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Privatization, is it the solution? This is definitely a very tough question. I’ll try to answer the question, but I’m not sure I will. Let’s start with a few considerations.

I think the first thing we should consider is that this is a changing world, definitely a changing world. I'm not going to talk about demographics. We have already heard a lot of demographics; but, what we call the "dependency ratios" are going down all over the world. I'll give you just one figure regarding Brazil. In Brazil, we have two workers in the labor force to each retired person. So, we are now in Brazil in the same situation in which the United States is going to be in 2020. We do have a problem to solve. So, lets shift to economics.

The second thing that I would like to tell you, worldwide we are going to have less industrial jobs. This is a worldwide trend, and a larger proportion of jobs in the service sector. Less power of workers' unions might be a consequence of this shift of employment from larger worker places to smaller worker places. There's also a transitory world of more unemployment, and relatedly of employment, unstable worker relationships, and, especially in our countries in Latin America, what we call informal markets, non-registered labor.

Let's go now to something I haven't heard yet; what we call the "epidemiological transition". We are having less of the so-called infectious diseases and more chronic and degenerative diseases. That's good, because that means progress. There are greatly increased costs to render care for those type of diseases. We are having an enormous increase in health care, not only here, but all over the world. Finally, lets move to what really matters--the political arena.

The technical issue is very important; but, what really makes change is the political scene, the political arena. What we are seeing all over the world is what I like to call the revival of the "invisible hand". You should note, however, that Adam Smith used this expression, the "invisible hand", just once in his book. That's the way people think of the so-called neo-liberal model. I'm a neo-liberal, not really, I'm a liberal. It does not have the same meaning as you have in the United States.

The second thing I would like to talk about is the so-called death of solidarity. Individual values are the only things that matter in modern society-that's how I see it, I might be wrong.

And finally, a basic crude mistake in terms of economics is that market solutions will solve everything. This basic mistake is really a crude mistake. I have to tell you that I have been a consultant for the World Bank for a long time; so, at the end of the speech, I might well lose some of my future consulting appoint-ments; but, anyway, let's go ahead.

In general, what's the purpose of social security? What should social security be designed for? Perhaps, one of the things that we do not consider is what the objectives of all those reforms will be in view of the objective of social security systems themselves? People like to talk about reforming social security just to restore financial equilibrium. Is that the only objective of social security? I do not think that it is. Should social security be redistributive? I don't think so.

Should social security benefits be related to earnings? Should it be funded by earmarked contributions, or should it come from the general budget? Should it be a pay-as-you-go system; or, should it be a capitalized system? Should it be defined contributions or defined benefits. And, finally, should it be publicly provided; or, can it be privately provided? What about reform and readjustments?.

I'd like to go back to basic concepts. I don't think you can discuss something if you don't have the concepts in your mind. These are my concepts -- I view social security as composed by three very different components. The first component is what we call social insurance. The basic objective of social insurance is to replace income once it's lost. The second component is social assistance. I'm not talking about giving away money, social assistance should apply to collective equity. The third component is health. I will leave this subject aside, because we don't have the time to discuss it; but, really it is, perhaps, the most important type.

So, what is individual equity? Most people around the world perceive social security, or, maybe more precisely, social insurance as being real insurance-what you're going to get from the system is what you have put in. I know it's different here in the United States. Here in the United States, I think it's a mix of social insurance and social assistance. All over the world, and especially in Latin America, people tend to see social insurance as really one system that you should get from it what you have put in the system.

Social assistance means redistribution. You are taking from somebody and giving to somebody else. In my opinion, for the sake of the so-called transparency of the system, it might be a very good idea to keep the discussion of social security, of social insurance, apart from the social assistance. And, finally, let me get to the question, I still haven't touched on - "privatization".

First of all, this is a completely inadequate word. What do you really mean by privatizing something? Do you mean all components of social security? Do you really mean private funding? Do you mean private service providers? Or, do you mean all of this? I have some opinions about this--that social security cannot be privatized. It's not a market thing, you know, it will never work. The market will never provide a social security scheme. Government has to interfere. My reason for that is just an economic reason. Why? I'm not an economist by the way, I'm an engineer, but, I like some of the economics, and some of the terms are very fancy terms, like the ones I'm going to tell you now.

The market is not an efficient solution for social security for two reasons. Because, you have asymmetric information; and, because you have externalities. Well, this is very fancy, really; so, I have to explain a little bit for the ones who are not economists. Asymmetric information just means, in the case of social security, the sellers have all the information; but, the buyers don't have any. That's asymmetric information. And, what are externalities? Externalities, in this context, means that the market will not supply the most efficient solution.

Everybody is talking about the Chilean model. I only have time for an overview, but the general characteristics is the separation of all components. In the Chilean model, you know exactly what's social insurance, what's the social system, and what's health. You have different contributions for all of these. You have compulsory affiliation with individual savings accounts. Let’s define it as a compulsory savings account scheme. Now we are beginning to see that it's not really a private system because government is saying you have to pay for that. I won't go into the details of that; but, that's another problem of the market-people, are short-sighted. They are short-sighted because they cannot forecast the future. Neither can we forecast the future, actually. When I present my projections, I don't dare to do 75 year projections in Brazil. People would just laugh at me. I do three year projections; and, people laugh at me.

What's good? Let's start the other way around, what's wrong? That's a very tough technical question. In the Chilean model, the first problem is transition costs. I would invite you to think for a moment about this problem because it is not a small one, as you probably have heard. In the United States, this is a very small problem. If you decide to privatize here, you will have to pay a bill. How much is that? It's around 10 trillion dollars. It's like two times the GDP. It can be managed anyway, in certain heads. The problem with the Chilean model was very easily solved there. I will tell you how they managed to do that. They dealt with contributions to the old system, the old pay-as-you-go system. They diverted funds to the so-called AFP's, Administradores de Fundes Pensiones, the administrators of the pension funds. But, there's a problem with this. Since the old system was working as a pay-as-you-go system, you still have to pay the bills of the old system retirees. These old obligations are still there.

Nothing happens, I like to define it in this way. Exactly at the time the reform takes place in the Chilean model, exactly nothing happens, absolutely nothing happens. All the retirees are there, you know, except that you lose the funding of the old pay-as-you-go system. That's not the only problem.

You still have the problem of people like me. I'm still contributing to the system; and, I have some rights acquired in this system. I'm not discussing how you're going to take them into account; but, you have to pay them. The Chilean model used what they called privatization bonds. Which were really not privatization bonds, but recognition bonds. Those recognition bonds were really public debt that had been issued to pay for that.

Finally, I will tell you exactly what I think the problem is. In the Chilean model, if you just look to the economics of it, there's an enormous trend for high concentration of capital. That means that very few AFP's will hold the majority of the capital. I like to call it a "savings oligopoly". Actually, three institutions have 80 percent of the assets, and, that's very dangerous from the standpoint of preserving competition in the market. That's why I said I'm a liberal (not in the American way).

What happens if long term interest rates are low? I made a study some years ago that clearly shows that a lot of people would be much less enthusiastic about going on the capitalizing type of stuff if they look in a time span not of 10 years but if they look to 70 years or 80 years. Long run interest rates are really low in the world; and, they have to be that way.

Also, administrative costs, at 10%, are extremely high . Most of the so-called intellectuals that conceived the Chilean model would recognize that's absurd because that's guaranteed income.

Finally, there's a problem that probably nobody talked about here, that there's usually a high turnover of low paid workers. The political problem is that you do need a very strong political will. That's a metaphor for dictatorship, usually. And, you do need a very strong political vacuum, and that's another metaphor for bankruptcy of the old system. So, most of our systems, and I'm talking about Brazil, will not go for a complete revolution of the system under a democratic environment. If you do not have a bankrupt system, something is right about the system, that means complete visibility. You see what you're getting. That's good in the sense that you don't have that many compliance problems. Men are not so much in solidarity with each other; so, the visibility stuff is good. Accountability is very good.

In most Latin American countries, under a pay-as-you-go system, you'll have very little perverse incentive to reverse the Robin Hood Syndrome (take from the very, very poor and you give it to the less poor). There is no reverse distribution. This reduces incentive for evasion.

Are there additional savings? I doubt it very much. Being a liberal, I do not believe that government can force people to save. They usually just substitute, if there are private savings; so, then they are going to save for the government, if you do compulsory governmental savings. I will tell you how the Chilean national savings went up because the minister, at that time, did a cut in the federal budget, not of 5 percent, but 5 points of GDP. That's about the size in the States of cutting all the Medicare and the Medicaid at once without, of course, having any political position. That's feasible under a dictatorship. It's not feasible in a democracy.

You have to separate social security from social assistance, especially in Latin America, so that you do not get the perverse types of incentives of very politically powerful people getting the most from the system just because they have voice and vote. Basic social security insurance should be compulsory, pay-as-you-go; and very low maximum benefits. The Brazilian Social Security pays maximum benefits that are higher than the American Social Security System. You in the United States get paid at the most, as far as I know, around $11,000.00 to $12,000.00 per year. We have maximum benefits of $13,000.00 a year, so we must be much richer than you are to begin with. I'd like to have some kind of supplemental social insurance; and, I don't really care if it's compulsory or if it's optional.

In regard to capitalizing, I'd like to have individual accounts. Why? Because, if you lump up, if you place a big sum of money under the administration of very few people, you have one of two conditions: either these people are going to sit around a table and find a way to steal your money, or the government will steal your money, because it does not have to fight that many people. That's why I have a tendency to favor the 401K type of stuff. These have to be completely optional, with a variety of benefits and costs and tax incentives. It's not the ideal solution. There has to be a lot of regulation on this type of market. I like the individual accounts as a second tier. You have a basic cushion. It's not a safety net You cannot say, he is not starving completely, he's half starving. There is no such thing. The basic social insurance has to guarantee some sort of decent living.

What I am proposing for Brazil right now is a very simple scheme. I don't like the idea of one size fits all, like you say here. I believe that people have different needs; and, they have different aspirations. They have different saving habits, and so on. So, aside from that compulsory, basic, pay-as-you-go system, I would like to have a variety of plans, with a variety of contributions, with a variety of methods for drawing the funds, and so on. I would like a kind of menu where you can choose what kind of plan you need. That requires a lot of government action because the basic stuff is information, good informa-tion, not just propaganda, like they had in Argentina, like they had in Chile, really good information; and, that's a government task.