It's clear that Chile鈥檚 private pension system, similar to what many would like to see the U.S. and other Western countries adopt to replace social security, needs reform. Chileans have been violently protesting and urging their government to scrap a system that has :
In 1981, Chile privatized its pay-as-you-go state pension system, then near bankruptcy. The new system put the onus on workers to save for retirement by contributing 10% of their income to an individual account managed by a financial-services company.
The system boosted economic growth with savings that developed Chile鈥檚 capital markets, making it Latin America鈥檚 richest nation, and over 30 countries such as Romania and Peru emulated it to varying degrees.
Thirty-five years later, the pensions aren鈥檛 what many expected, averaging just $340 a month, according to the pension regulator. Chilean men receive on average 38% of their pre-retirement earnings and women 33%鈥攁mong the lowest in the Organization for Economic Cooperation and Development. Nearly 80% of Chile鈥檚 pensions are below the minimum wage and 44% fall below the poverty line.
It's important that the people who design new pension systems be serious about the needs of workers. To think of this as a bloodless technocratic matter to balance government books isn鈥檛 enough. Special needs of low income workers, women who are out of the workforce due to childbirth and child care, and other similar problems need to be taken account of from the beginning.
Also, a private pension system will not end the state鈥檚 responsibility: there will need to be a safety net. That, too, needs to be saved for and planned for.
Private systems can out-perform public systems like social security, but to achieve their potential they have to be very carefully designed, and generosity rather than cheese-paring austerity needs to be the governing spirit behind them. This is about securing a prosperous and safe retirement for citizens, and the goal is to be a better Santa Claus, not a tighter Scrooge.
The problem with our pensions now isn鈥檛 that pensions aren鈥檛 for the most part too high; it鈥檚 that they are too insecure due to the failure of politicians to make proper provisions for them鈥攁nd they cause problems for cash-strapped governments now, as they must choose between honoring pension promises they haven鈥檛 prepared to pay out and providing services for needy residents and schools.
The advantages of a more flexible private system include an end to the moral hazard of politicians promising pensions and leaving it to the future to provide them, more flexibility and security for workers who change jobs or work at multiple jobs, an economic boost from the more productive use of savings channeled through the private system, and, potentially at least, significantly higher returns for workers. These are significant and worth fighting for鈥攂ut Americans (and other workers around the world) are justifiably cautious when it comes to pension reform. They know that Wall Street hypes products, takes advantage of small investors, and uses its lobbying power for regulatory capture. It suspects, and not without reason, that some of the Wall Street interests who would like to see a private pension system are more motivated by the prospect of a vast fee-paying market of compulsory savings than by any philanthropic concern over the retirement security of average Americans.
What鈥檚 needed is a pension reform plan developed by people who are committed advocates of market oriented solutions, senior citizens, and the poor. With something like that in hand, this country might begin to have a sensible conversation about pensions and retirement.