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In Chile

A Safety Net With Some Holes

By Monte Reel
Washington Post Foreign Service
Monday, April 11, 2005; Page A11

SANTIAGO, Chile -- As Eugenio Pumarino studied investment options for his state-sponsored private pension account, the 71-year-old retiree uttered words that would be sweet music to advocates of private accounts for the U.S. Social Security system.

"I'm not completely happy with my account, but that's because there were several years when I didn't put much money into it," he said. "But this system is better than the old one. Now it's my money, and I control it -- not the government."

Retirees wait in line at a government office in Santiago to receive their monthly pension payments.

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Social Security Around the World As U.S. Considers Private Accounts, Experiences in Chile and Britain Provide Some Inspiration and Offer Cautionary Tales
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Social Security

But such pride of ownership is lost on many other Chileans whose pensions are too low to spur any feeling other than dismay.

"It's an embarrassment to work 42 years and get what he gets," said Elena Sarro-Spanchiare Opazo, 71, as she examined the account of her 81-year-old husband, who worked 42 years in Chile and receives a payout of about $220 a month. "He worked for five years in Spain, and his pension from Spain is twice that much."

The vastly different experiences of pensioners in Chile suggest that any shift to a private-accounts system offers promise and problems. For nearly a quarter of a century, this small, homogeneous country has operated a partially privatized pension system that has become one of the most studied and debated free-market experiments in the world. Conservative politicians have extolled its virtues. President Bush has cited it as a model for his push to restructure Social Security.

Chile's system has not yet proved a clear success because the state still spends millions to supplement benefits. Administrators say that is because the previous program still greatly influences payouts.

The previous pension system in Chile was financed by payroll taxes much like Social Security in the United States. It was replaced under Gen. Augusto Pinochet, whose authoritarian government embraced free-market economic theories and implemented them with little resistance.

Jose Piñera, who then was Chile's labor and social security minister and now is a well-traveled proponent of pension privatization, said he devised the system to restore a link between effort and reward.

In 1981, Chile began allowing people already in the labor force to opt out of the previous pay-as-you-go system and deposit 10 percent of their earnings into personal accounts. Enrollment in the private system is mandatory for any worker who joined the work force after 1981. Participants are not taxed on those deposited earnings until the money is withdrawn at retirement.

Six companies manage the pension funds under government regulation, and workers can choose which of the six will handle their money. An additional 2.4 percent salary deduction covers management fees.

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