|
||||||
|
|
|
|
|
|
|
|
|
 |
 |
 |
 |
 |
Retirement in Chile is a private – and heated – matter
By:
Reese Erlich
Santiago,
Chile – It
wouldn't be an election year in the US if the controversial topic of
Social Security didn't come up. In March, the
trustees of US Social Security said in their annual report that, although
the forecast for the retirement program is slightly better than previous
estimations, immediate action is necessary to fix its underlying
weaknesses. The program is expected to go bankrupt in 2041. Chile's private
pension system is looked at by some as a model of how the US should
address the long-term solvency of Social Security, though detractors say
the South American country's program still has significant flaws. In 1981, Chile's
state-sponsored pension plan faced bankruptcy. A group of US-trained,
conservative economists convinced then-dictator Gen. Augusto Pinochet to
privatize the system. Chile abolished
its mandatory, state-sponsored pension plan and created what amounts to a
giant 401(k) plan. The system
requires 13 percent of a worker's wage to be automatically deducted and
sent to one of seven independently managed mutual-fund companies selected
by the worker, with a small part of the contribution going towards
disability insurance. Neither employers nor the government contribute to
the individual accounts. The contributions are tax-deferred and remain
under the workers' control if they change jobs. The system has
proven successful, according to Luis Larraín, a member of the board of
directors of Habitat, Chile's second-largest pension fund. "There has
not been a bankruptcy," he says. "Nobody has stolen the money
from the workers. That was the typical argument against private
administration." The returns for
Chile's program have exceeded the Chilean stock market since 1981, and far
outpace the previous system. The funds' investments have grown an average
of 10.7 percent over the past 21 years. This has allowed retirees to
receive pensions amounting to 78 percent of their mean income over the
previous 10 years, according to a 1995 academic study. Guillermo Arthur,
president of the association of Chile's pension mutual funds, says the US
should follow Chile's lead. "It would be a big advance," he
says. But critics say
the good statistics are misleading because people hope to retire with an
income close to their earnings during the final few years of employment. Also, the system
still requires federal subsidies. "Without
doubt, the Chilean government has created a very sick child," says
Jorge Millan, pension specialist with Chile's largest trade union
federation. "If we don't operate, the child will die." Mr. Millan would
like to see the return to a system in which employers are obligated to
make matching contributions to their employees' plans. Former high
school teacher Olga Seguel's pension amounts to less than half her salary
when she retired. Ms. Seguel has friends who, in 1981, opted to remain in
the traditional teacher retirement fund. They are getting pensions close
to their final salary, she says. Under the old system, employers had to
match the teachers' monthly contribution, thus increasing the pension.
Anyone becoming a teacher after 1981 had to join the privatized system. Authorities
realized that, given Chile's poverty rate of 21 percent, some workers
would never be able to save much toward retirement. So the government
guarantees a minimum pension to anyone who has worked as a regular
employee for 20 years. The government
subsidizes the difference between what workers receive from their mutual
funds and the guaranteed minimum. That minimum pension, although indexed
for inflation, is now $110 per month, compared to a minimum wage of $156. Juan Gumucio, a
law professor at the Bolivarian University, says that by 2010 as many as
60 percent of retirees will only qualify for the minimum pension. Mr.
Larraín disputes that figure, saying minimum pensions will account for 15
to 18 percent of the total. Even Larraín
admits, however, that the system has another major problem. Forty-two
percent of the workforce isn't covered by any pension system, according to
government statistics. These are mostly independent contractors and
workers in the informal economy. They can make voluntary contributions to
the system, but almost none do because their incomes are so low. Larraín says the
government should create tax incentives to encourage the participation of
this sector. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
|
