Last week marked the thirty year anniversary of Chile’s privatized pension system. Contrary to what leftists might suspect, Chileans at large never squandered their earnings to end up poor and desolate in their sunshine years. Instead, by turning workers into investors, Chile averted the sort of entitlement crisis that is now looming in the United States.
Designed by labor secretary José Piñera during the military government of Augusto Pinochet, Chile’s private retirement accounts replaced a bloated and unsustainable public system. Instead of paying a 12.4 percent Social Security tax as Americans do, Chilean workers must contribute between 10 and 20 percent of their wages to one of several conservatively managed pension funds. From their accumulated savings, Chileans receive a life annuity and they can make programmed withdrawals.
Politicians, however, are not able to plunder the retirement savings of citizens as happened most recently in Europe last year. Piñera firmly embedded the private property status of pension savings in Chile’s 1980 constitution.
Since Chile’s privatized system was introduced, annual rates of return have averaged more than 9 percent above inflation. By contrast, America’s Social Security program pays a 1 to 2 percent return and even less for new workers — not to mention the fact that for several years now, it has been paying more in benefits than it is taking in in contributions.