PERSONAL PENSION ACCOUNTS IN CHILE
February 11, 2005
In Chile, personal savings accounts (PSAs) have made young workers who pay into the system better off because their investment earns a tidy return, something not possible with a system that merely transfers income to seniors from working persons. What PSAs do not do is redistribute income or create dependency on the political system. Maybe that is what most bothers those who fear George Bush's initiative, says Mary Anastasia O?Grady, writing in the Wall Street Journal.
In 1981, Chile established personal savings accounts because the state-run system was unsustainable. Like Bush's proposal, the new plan did not force workers already in the system to change. Thus far, Chile's pension system has bolstered President Bush's calls for private accounts, says O'Grady:
- Personal pension accounts in Chile are averaging a 10 percent return on investments.
- Strong pension returns have fueled the fastest economic expansion by a country in Latin America over the last 20 years.
- The transition cost for the system has been modest, about 2 percent of gross domestic product (GDP).
While about half of workers are captured by the system, this was the same as under the old system -- the difference being that the old income transfer system was incapable of supporting future retirees.
O'Grady suggests the size of the nation's underground economy is depressing private account participation, something that can be remedied by making legal work less expensive: cutting taxes and reducing regulation.
Source: Mary Anastasia O'Grady, "Chile's Personal Pension Accounts a Failure? Says Who?" Wall Street Journal, February 4, 2005.
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