- The Washington Times - Monday, December 13, 2004

SANTIAGO, Chile — As a 30-year-old economist, Jose Pinera revolutionized Chile’s pension system in 1980, when he was secretary of labor and social security under dictator Gen. Augusto Pinochet.

Mr. Pinera, the architect of the country’s privatized system, is now an internationally recognized advocate of replacing government “pay-as-you-go” social security with private pensions, in which workers bankroll their retirements with investments in mutual funds.

Mr. Pinera, educated at Harvard and the University of Chicago, also founded the International Center for Pension Reform. Here are excerpts from an interview with the Associated Press:

Question: Chile’s military and police decided not to be part of the privatized system when it was established and kept their government-funded pensions. Did the military and police get a better deal?

Answer: Because of ignorance, prejudice and Prussian military formation, they inflicted on themselves the worst possible deal. … The military have missed a 10 percent real return on their contributions over 23 years. And their bankrupt pay-as-you-go, government-run system … leaves them hostage — and very, very pliable — to whoever is in government. … The incident proves how difficult [it] was making these reforms in a military government, given that their formation is generally pro-government and pro-centralization.

Q: Returns on the funds have been phenomenal since the start, largely because of Chilean privatization, but are expected to be lower in the future. What can be done to try to ensure the types of returns realized so far?

A: Expected by whom? How do they know so much about the future? Facts are facts. Expectations are, well, expectations, not a basis for analysis.

There is a whole industry of pessimistic forecasting. Beware of them. Remember that I explained the new system on TV to all the country [predicting] only a 4 percent rate of return. It has been 10 percent real on average for 23 years. …

Continue the privatization process. Return to the economic policies that led to 12 years of 7 percent plus economic growth. Stop discouraging investment by announcing new taxes every month.

Q: The similarities between the Chilean system and American voluntary 401(k) retirement funds are striking, yet one element is missing from the Chilean system that motivates Americans to participate in their 401(k) plans: employer matches. Yes, businesses would scream if they had to participate, but wouldn’t it be a psychological impact that would increase savings?

A: No. There is a fundamental difference. In many 401(k) [plans], the employer decides or influences the investment allocation and generally ends putting a large fraction of the workers’ retirement money in their own stock [as at Enron]. That is putting your job and your pension in the same risk basket. A huge mistake of concept.

The beauty of the Chilean system is the complete divorce from the company where you work and the companies where your pension is invested. … We all know from kindergarten economics that mandated employer contributions ultimately come from the worker’s wage. …

The fraudulent way to increase payroll taxes is to label half of them as employer contributions, and then politicians dare to increase them at will, despite the fact that wages will come down by that amount following market pressures. …

I prefer not to give psychological arguments — so convenient to support anything — but stick to economics and common sense.

Q: Chileans of all classes seem to lack knowledge or interest determining savings needed to reach retirement goals. What is the extent of this problem, and how can it be overcome?

A: I do not have a definite assessment on this since it is a highly empirical issue.

Now, it is true that it is part of Latin culture [to leave] things for the last moment in every aspect of life. Of course, the government, the [fund administrators] association, modern trade union leaders, etc., should do more to create a culture of responsibility in societies that have had a weak one for 500 years. And it takes time.

What is absolutely clear is that a defined contribution system, or capitalization system, clearly encourages responsibility, while a defined benefit system, whether government or private, clearly encourages indifference.

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