- The Washington Times - Tuesday, December 14, 2004

SANTIAGO, Chile — Instead of paying social security taxes and wondering whether the government will deliver the promised retirement benefits, Chilean workers bankroll their own retirements and manage their own nest eggs.

In visits to modern customer-service offices, which are as common as bank branches in this city of 5.5 million, they move money from one stock and bond fund to another and use ATM-like machines to ensure that their monthly salary deductions go into pension savings.

Two decades after Chile’s military dictatorship scrapped the country’s broken and bankrupt government-run social-security system and replaced it with privatization, forced retirement savings by everyone who gets a regular paycheck is a way of life.

Chile’s pension system is hailed as a model for the world because workers fund their old-age pensions, although critics point out that it doesn’t cover the self-employed or the legions of workers who float from job to job and contribute infrequently.

Still, about 7 million Chileans in the nation of 15 million are investors in the longest-running government-mandated private pension experiment on the planet. They don’t pay the government a single peso to fund their social security, and half regularly funnel 10 percent of their income into retirement accounts they own and decide how to invest.

“The best thing about it is, I didn’t give my future to the government,” said retired tax lawyer Juan de Dios de Vergara, while making minor pension changes at an office run by Summa Bansander, owned by Spain’s Banco Santander. “I assumed my own risks, made my own decisions, and the funds belong to me, so I get the earnings.”

Countries from Mexico to Sweden have adopted the system or elements of it amid concerns that government-based social security benefits will be slashed when retirees outnumber contributors.

The Chilean system also helped feed an unprecedented expansion for South America’s most market-friendly economy and has drawn attention from President Bush, who has made privatizing part of the U.S. system a top second-term goal.

Chilean employers pay nothing into the system, politicians barely fret about social security, and the workers choose where to put their money, picking among six companies regulated by the government.

The funds have delivered 10.3 percent per year on average since 1981 after inflation is factored in. That has many contributors feeling more secure when they reach retirement age and have to decide whether to start making withdrawals or buy an annuity that delivers a guaranteed monthly amount.

Lawyer Pilar Duarte, 32, could donate more than the government-required 10 percent of her income, but said the idea has never occurred to her because she has three decades of contributions ahead of her. Miss Duarte parks her $112 monthly contribution in the riskiest stock fund available, realizing that it might fluctuate wildly in value but should provide high long-term returns.

“I think it’s a really well-thought-out system,” she said. “I’m not scared I’m going to lose all my money.”

The architect of the system is former Chilean Labor and Social Security Secretary Jose Pinera, an economist trained at Harvard and the University of Chicago who now travels the world promoting laws establishing private pension funds. The idea has caught on from Latin America to Eastern Europe, and Asia is expressing strong interest.

Mr. Pinera compares the underfunded U.S. Social Security system to the Titanic heading toward an iceberg, saying the Chilean example “shows that a system of personal retirement accounts can work superbly.”

But several miles from Santiago’s downtown of well-preserved colonial buildings and gleaming skyscrapers, the warts of Chile’s system are exposed in the gritty blue-collar neighborhood of Independencia.

Many residents are self-employed or go from one job to another, sporadically or never contributing because they barely earn enough to survive. Those that don’t save enough to fund the minimum pension, currently paying out 79,000 pesos, or $136, per month, will need government help to make up the difference.

Retirees from Independencia shuffle into a dusty government office to receive their monthly cash pensions, hoping they won’t be robbed on the sidewalk after passing the armed guard posted just inside the front door.

Despite being bombarded for years by ads from fund companies competing for pension business, many Chileans doubt they’ll ever profit from the private system.

“I’m not in it and probably never will be,” said Ignacio Ibacache, 47, who makes about the monthly minimum wage of $207 photographing tourists in front of Santiago’s central cathedral.

In his hip restaurant in a bohemian part of Santiago, Rhony Castro knows he should be contributing but hasn’t for years.

“There’s always some crisis that comes up in this business, so I just say, ‘I’ll get through this one and start contributing,’ but I never do,” said Mr. Castro, 48. “Most small-business men here work until they die, and I’ll probably be one of them.”

If the lack of regular contributions continues, nearly half the work force retiring over the next 30 years won’t save enough to fund their own minimum pensions, according to a study by the government’s Superintendency of Pension Fund Administrators, which regulates the pension funds.

Privatizing Chile’s old bankrupt “pay-as-you-go” pension system wasn’t politically difficult because it happened during the rule of dictator Gen. Augusto Pinochet.

“The Chilean system had gone under,” said Joseph Ramos, an economist at the University of Chile. “But they didn’t have to ram the new system through. There wasn’t any place to ram it through.”

Chileans have complained that fees charged by fund administrators are high, and some still harbor suspicions about privatization because the police and military were allowed to keep their government pensions.

Although he concedes that privatization has been successful in many respects, senior World Bank economist Truman Packard said the change “wasn’t the big silver bullet that everyone expected.”

“There was the strong expectation and the promise that participation rates would go up to as high as 80 to 90 percent. Judged by that expectation, there is tremendous disappointment.”

Also, more than 17 percent of retired workers older than 65 continue working or head back to work because their pensions don’t provide enough income, according to a study conducted for the government.

Mr. Pinera insists that the system doesn’t need an overhaul and said labor reforms in Chile would help boost stable employment and increase pension funding. Small-business owners exempted from the system often prefer investing in their businesses for retirement, he said.

“It is an open question whether they should be required to contribute,” Mr. Pinera said.

But Chile has a good chance of fixing its system’s coverage problems because most Chileans are funding their own pensions, unlike countries such as the United States that face huge Social Security deficits, said Guillermo Larrain, who heads the Superintendency of Pension Fund Administrators.

“I think we have a huge opportunity in front of us, instead of a huge challenge,” he said.

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