Cato Scholar Tells Congress Chilean System Offers Model for Reform

August 6, 2001

Chile's experiment with Social Security privatization has been a tremendous success and could serve as a model for Social Security reform in this country, according to L. Jacobo Rodríguez, assistant director of the Cato Project on Global Economic Liberty, in testimony before the Subcommittee on Social Security of the House Committee on Ways and Means.

In 1981 Chile replaced its bankrupt pay-as-you-go retirement system with a fully funded system of individual retirement accounts managed by the private sector, a solution that "defused the fiscal time bomb" caused when "fewer and fewer workers have to pay for the retirement benefits of more and more retirees," said Rodríguez -- a situation that many countries face, including the United States. As a result of the reform, "workers are retiring with better, more secure pensions and, increasingly, at an early age," he said.

"Through their pension accounts, Chilean workers have become owners of the means of production in Chile and, consequently, have grown much more attached to the free market and to a free society," Rodríguez noted. "This has had the effect of reducing class conflicts, which in turn has promoted political stability and helped to depoliticize the Chilean economy. Pensions today do not depend on the government's ability to tax future generations of workers, nor are they a source of election-time demagoguery. To the contrary, pensions depend on a worker's own efforts and thereby afford workers satisfaction and dignity."

Chile's reforms have proven so successful that "the Chilean system has clearly become the point of reference for countries interested in finding an enduring solution to the problem of paying for the retirement benefits of aging populations," Rodríguez said.

While critics cite high administrative costs, lack of portfolio choice and high transfer rates between funds, Rodríguez argues that those criticisms are either misinformed (as in the case of administrative costs, which are only one percent of assets) or the result of "excessive government regulation." With some liberalization, "we should expect Chile's private pension system to be even more successful," he said. "And unlike a pay-as-you- go system, a fully funded individual capitalization system can anticipate fewer problems as it matures."

Rodríguez's testimony can be found on the Cato Web site at www.cato.org/testimony/ct-jr073101.html.

2002 Index | 2001 Index | 2000 Index | 1999 Index | 1998 Index