Viewed as one of the world's most innovative pension systems when it was created a quarter century ago, the Chilean retirement program is receiving new scrutiny as participants begin to reach retirement age, and President Bush promotes elements of the plan as a way to reform Social Security in the United States.
An upcoming Presidential election in Chile has prompted additional debate about whether the Chilean system provides enough coverage to prevent old-age poverty, according to Olivia Mitchell, director of Wharton's Pension Research Council, who recently led a panel entitled, "Exporting the Pension Revolution: Chile and Beyond," at the Wharton Global Alumni Forum in Santiago.
"Many comments are beginning to bubble up about how well the Chilean system is working and for whom it is working well," says Mitchell. "Some of these perspectives are being repeated in the U.S. press because Social Security reform is such a hot potato."
Chile enacted its national defined contribution pension system in 1981 after the prior government-run systems collapsed. The core element of the plan is that workers are required to set aside 10% of their earnings into private savings accounts. Eleven other Latin American countries have copied elements of the Chilean approach, in which bankrupt state-run pension plans are replaced by defined contribution-funded individual accounts. "This reform model has been exported all around the Americas and it's been held up by many as a fine example of a well-functioning national personal accounts system," says Mitchell. Overall, the Chilean system has provided savers a 10% real rate of return since its inception. "That has made the system very popular, but it's not clear whether this can persist in the future, or whether others can replicate it," she adds.
Six-Month Cushion
A World Bank report released in December 2004 entitled, Keeping the Promise of Social Security in Latin America, found that the reforms have reduced fiscal liabilities, helped develop the nations' financial sectors, and improved the equity of pension systems.
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