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Thursday, January 27, 2005
Chile's Pension Plan
President Bush has stated in the past that the United States could "take some lessons from Chile, particularly when it comes to how to run our pension plans." Chile's retirement insurance program has gotten attention lately because the reforms enacted in the country a little over twenty years ago share many similarities with reform plans being discussed by U.S. Republican leaders today.
The major similarity is that Chilean workers pay a percentage (roughly 10 percent) of their salaries into private investment accounts. This system was put in place with the thought that these accounts would spur economic growth as well as provide monthly pension benefits larger than what the traditional system could offer. Two major differences, however, include the fact that Chile's private pension system is not currently optional, and also, according to this article in the New York Times, the country "was careful before it started its private system to accumulate several years of budget surpluses." The U.S., unlike Chile, is considering a social security reform in the midst of multiple consecutive years of budget deficits.
The New York Times article provides a good description of how Chileans have fared under this system. As the first group of workers to depend on this system begin to retire, it is becoming evident that benefits are falling short of what was originally advertised when the program was put into place, and will unfortunately plunge many once-comfortable retirees into poverty. Not only that, but the Chilean government has had to continue diverting billions of dollars into a safety net for workers whose monthly contributions were not large enough to ensure a minimum pension. While the Chilean and U.S. economies and workforces are different and thus will benefit differently with private pension plans, it helps to look at the problems Chileans are experiencing with their private accounts if we are going to be considering enacting similar policies.
Posted by Becky Lewis
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