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The system in Chile has become an incredible model all over the world. If you read business publications in the United States, or magazines like Time or Reader’s Digest, you’ve heard these wonderful tales in which the Chilean private social security system is credited with everything short of the second coming of Christ. It supposedly turned Chile into an Asian tiger type savings rate country. It's supposedly eradicating senior poverty; and, all in all, just making for a wonderful land. The World Bank pushes it at every opportunity. Those in the United States who are seeking to privatize, including the 50-member caucus in Congress, and Wall Street, which smells the smell of money, are referring constantly to Chile. One of the very familiar faces in the United States now is Jose Piñera the former Minister of Labor under the Penochet dictatorship, who privatized social security. He runs around speaking to audiences on a monthly basis, pushing the system in the United States, as he does all over the world.

There were no questions that the Chilean social security system was in need of some reforms. It had uneven benefits; and, some of this has been mentioned, how the upper public employees were able to get too generous pensions. It was sometimes easy to get a second pension. But, as critics have looked at it, all of the problems within the system could have been solved internally, none were intrinsic to the model.

Those who instituted the new Chilean system promised pensions that were going to be 40 to 50 percent higher, etc. We're going to take a look at these in a few minutes, at what actually happened. The Chilean system went back to the twenties. There was a system of these various benefit houses, casas de provision, which grew up sector by sector; and, most of the older social security systems built up that way, not like in the United States where it all mostly happened at once. Before the military coup in 1973, about 75 percent of Chilean workers were covered by the system, an extremely high rate of coverage. It also included health care, national health care as part of social security, that covered an even larger percentage. In addition, for employers, social security payments varied, depending on whether you were a public employee or an industrial worker or whatever. Generally, employers paid two thirds of the freight.

Come the military dictatorship and the coup in the early 1970's, you began, first of all, bleeding social security. And, later when privatizers began to talk about the "pitiful pensions", it was a little like those people who killed their parents and used the fact that they were orphans as a defense. They had begun freezing wages, freezing social security benefits, etc. By the time they actually privatized, in 1981, there were tremendous problems in the system; though, at the time, they had made some reforms that were necessary, which was to sort of make some more even standards throughout the country. That was before the change.

It's already been mentioned the wonderful system the military police kept themselves out of, which says a lot about it right there. Basically, under the new system, each new worker, starting after 1981, had to open an individual retirement account in the company of their choice. From thirteen percent of their salary, ten percent would go toward a contribution, and three percent would go toward various insurance costs, for disability and survivors, and for the fees for the company, and another seven percent to go for health care. Employers no longer had to contribute anything. It was all to be paid by the employee.

As the World Bank recommended, this reform in Chile was done with a whole bunch of others; and, it was one of the first done. This fellow, Piñera I mentioned, called it "the Mother of all the Privatizations" in Chile; and it was. At the same time, a stock market was launched. There was a tremendous bargain basement sale of government assets and companies to corporations. A new labor code was put in place to insure that Chile's once strong unions, and those people who had survived the murder and repression, could no longer be strong. "Flexible labor markets" was the key term; and, that means, to put it in plain English, part-time, downsizing, contract labor, etc., etc., etc.

It's not surprising in a system like this that one of the real ironies here is that the people who called for this whole set of economic reforms that gives all power to the market are then surprised when their private systems get such low coverage. But, if you do not have a good paying job, you don't wind up being qualified for enough years. Only a little over half of the people who even have these private pension accounts contribute regularly. At least 43 percent, at any one time, are not contributing out of their pay check to this private pension fund, which is collected by the employer and supposedly passed on; although, there are over 300,000 complaints lodged with the government investigative agency about employer non-compliance.

At the time, people who were already working under social security were given the option to change or stay in social security; and, over 90 percent switched. There are a lot of reasons for this. First of all, workers were given a net increase in take-home pay. They were barraged by propaganda which promised them all these wonderful pensions. Often they were given free gifts. If a worker chose to stay in social security, they were going to have to pay it all themselves; and, it was going to cost them a lot more (although, 300,000 people did choose to stay in the old system).

In many cases, particularly in the public sector, employers simply ordered their employees to change over. One lawyer, who worked for the government, who at the time sought to put out a basic flyer saying here are the pros and cons, was not allowed to do it. Workers faced captive meetings. So, all over Chile, despite what a US Congressman told me who chairs the Privatization Caucus, who said 90 percent switched; and, the other 10 percent are sorry they didn't, I saw a tremendous regret in Chile in the opposite direction. The people said that, if we had known then what we know now, we never would have switched.

Right now in Chile, everything is privatized in the system. Health care was turned over to private esoperes, which are like HMO's; and, except the poorest of the poor, everybody pays. The 7 percent deduction from your pay really entitles you to pay more. I found many, many cases of senior hardship now--people burdened by medical debts they never would have had under the old system. Disability insurance, an integral part of social security, was turned over to for-profit insurance companies. Now a staggering three quarters of the people, who would have qualified for total disability under the old system, don't qualify anymore-only 25 percent do qualify.

There was undoubtably some abuse in the old system; but, even as the chief lawyer in the agency overseeing the system says, what we have now is not a humane system. It also takes 20 years of putting contributions into your individual accounts to qualify for any kind of pension; whereas, it only took 10 years of contributions before that.

The cost of transition here has been mentioned; but, it's worth being talked about more, because Chile did build up a budget surplus, as was mentioned, in order to fund this model. Where did it come from? It came out of the hides of workers, very simply. The people had to pay for it. What you saw was that, in the early 1970's, social security pensions took up a little over 20 percent of the social spending budget of the government, now it takes up a majority. And, at the same time, spending on health care and education were drastically slashed. The average worker in Chile today, sending his or her children to the public schools, has to pay even for public school education. With this transition, the costs are only going to get worse; and, some of this has been mentioned, because these recognition bonds that were just mentioned, are going to have to be paid off. These gave people credit for their years of contributions to social security. When people start retiring in large numbers, you're going to have an even greater burden on the state; and, the other burdens are going to be even worse, because we're going to talk about what is going to happen to the quality of pensions.

This system does have a guarantee in it of a minimum state-funded pension of three quarters of the poverty rate, if you've had your 20 years of contributions; but, then you still don't meet enough of the criteria because you still have earned too little. So, all these burdens of the minimum pensions are also going to fall on the taxpayers in the state. This burden is only going to grow greater, because ILO studies have shown, perhaps 60 percent or more of people will not even qualify for these minimum pensions; thus, the welfare budget will also grow enormous. Chile has something called a "welfare pension". It's very, very low. In the early 70's, about 75,000 people were getting them. They've maxed out on the 300,000 maximum that they have in the system, with 10's of thousands more waiting in line for them. This is largely the elderly.

What you have here is a kind of individual capitalization system now, and people have crunched the numbers, it needs a growth rate that cannot be sustained in Chile in the long run. It is also based on demographics that assume you're not going to live very long. They've crunched their numbers based on life expectancy at birth, rather than life expectancy at retirement. The ILO has pretty much destroyed the facts. This system will only contribute good pensions to perhaps 20 percent of the population; so, the system's going to get worse.

One of the reasons that anti-government ideologues want to do that in the United States (we know why Wall Street wants to privatize) is because they make big money; but, why do people like the CATO Institute want to do it? Because, you can just look at Chile this way. This has become so costly that it has crippled a slightly better intentioned democratic government now. It doesn't really have any money now to fund anything. It's just like Reaganomics, that military buildup, that huge tax cut for the rich. There's no politicians talking about governments doing anything anymore, right? And, that's exactly what social security privatization would do here as it did in Chile. It takes up so much of the costs of transition, you really can't do anything else.

It should be very important to note here that the greatest burdens here are falling on women, because women earn less, and they live longer. The possibilities of accumulation in your private pension fund doesn't work. You just can't make it. Some of the other things that have happened is that social security also included low cost, no down payment housing loans. Most workers in Chile bought their houses through pension fund loans. That's gone. Right now, to own a house, you have to pay a mortgage that keeps going up in costs; and, you have to have a down payment. Also, by law, employers have to give a month-per-year of severance pay when someone retires. That's gone, except for those people who are grandfathered in. So, they have a growing standard of living problem for seniors of a tremendous, tremendous consequence.

Social security in Chile costs a whole lot more than in the US. It was about 6 percent of overall costs. Depending how you figure in the costs of these private pension funds, it now costs 18, 20, up to 30 percent.

Last year, the value of accounts, individual pension accounts, went down for the first time. They've had a real stock market boom; but, for the first time, people lost two and a half percent. People retiring last year, who were trying to buy an annuity on that, really got screwed badly, first of all; but, the pension companies didn't. Their profits were still over 20 percent, while the people who owned the accounts in them lost money. What you've had is a total artificial boom in Chile. You created a stock market. You sold these companies off. People who owned stock got a great boom, as all of a sudden all of this money, that was going into social security, got invested in the stock market; and so, you had this tremendous artificial boom, which has kept the stock market booming, interest rates relatively low, and a very high return. It's not going to last; and, even the person regulating the system now says that the days of double digit returns are over. What they're hoping to do now is invest elsewhere in Latin America where they are starting to privatize, so that they can still get good deals and continue to get the high rates; but, it's not going to work in the long run.

As we have already mentioned, three companies, one of these US owned, Aetna, the largest health care company in the United States, owns the third largest private pension company in Chile, as well as one of the private health organizations and several insurance companies. They are making out like bandits. Banker's Trust and the American International Group from the United States are also there.

On this whole idea that the savings rate in Chile has been increased by this, Merrill Lynch even thinks otherwise. They say basically that there was a huge transfer from the public to the private sector--that doesn't increase savings. But, what has increased savings is increased corporate savings. That means increased corporate profits. We've already told you where that has come from, because unions have been less strong. You have a total contingent labor market. You can fire people for any reason. You can have 25 different unions in any one company, etc., etc. They have really kept the market going. What happens when they start to have to pay pensions off of this system, and people start selling stock instead of buying it? You're going to see a tremendous devaluation of that market.

As also has been mentioned, we have a tremendous, dangerous growth of economic power and concentration of economic power that's only been made worse. The percentage of income going to wages keeps going down in Chile. The percentages of profits keep going up. It's no wonder that 50 percent of Chileans now think that, despite all the talk of the miracles, despite the talk that every Chilean will now be a capitalist with this new system, and that the class struggle will be over because workers would have a stake in the system, it's no wonder that 50 percent of the Chilean people think that their future will be worse for their children than what they have now. They think that 70 percent of the people totally distrust both the private health care system and these private pension companies. None of this mentions the 1 million or 2 million workers, perhaps, who are totally in the informal market and not touched by this market at all anymore. I have people try to tell me with a straight face that most of the people who had accounts, but weren't contributing to them, were housewives, who had worked one Christmas, rather than the maids and the domestics and the people who find a temporary job for a while that contribute and then can't. You have an economic mess for half the country, in the midst of a tremendous boom in a tremendous land of plenty.

The majority of the Chilean population, living pay check to pay check, are more likely not to be able to retire at all. Many young workers told me things like that. They doubt it, and they see their parents have to work now instead of retire, having to do jobs, having to do whatever they can. They see people going into wide debt because of the health care system. They see credit card debt taking enormous proportions in the country, based on this system.

I came across a quote that I want to close with from the current President of Costa Rica, who talked about what the world economic system is today. I couldn't tell if he was being tongue-in-cheek or not; but, he said "Everyone carries their own weight, and we don't give anyone a break. Isn't that what a global economy is?" That's certainly what the Chilean private pension system is. It's been a failure on all of its own things (i.e., what it claimed to try to do about eradicating poverty, about costs, and every other measure). It's created more inequality. It's created a greater burden on government; and, in short, it's a failure. Those who are trying to sell it to us in the United States, or to you anywhere else, ought to be looked at with a very jaundice eye.