Private Pensions in Chile = Total Disaster
If you are engaged in the battle to save defined benefit pensions for your officers and need some ammunition to make the case that privatizing the public sector pension system would be a total disaster—just look at what’s happening in Chile.
According to an in-depth report in the New York Times, discontent has been brewing for years over pensions so low that most people must keep working past retirement age. All the while, privately run companies have reaped enormous profits by investing Chileans’ social security savings.
Under the privatized system, which President George W. Bush hailed as an example to follow, workers must pay 10 percent of their earnings into accounts operated by private companies known as pension fund administrators, or A.F.P.s, the initials of the term in Spanish. The administrators invest the money and charge workers a commission for transactions and other fees. Employers and the government do not make any contributions to the workers’ accounts.
Chileans were given the option of keeping their old plan or switching to the new system. Most switched. But those entering the work force after 1981 had to invest in the privatized system. The armed forces and the police were exempted from the change and today enjoy pensions several times higher than those available in the privatized system.
The money invested by the administrators bolstered Chile’s capital markets, which stimulated economic growth and yielded reasonable returns. Today six A.F.P.s—half of them owned by foreign companies—manage $171 billion in pension funds, equivalent to about 71 percent of Chile’s gross domestic product, according to the office of the supervisor of the pension funds.
But the pioneering privatized system has failed to provide livable pensions for most retirees. If the stock market dips or investments go awry, workers’ savings and retirees’ pension checks decline.
“The pension system is unfair,” said Romina Celis, a 28-year-old teacher who marched in one of the protests. “I don’t know what formula we can use, but there has to be more state participation. We must continue protesting. The thought of reaching old age so precariously is scary.”
The anger boiled over this summer when Chileans learned that the former wife of a Socialist Party leader was receiving a monthly pension of almost $7800 after retiring from the state prison police department. $7800 is a huge amount of money when you realize that the average monthly pension is $315, which is even less than a monthly minimum-wage salary of $384.
Hundreds of thousands of people marched through Santiago, the capital, and other cities to protest the privatized pension system. More than 1.3 million people, according to organizers, turned up making it the largest demonstration since Chile’s return to civilian rule in 1990.
In 1981, the military dictatorship of Gen. Augusto Pinochet privatized the old pay-as-you-go pension system, in which workers, employers and the government all contributed. The wheels turn slow, but they do turn and the private pension system has been a disaster.
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