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Tuesday, January 10, 2006

Chile Confronts Problems Caused by Social Security Privatization

Remember when Chile's private account system was hailed as a model for Social Security reform? As this article notes, the Chilean system was endorsed by President Bush, who has called it "a great example" from which the United States can "take some lessons." So what are the lessons?:

Chile's Candidates Agree to Agree on Pension Woes, by Larry Rohter, NY Times: Michelle Bachelet is a pediatrician and a Socialist, while Sebastián Piñera is a billionaire businessman and a conservative. They may agree on little as the opposing candidates in Chile's election for president, but they concur on one important point: the country's much vaunted and much copied privatized pension system needs immediate repair. ... [D]issatisfaction with the system has emerged as one of the hot-button issues in the election...

"Most people perceive the costs of pensions and the pensions themselves as unfair," said Patricio Navia, a political science professor at New York University and at Diego Portales University here. "Many of those who started work when the system was first adopted are realizing that they have not been able to contribute enough to get a significant pension," ... they resent "overhead costs that are so high" and that have led to record profits for the pension funds that manage contributions automatically deducted from workers' paychecks. ...

"There are two big issues, coverage and costs," Andrés Velasco, Ms. Bachelet's economic adviser, said ... "Too many people are outside the system," he said, adding that too many of those in the system have found that "saving via the pension funds is quite expensive." ...

[S]skeptics point to another developing problem: many young people, who should be enrolling in the system early to accrue maximum benefit, are staying out or paying in very little. Some cannot afford to contribute beyond the obligatory minimum payment, which is 10 percent of wages, while others are either self-employed or have been hired by companies as low-paid independent contract workers and therefore do not have to contribute at all. ...

[E]ven advocates of an untrammeled free market, like Mr. Piñera, the conservative candidate, are jumping in with criticisms, to the surprise of some here. Mr. Piñera is the brother of José Piñera, the former labor minister who imposed the personal account system during the dictatorship of Gen. Augusto Pinochet. [and co-chairman of the Project on Social Security Choice at the conservative Cato Institute] ... "Chile's social security system requires deep reforms in all sectors, because half of Chileans have no pension coverage, and of those who do, 40 percent are going to find it hard to reach the minimum level," Mr. Piñera said ... "This has to be confronted now..." ...

    Posted by on Tuesday, January 10, 2006 at 10:42 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (23)

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