NCPA - National Center for Policy Analysis

Latin America Leading The Way On Social Security Reform

January 22, 1999

Chile, the first nation in the Western Hemisphere to establish a social security system, was the first nation in the world to privatize its system in 1981. Since then, seven other Latin American countries have adopted the Chilean model to some degree.

  • Peru privatized its Social Security system in 1993, followed by Argentina, Colombia, Uruguay, Bolivia, Mexico and El Salvador.
  • The new Mexican system, launched in February 1997, already is the largest in Latin America.
  • Most other Latin American countries are considering such a move.

The privatized systems vary from country to country, but all of them require workers to contribute to individual retirement accounts managed by private investment funds and conservatively invested in a diversified portfolio of assets. In every country but Mexico, the private fund also provides disability and survivors insurance.

In some countries, political opposition has made complete privatization impossible.

Workers in privatized systems fund their own pensions, unlike government systems that use current tax revenues to pay benefits to current retirees. Privatization is expected to bring workers higher benefits than they would receive in a pay-as-you-go system and to increase economic growth by providing new investment capital.

In Chile, the only nation with long-term experience with a privatized system, the average annual real return on assets has been 10.7 percent, and retirement benefits are 19.6 percent higher than under the old system. Private disability pensions are 30.9 percent higher, and survivors benefits are 17.8 percent higher for widows, although they currently are only 75 percent of those under the old system for orphan children. Researchers say the reformed pension system also has bolstered Chile's economy.

Source: Luis Larrain Arroyo (deputy director, Instituto Libertad y Desarrollo), "Privatizing Social Security in Latin America," NCPA Policy Report #221, January 1999, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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