Retiring on the Free Market: Chile's Privatized Social Security
Lear, John & Collins, Joseph
In the fall of 2000, a theater in Santiago's Bellavista district featured the play Con Flores Amarillas, the story of a computer hacker who breaks into the accounts of Chile's big banks to send...
...They can choose the programmed Temporary farm workers are among the many Chilean workers excluded from the private pension system...
...1 7 Other pending proposals are merely modest, technocratic solutions that leave the current, private system intact, such as allowing selfemployed workers to pay by Internet, or letting groups of employees negotiate lower commissions...
...The commission for those earning the minimum monthly wage (105,000 pesos, or US$150), including regressive fixed fees, ranges from 20% to 30% of what is actually deposited in an individual retirement account, depending on the AFP...
...Any meaningful reform of the private social security system is unlikely to occur soon, given the limited political protest over retirement issues in the last decade...
...Many workers oppose raising employee withholdings as long as employers contribute nothing to retirement...
...Even if a working woman accumulates the same amount in her AFP account during her working life as a male counterpart, her monthly retirement benefits will be smaller, since the AFP (or insurance company) calculates a lower monthly income that factors in her earlier retirement age and longer life expectancy...
...Kurt Weyland, "Economic Policy in Chile's New Democracy," Journal of Interamerican Studies & World Affairs, Fall 99, Vol...
...Monthly retirement income from an insurance annuity is usually less than that received from a programmed withdrawal, but the annuity eliminates the risk that private retirement savings might be decimated by market fluctuations or by a particularly long life after retirement...
...The inclusion of retirees among those aided by this fictional, high-tech Robin Hood reflects a growing awareness among Chileans that the privatized social security system bequeathed to them by General Augusto Pinochet may not be all it was cracked up to be...
...Not surprisingly, returns drop dramatically when these upfront commissions are factored in...
...El Mercurio (Santiago), November 15, 1980, cited in Jose Pablo Arellano, Politicas Sociales y Desarrollo, Chile 1924-1984 (Santiago: CIEPLAM, 1988), p. 83...
...The sector's oligopoly structure-with a handful of AFPs controlling most employees' retirement funds-and the high profits of the AFPs have become public issues...
...The National Association of Public Employees has successfully pushed the government to allow over 24,000 public employees near retirement to return to the more generous public system, and advocates the maintenance of a dual system, public and private, as in Colombia and Argentina...
...Since the system was introduced, the number of people affiliated with an AFP has increased steadily to over six million, virtually equal to the size of the economically active population...
...In 1997, new regulations limited how easily people could switch between AFPs, a change that only marginally reduced costs to contributors while dramatically increasing profits to surviving AFPs...
...But as the population grows older-currently 8% of Chileans are over 65-and most Chileans begin to retire with far less than their previous salary, with the minimum retirement income or with nothing at all, criticism of the privatized system is likely to increase...
...The AFPs themselves propose increasing the percentage of employees' salaries withheld for retirement, and raising the current limit on the percentage of retirement funds that can be invested abroad from 16% to 50...
...In 1998, while economic recession brought negative growth rates to individual Sthe limits and r moving beyond eralism...
...One government response has been to require each AFP to create a second fund of fixed, low risk investments for those already retired and those employees within ten years of the minimum retirement age...
...As mentioned, the government recently required AFPs to create a second fund with fixed returns, and is likely to approve up to five different AFP portfolios with different risk levels, as well as greater flexibility for AFPs to invest funds abroad...
...These totalled only 4% of the employed work force by 1998...
...The fact that 56% of Chileans are able to make, at best, only irregular payments is rooted in two constants of the Chilean economy that are deeply rooted in Pinochet's neoliberal reforms: the precarious nature of temporary, seasonal and informal work in Chile, and the second worst distribution of income in Latin America...
...rather, it suggests how deeply entrenched neoliberal social policies remain in Chile, as well as how the problems of retiring on the market can easily be deferred to future generations, in Chile and elsewhere...
...The average retirement benefit paid out to women by the AFPs in 1998 was 33% lower than that paid to men...
...But of those enrolled, only around 44% pay regularly into the system...
...4. La Segunda (Santiago), Octubre 25, 1999...
...La Tercera (Santiago), October 3, 2000...
...More significantly, retiring AFP affiliates are likely to be an increasing financial burden on the state...
...social security system...
...With little chance of aspiring to the minimum retirement income, working people with low wages and irregular work have little incentive to contribute to a retirement fund...
...One difference is that in Chile employers don't contribute to their employees' retirement security...
...But Chile faces increasing competition from countries following similar export strategies and has made limited progress in moving toward a "second phase" of exporting based on further processing of its raw materials...
...Arenas de Mesa, "El Sistema," p. 13...
...The other 56% have little chance of making the 240 monthly payments necessary to receive the minimum monthly retirement income (currently about 67,000 pesos, or US$96) guaranteed by the government, and are only entitled on retirement to the funds they have accumulated...
...As part of the structural adjustments imposed on Latin America after 1982, the Chilean private retirement plan has already been replicated with some variations in other countries in the region, including Argentina, Bolivia, Mexico, Peru, El Salvador and Uruguay...
...Patricio Meller, "Pobreza y distribuci6n del ingreso en Chile (D4cada ffde los noventa)," in Drake and Jaksic, eds., El modelo chileno...
...Moreover, conservative think tanks in the United States often praise Chile when promoting privatization of the U.S...
...Privatized social security will inevitably be tied to broader debates in Chile and elsewhere about the future of neoliberal policies...
...By contrast, those entering the workforce for the first time were required to enter the private system, assuring a slow but sure death for the public system since it would have no new payers, and a dwindling number of active, pre-1981 payers...
...The few private companies that make up the system are able to wield oligopoly power...
...9 With the decree establishing the system of AFPs in 1980, the Labor Minister Jos6 Pifiera claimed that "the cost of the reform to the public treasury is zero...
...The system certainly had problems, such as the diversity of benefits offered to different sectors of employees, rising government costs, and the high levels of contributions from employers and employees...
...Ruiz-Tagle, "Reformas," p. 33...
...The neoliberal model that Pinochet's government bequeathed Chile has been the basis of continued economic growth in the last decade of civilian rule, even if Chile has been unable to move beyond the unregulated exploitation of its natural resources and its cheap, "flexible" labor force...
...In 1999, Subsecretary of Finance Alvaro Clarke provoked considerable controretirement funds, the profits of the AFPs as private corporations were 21%, and in 2000 they topped 23%.6 The dangers of oligopoly control over retirement funds by a handful of AFPs became obvious by 1997...
...For those who reach retirement age (65 for men and 60 for women) without sufficient savings in their individual AFP accounts, the government guarantees a minimum income once retirement savings are exhausted, as long as they have made regular contributions to an AFP account for 20 years, or a total of 240 months...
...While these transition costs will eventually decline, other costs are permanent and sure to expand...
...As with the rest of the Pinochet program, privatizing the social security system meant a complete reversal of long-standing Chilean trends: Since the 1920s, Chile had developed one of the most advanced and progressive public social security systems in Latin America, based on government-backed, industry- ivatization of specific organizations (Cajas de ecurity system Previsitn) that combined contributions by workers, employers ing longtime and the government...
...he biggest problem with the private social security system-that most people are left outrarely makes headlines...
...Riesco L., "Una Reforma Indispensable," 68-69...
...I knew from my colleagues that the bosses had had meetings with officials and executives of the AFP San Cristobal, who had explained the benefits of changing...
...Although benefits were linked to salary e once had levels, redistribution occurred ost advanced from higher to lower paid employees, since low-income ssive public workers often received more in ty systems in pensions than they had paid in, and from one generation to the merica...
...In the meantime, academics, businessmen, labor unions, social organizations and even playwrights have finally begun the debate about the privatization of social security-a discussion that was not allowed in 1981...
...Together these two government costs constitute 3% of Chile's GDP...
...More significantly, they propose turning the remnant of the public system into a "State AFP" to lower costs and compete against the oligopoly structure of the AFPs...
...And so I changed...
...3. Jaime Ruiz-Tagle, "Reformas al nuevo sistema de pensiones en Chile: Andlisis de las propuestas...
...Though negative returns in those two years were modest, the drop in account balances raised the very real specter of retirement savings dropping dramatically for those about to retire, or for those already living on programmed retirement withdrawals...
...La Tercera (Santiago), July 31, 2000...
...At the outset, the Pinochet government persuaded most of those paying into the old system to switch...
...Their neoliberal experiments were more thorough than elsewhere because the long and ruthless dictatorship ruled out effective opposition...
...Instead, competition has been largely based on advertising and large and aggressive sales forces which sometimes engage in unethical practices, such as under-the-table kickbacks to those who sign up...
...Those who cannot qualify for the minimum retirement pension must rely on family or apply for public assistance, limited in availability and worth about half the minimum retirement income...
...Critics reject sending retirement funds abroad, since it ultimately takes capital and jobs away from Chile's domestic economy...
...Arenas de Mesa, "El Sistema," Table 8. 15...
...next, since withholdings from active workers helped pay the income of retirees...
...By contrast, if she had stayed in the old system, she could have retired with a monthly income of 650,000 pesos (US $930).2 Concerns about Chile's private social security system became more public in Chile when private retirement funds experienced their first two years of negative returns in 1995 and again in 1998 in the aftermath of the Mexican and Asian economic crises...
...l iJVVIedge the shortcomings of the privatized social security system...
...Balance y desaflos," in Paul Drake and Ivan Jaksic, eds., El modelo chileno: Democracia y desarrollo en los noventa (Santiago, Ediciones Lom,1999) 2. El Mostrador, February 5, 2001...
...73-74...
...but many long-needed reforms were finally implemented during the first years of the authoritarian rule of General Pinochet...
...But this figure incorporates the spectacular early returns from the 1980s, when the flurry of privatizations of public companies boosted initial stock market earnings and when both the number of those in the system and the accumulated funds were relatively small...
...Chile's most dynamic and labor intensive export industries-fruit, forestry, fishing and aquaculture-all have seasonal labor demands, and "flexible" labor conditions still characterize most service and manufacturing jobs...
...In the fall of 2000, a theater in Santiago's Bellavista district featured the play Con Flores Amarillas, the story of a computer hacker who breaks into the accounts of Chile's big banks to send checks to the poor, to Mapuche Indians-and to retirees...
...1 9 And while economic growth and specific Concertaci6n social policies have helped lift many out of poverty, Chile remains a dramatically unequal society...
...The fact that the military dictatorship never put its own retirement into the private system raises questions about the legitimacy of the "reform...
...But older employees and retirees are not required to move their savings to the safer funds, and thus their retirement continues to be vulnerable to market swings...
...In 1981, however, the Pinochet government began unilaterally phasing out the public social security system, replacing it with private companies known as Pension Fund Administrators (AFPs...
...In that year, CEO Josd Yuraszeck made a fortune by convincing the AFP-affiliated board members who controlled a majority of stock in one of Chile's largest electrical companies to e Vl'.A IVII ly 11'uII 1a I IVV Ql...
...Since the mid-1980s, top officials of the World Bank, the International Monetary Fund, the U.S...
...Starting in 1975, well before the wave of neoliberal reforms elsewhere in Latin America, Chile was turned into a laboratory for Pinochet's "Chicago Boys," nicknamed after their free-market mentors at the University of Chicago...
...4 If contributors have not done as well as the AFPs claim, the AFP companies themselves are thriving...
...MIDEPLAN, Noviembre 2000, 19, 30...
...That the privatized retirement system remains in place is not necessarily an indication of its widely touted success...
...sell the company to EndesaSpain...
...Privatized social security is but one enduring element of the broad package of neoliberal reforms implemented by Pinochet's military government (19731990...
...According to the government's Superintendent of AFPs, when fees are factored in the average return on the retirement fund of someone earning the monthly minimum wage drops to 7.4% for 1981 to 2000, and to a modest 3.7% for 1994 to 2000.3 For the majority of those A , rk;l with low incomes, real returns after fees are actually negative for the first years of contributions...
...In the United States, a close equivalent to the AFP system would be an individual retirement account (IRA or 401k...
...he current debate over needed reforms to the Chilean system suggests both the limits and possibilities for moving beyond neoliberal policies in Chile today...
...But proposed solutions vary widely...
...But the critical difference between the two systems is that the private AFP system is neither optional nor supplemental to a public social security system...
...They often work in the lowest paying and most informal jobs, and periodically withdraw from the paid labor force to have and care for children...
...Despite attempts by post-Pinochet governments to make starting an AFP easier, the trend instead was for the large AFPs to absorb the smaller ones: By 2001 only seven AFPs were operating, down from a high of 22...
...media, and prominent neoliberal economists such as Milton Friedman have celebrated Chile's free-market experiment and held Chile up as a development model for nations around the world...
...1 0 The reality is that the cost to the public treasury has been significant, as the government has assumed far greater costs than expected...
...8 Of those projected to receive the government-guaranteed minimum income in the next 20 years, 73% are women...
...The ministry of women's affairs, the National Women's Service (SERNAM), insists on lowering the required number of contributions necessary for women to qualify for a guaranteed minimum retirement income.1 5 Manuel Riesco of the National Center for Studies of Alternative Development proTo continue working, or depend on their families or limited public aid, are the options many elderly Chileans face...
...It lured them with a significantly lower deduction from their paychecks and the promise of a "recognition bond," calculated according to the number of years they paid into the old public system and paid into their individual retirement account upon retirement...
...The rejection of continued military rule in the 1988 plebiscite and the victory of opposition leader Patricio Aylwin against Pinochet's handpicked civilian candidate in presidential elections the following year, ultimately served to further legitimate Latin America's longest-running experiment with neoliberal policies...
...1 8 In a time of slowing growth rates, stagnant wages and rising unemployment, the current coalition government led by the Socialist Party's Ricardo Lagos has been torn between proving its pro-business credentials to powerful economic groups who threaten to withhold investment, and delivering longdeferred social demands to its key voting constituents, such as a promised revision of the labor code that would strengthen the labor movement...
...If she retired now, she would have a monthly income of 159,000 pesos (US $227), far less than her current monthly salary of 727,000 pesos (US $1040...
...5 AFPs were supposed to compete by offering the highest returns and lowest fees, but surveys show that people rarely make decisions about which AFP to join based on where costs are lowest or where they will get the highest return...
...Negative returns also inevitably raised the issue of how profitable the private retirement funds really have been for contributors...
...And therefore they will have to look for complementary support from the state...
...40-41...
...8. Ruiz-Tagle, "Reformas," p. 44...
...5. Superintendenia de AFPs, "Boletin Estadlstico" at http://www.safp.cl/ 6. Ruiz-Tagle, "Reformas," pp...
...Also and progr with the new system, employers social secur were "freed" from mandatory contributions for their employees and Latin thus could be more competitive in national and international markets...
...it is now the only form of providing for retirement for most working people in Chile...
...For every 100 pesos deposited into a retirement fund, a minimum of 20 pesos goes to the AFPs as an administrative fee...
...None of these government proposals adequately address the fundamental issues facing the private social security system: high costs to contributors, the inordinate power and profit of AFPs, the vulnerability of retirement savings to market fluctuations, and the likelihood that half the working population will not be able to retire without help from the state...
...When Chileans retire in the AFP system, they have two basic options...
...Miriam Glasinovic, for example, has worked the past 33 years as a government official, and the past 20 paying into the new private system...
...7. Manuel Riesco L., "Una Reforma Indispensable al Sistema de AFP," in Propuestas Alternativas, Centro de Estudios Nacionales de Desarrollo Alternativo, Hugo Fazio R., ed., 1999, pp...
...This market-based system, the Chicago Boys claimed, would give a Chilean worker the freedom to provide for retirement according to his or her choice, with Pinochet's p the knowledge that salary with- Chile's social holdings would be invested and allowed to accumulate individu- meant revei ally in the transparent and shrewdly efficient hands of a pri- trends...
...1 At the same time, however, civilian governments have left the privatized social security system intact and largely at the mercy of the market mechanisms put in place by Pinochet...
...AFPs publicly tout a healthy rate of return on retirement accounts that averages an impressive 11% from 1981 to 2000...
...The major cost to the government is that it still has to pay benefits to 1.4 million retirees in the old, public system, given that only a few active wage earners now contribute to that system...
...In the last few years, different sectors of Chilean society have come to acknowledge the many shortcomings and pending problems of the privatized social security system...
...Even an editorial in the conservative newspaper El Mercurio called the manipulations "the scandal of the century...
...Ruiz-Tagle, "Reformas," p. 29...
...1 2 From 1974 to 1980, the cost to the public treasury of maintaining the public system averaged 2.4% of GDP...
...The largest AFP, Provida, owned by Spain's Banco Bilbao Vizcaya, has now signed up 40% of all contributors in the system, and receives 31% of all payments...
...Arenas de Mesa, "El Sistema," p. 2, 9. 14...
...Many others risk seeing their retirement funds decimated by stock market downturns...
...41 Issue 3, p. 67, 30...
...A recent study estimates that with future real rates of return on AFPs of 3%, the government would have to supplement the retirement of about 58% of workers...
...The next largest AFP, Habitat, has 23% of contributors...
...Reflecting Chile's dynamic economic growth between the late 1980s and 1998, and the steady increase in wages during most of the 1990s, retirement funds deposited in private retirement accounts now total 36 billion dollars, equal to half of Chile's GDP...
...El Mostrador, February 5, 2001...
...they charge hefty fees and make large profits...
...Since the creation of the system of AFPs, the cost to the public treasury of maintaining the public and private systems has averaged 5.7% of GDP, representing 42% of the government's social spending and 27% of total spending.1 3 The public cost of the social security system is projected to remain between 5 and 6% of GDP for the next two decades.14 In spite of the fact that virtually all employee withholdings for retirement have been privatized, the government will continue to make substantial outlays out of general revenues to supplement inadequate savings in the private social security system...
...In 1980, with no public debate, the "Chicago Boys" announced what was presented as the crowning achievement of their neoliberal modernizations, the privatization of social security...
...16 Government proposals, by contrast, have been timid...
...government, the most influential U.S...
...For many white-collar and public employees approaching retirement in the private system, the old public system provides an obvious and painful point of comparison...
...The AFPs compete for employee retirement withholdings, which are held in individual accounts and invested in stocks and bonds...
...Advocates praise the private system's administrative efficiency and investment...
...The three subsequent governments of the Concertaci6n, a coalition dominated by the Christian Democratic and Socialist Parties, inherited an economy that was booming by regional standards and they proved reluctant to challenge two fundamental pillars of the neoliberal model: virtually unregulated access to natural resources and cheap, "flexible" labor...
...By contrast, returns from 1994 to 2000 have been far less spectacular, averaging 4.9...
...Organizing basic social services like health, education and retirement primarily around market mechanisms-that is, access based on income and provision based on profit-only compounds those inequalities...
...By 1973, over 75% of working Chileans were covered by the social security system...
...Chile's main labor federation, the Unified Workers Central (CUT), and other unions propose limiting the commissions that AFPs are allowed to charge and requiring employers to pay an additional 2% of employee salaries towards retirement...
...Concertaci6n governments were more willing to tinker with neoliberal social policies, devoting greater public expenditures to poverty alleviation programs, and to public health and education, all of which had been devastated by budget cuts and privatizations under the military government...
...Many agricultural workers, for example, often have steady work only four months of the year, so they would need to work 60 seasons to accumulate the 240 monthly contributions needed to guarantee the minimum retirement income...
...Secondly, the government has to provide a "recognition bond" to those who switched into the private system, based on their years of payment into the public system before 1981 and paid into their private accounts when they retire...
...withdrawal of accumulated funds from their individual accounts, with the monthly amount adjusted annually according to their life expectancy and the remaining balance in their account, or they can choose to exchange the balance of retirement funds for a guaranteed annuity from an insurance company...
...7 By contrast, those whose retirement savings are in AFPs have no say in the AFPs' investment policies...
...I Jaime Ruiz-Tagle, an economist working in the Ministry of Planning, warns that "given modest earnings, gaps in coverage, and the low level of active payments, it is likely that the majority of contributors won't be able to accumulate the funds necessary to finance the legal minimum pension...
...The tale may hold lessons for the United States as well as the rest of Latin America...
...The largest AFPs benefited from deep advertising pockets and economies of scale, and therefore have been able to steadily absorb the smaller AFPs...
...And the new system has not, in fact, reduced the burden on the public treasury, which continues to pay out large sums for retirement benefits...
...Many within Chile's big economic groups (those without a direct interest in the AFPs) advocate deregulation to allow banks and brokerage firms to compete with the AFPs to invest employee retirement funds...
...Because competition has dropped sharply in the last few years while the administration fees charged have barely fallen at all, the remaining AFPs have been extraordinarily profitable...
...9. Alberto Arenas de Mesa, "El Sistema de Pensiones en Chile: Resultados y Desafios Pendientes," 13, http://www.redsegsoc.org.uy/l %20Arenas Chile.htm 10...
...Income inequality grew significantly under Pinochet and then remained constant under civilian government-an accomplishment of sorts-with the top fifth of the population receiving 57% of national income, just as they had in the last year of Pinochet's rule, and the bottom fifth receiving the same 4%.20 The reproduction or expansion of inequalities is a fundamental aspect of neoliberal economic policies in Latin America...
...Retiring on the Free Market 1. Joseph Collins and John Lear, Chile's Free-Market Miracle: A Second Look (Food First Books, 1995), chapters 8 and 9; Dagmar Raczynski, "Pollticas sociales en los afos noventa en Chile...
...More importantly, average returns published by AFPs consider only the money that actually makes it into individual accounts...
...The form arrived at the house and I almost didn't look at it...
...She explains why she switched in 1981: "I was pregnant...
...They also celebrate the increased national savings rates and reduced burdens that private social security systems seem to offer to fiscally strapped governments...
...But from the perspective of many Chileans, the system has shown itself to be more problematic: Many working people are never able to pay in enough to qualify for the minimum retirement income...
...The public retirement system of the national police and armed forces was left untouched by the 1981 reform, creating a continued annual deficit averaging 1.5% of GDP...
...Ch vate fund manager rather than be one of the r lumped together with the withholdings of other employees...
...poses completely eliminating the requirement of a minimum number of contributions, in effect having the state guarantee a minimum retirement income to everyone who contributes to an AFP...
...Women have an especially hard time making enough regular payments to be eligible for the minimum pension...
...Others see returning a greater direct role in social security to the state as the only alternative...
...the debate over reforms i me limit and versy when he released a study suggests boti suggesting that retirement funds would be better off possibilities for under a mattress for the first neolib seven years since only after that length of time do lowincome employees begin to earn a profit on their accumulated funds...
...Once the phaseout of the old system is complete, members of the national police and armed forces will be the only Chileans protected by a public retirement system...
Vol. 35 • January 2002 • No. 4
