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The Chilean Model

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October 11, 2011 – Comments (0)

Sorry all, no pictures.

As most of you know 'The Chilean Model' reffers to a model for the privatisation of Social Security modeled after what was done in Chile as Republican nominee and straw poll winner Herman Cain mentioned in an early debate.

Since the privatisation of SSI into personal accounts has been on the table for discussion for a few years now, the thirty year results of the Chilean model are relevant.

This article is from the NY Times from 2006. http://www.nytimes.com/2006/01/10/international/americas/10chile.html?ex=1294549200&en=597516f5ad9fbb0a&ei=5090&partner=rssuserland&emc=rss 

SANTIAGO, Chile, Jan. 9 - Michelle Bachelet is a pediatrician and a Socialist, while Sebastián Piñera is a billionaire businessman and a conservative. They may agree on little as the opposing candidates in Chile's election for president, but they concur on one important point: the country's much vaunted and much copied privatized pension system needs immediate repair.

The Chilean system of personalized accounts managed by private funds has inspired a score of other countries since the pioneer effort to create it here 25 years ago. It is endorsed by President Bush, who has called it "a great example" from which the United States can "take some lessons." Here at home, though, dissatisfaction with the system has emerged as one of the hot-button issues in the election, a runoff that will take place on Sunday.

"Most people perceive the costs of pensions and the pensions themselves as unfair," said Patricio Navia, a political science professor at New York University and at Diego Portales University here. "Many of those who started work when the system was first adopted are realizing that they have not been able to contribute enough to get a significant pension," Mr. Navia said, adding that they resent "overhead costs that are so high" and that have led to record profits for the pension funds that manage contributions automatically deducted from workers' paychecks...

...

According to a recent study here, Chile's pension funds, whose number has shrunk to 6 from more than 20 as competition has diminished, recorded an average annual profitability of more than 50 percent during a recent five-year period. Other studies, including one conducted by the World Bank, indicate that pension funds retain between a quarter and a third of workers' contributions in the form of commissions, insurance and other administrative fees.

At the moment, the government pays about 5 percent of gross domestic product, or more than it spends for either health or education, on pensions for the poor, payments into a separate military retirement plan and so-called transition and administrative costs. Supporters of the privatized system argue that the state's burden will diminish as older retirees enrolled in the pay-as-you-go system that prevailed here before 1981 gradually die off.

But skeptics point to another developing problem: many young people, who should be enrolling in the system early to accrue maximum benefit, are staying out or paying in very little. Some cannot afford to contribute beyond the obligatory minimum payment, which is 10 percent of wages, while others are either self-employed or have been hired by companies as low-paid independent contract workers and therefore do not have to contribute at all.

Also from the NY Times but now in 2008; http://www.nytimes.com/2008/03/10/business/worldbusiness/10iht-pension.4.10887983.html 

SANTIAGO — Chile is undertaking its biggest overhaul ever of its pioneering private pension system, adding sweeping public payouts for the low-income elderly.

The new $2 billion-a-year program will expand public pensions to groups left out by private pensions - the poor and self-employed, homewives, street vendors and farmers who saved little for retirement - granting about a quarter of the nation's work force public pensions by 2012.

The program, to be signed into law Tuesday, is the most ambitious pension plan for the poor in the region, according to David Titelman, a social security expert at the United Nations Economic Commission for Latin America and the Caribbean.

The so-called Solidarity Pensions of President Michelle Bachelet will supplement, not scrap, the current private pensions, while salaried employees continue paying in to private funds in a combination of state subsidy and free market.

"This illustrates an evolution - it shows you need a hybrid system and can't put all your eggs in one basket," said Estelle James, a former World Bank economist. Public pensions alone won't do, because governments are not able to finance them, while private accounts can leave people out, she said....

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