WSJ: South America Offers a Lesson in Pension Reform

August 13, 2002

The Wall Street Journal's Pamela Druckerman reports on the Chilean and Argentinean pension systems and their potential models for United States' reform. The lessons are that well-regulated funds in a healthy economy can function well. In an unhealthy economy like Argentina's, both pay-as-you-go and funded systems would suffer. Excerpts follow:

"In 1984, just a few years after Chile privatized its lumbering state-pension system, Cristian Jara eagerly opened an account and began making monthly contributions. Now 41-years old and head of sales at a medical supplies company, Mr. Jara is convinced his account's sometimes rocky growth, alongside that of Chile's economy, will provide a comfortable nest egg when he retires."

"Across the Andes in Argentina, Perla Crivolitti, an executive secretary who is also 41, is convinced she will never see any of the money she has been socking away in a private retirement account since Argentina began allowing the funds in 1994. Her last financial statement showed her account was valued at about $2,200, down from $15,000 before Argentina spun into government debt default and currency devaluation in December.

"South American countries that have taken the private pension plunge offer both encouraging and cautionary tales for the U.S., where the Bush administration's plans to partly privatize the Social Security system have been postponed, but not canceled, by the stock market's deep decline and by Democrat's opposition. In Argentina, many retirement accounts have been devastated, and the pension system has grown increasingly frail amid the broader economic meltdown. In Chile, however, turbulence in financial markets has ruffled pensions but hasn't caused deep damage.

"The Bush team is seeking far less radical change than that undertaken by Chile and Argentina, where private plans are the sole source of income for most retirees, rather than a supplement to the public system. In recent remarks, a spokesman said Mr. Bush wants to allow younger workers to divert just a portion of their earnings to private pension plans instead of to Social Security.

"Still, experts say the U.S. government would face dilemmas similar to those encountered farther south: how to cushion against big declines in financial markets and how to keep paying retirees who are owed state pensions, even after the government loses revenue from younger workers who switched to private plans.

"Both Chile and Argentina sought to protect workers, most of whom had never owned stocks or bonds, by initially limiting the funds to government bonds and then gradually permitting workers to buy corporate debt and a limited amount of stock. This proved effective in Chile: Though returns still varied sharply from year to year, from gains of almost 30% in 1991 to just 3% in 1992, the funds posted average annual returns of 10.5% through June. One of the main classes of Chilean pension funds, which has a blend of stocks and bonds, rose 2.6% through June, even though stocks were mostly flat and economic growth has been weak."

For more information on the Chilean pension system see José Piñera's "Empowering Workers: The Privatization of Social Security in Chile", and Jacobo Rodríguez's "Chile's Private Pension System at 18: Its Current State and Future Challenges."

For more information on world pension reform see José Piñera's "Liberating workers: The World Pension Revolution."

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