemisphere.
Rodriguez thinks administrative costs would be even lower were it not for government rules that strictly regulate how investment funds can operate.
He suggests that the performance of Chile's funds could be improved even more if commission structures were liberalized, banks and other financial institutions were allowed to enter the industry and pension fund management companies were allowed to manage more than one fund.
Source: L. Jacobo Rodriguez, "Chile's Private Pension System at 18: Its Current State and Future Challenges," July 30, 1999; SSP No. 17, Cato Institute, 1000 Massachusetts Ave., N.W., Washington D.C. 20001, (202) 842-0200.
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