NCPA - National Center for Policy Analysis


December 3, 2004

Since 1980 Chile has enjoyed the benefits of a privatized social security system, whereby workers take ownership of their own retirement accounts, says Jose Piera, president of the International Center for Pension Reform and cochairman of the Cato Institute Project on Social Security Choice.

Conventional pay-as-you-go systems are hostage to demographic trends and destroy the link between individual contributions and benefits, says Piera. By contrast, private accounts maintain the relationship between effort and reward:

  • Chileans deposit at least 10 percent of their pretax wage into a personal account; the invested amounts grow tax-free until they are withdrawn at retirement.
  • Chileans who have worked 20 years but whose accumulated fund is not enough to provide a minimum pension receive that amount from the government after the personal account has been depleted.

Workers may choose any one of several competing private pension fund companies to manage their accounts, though there are restrictions on how the money is invested. Since the system started in 1981, Chileans have enjoyed significant benefits:

  • The average real return on personal retirement accounts has been 10 percent a year.
  • Pension funds have accumulated resources equivalent to 70 percent of gross domestic product.
  • The reforms have contributed to the doubling of the growth rate of the economy from 1985 to 1997, from a historic 3 percent to 7.2 percent a year.

Because Chileans now have personal stake in the economy, they become participants and supporters of a free market and a free society, says Piera.

Source: Jose Piera, "Retiring in Chile," New York Times, December 1, 2004.

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