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January 12, 2006

Privatize SSI Ala Chile? Maybe Not...

Conservatives love to point to Chile's privatized system of pensions as a great alternative to Social Security. How's the system working these days? In Chile's election, both the left and the right are arguing the system needs a major overhaul.

Why? For starters, surprise, surprise, investment funds are making out like bandits at everyone else's expense:

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.

The other major 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.

"The bottom line is that this system does not work with this labor market," said Andras Uthoff, an economist who is director of the social development division of the United Nations Economic Commission for Latin America here. If trends continue, he added, "only a small percentage of people are going to be able to finance meaningful pensions. What happens then to the rest?"

Posted by RalphTaylor at January 12, 2006 06:25 PM