Social Security Choice Paper No. 17

Chile’s Private Pension System at 18: Its Current State and Future Challenges

Executive Summary

In May 1981 Chile replaced its government-run pay-as-you-go retirement system with an investment-based private system of individual retirement accounts. The new system has allowed Chile and other Latin American countries that have followed the Chilean example to defuse the fiscal time bomb that is ticking for countries with pay-as-you-go systems, as fewer and fewer workers have to pay for the retirement benefits of more and more retirees. More important, Chile has created a retirement system that, by giving workers clearly defined property rights in their pension contributions, offers proper work and investment incentives; acts as an engine of, not an impediment to, economic growth; and enhances personal freedom and dignity.

In the 18 years since the Chilean system was implemented, labor force participation, pension fund assets, and benefits have all grown. Today, more than 95 percent of Chilean workers have their own pension savings accounts; assets have grown to over $34 billion, or about 42 percent of gross domestic product; and the average real rate of return has been approximately 11.3 percent per year, which has allowed workers to retire with better and more secure pensions.

Its success notwithstanding, the Chilean system has found many critics, who often point to high administrative costs, lack of portfolio choice, and the large number of transfers from one fund to another as evidence that the system is inherently flawed and inappropriate for other countries, including the United States. Some of those criticisms are misinformed. Many other criticisms reflect real problems, but they are largely the result of excessive government regulation.

The spirit of the reform has been to relax regulations as the system has matured and as the fund managers have gained experience. All the ingredients of success — individual choice, clearly defined property rights in contributions, and private administration of accounts — have been present since 1981. If Chilean authorities address the remaining shortcomings with boldness, we should expect Chile’s private pension system to be even more successful in its adulthood than it has been during its first 18 years.

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L. Jacobo Rodríguez is assistant director of the Project on Global Economic Liberty at the Cato Institute.