NCPA - National Center for Policy Analysis


February 15, 2005

In 1981 Chile adopted a national system of personal retirement accounts. The virtues of Chile's system have been trumpeted by those seeking to replicate it here, says Estelle James, a former member of the President's Commission to Strengthen Social Security in 2001.

  • Unlike traditional social security payments, benefits in Chile are based on personal investment accounts owned by workers.
  • Chileans don't worry about whether the government will run out of money as baby boomers retire, because benefits are financed by their own assets, which have been accumulating in their own accounts, not by taxes paid by current workers.
  • The funds are privately managed and therefore insulated from political interference.

Has it been a good deal? Yes, says James.

The annual rate of return excluding fees (more on that shortly) during the first 22 years was an astonishing 10 percent above inflation -- fortunate for the new system but far above the rate that any country can maintain in the long run.

However, even lower returns can ensure comfortable retirements, says James: If the rate of return falls to 4.9 percent above inflation (a figure the U.S. Social Security Administration uses as the expected return from a mixed portfolio of stocks and bonds) while wages grow at 2 percent above inflation, the average Chilean worker who contributes until he retires at 65 would get 60 percent of his final wage plus a survivor's pension for his spouse. (Under Social Security, a middle-income U.S. worker currently gets about 42 percent of his pre-retirement earnings.)

Chile has reduced risk in several ways. Most importantly, it established a minimum pension guarantee, financed out of general tax revenues, for any worker who contributes to a personal account for 20 years.

Source: Estelle James, "How It's Done in Chile," Washington Post, February 13, 2005.

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