Since President George W. Bush launched his proposals to modify Social Security laws, Chile and its retirement system have been reference points in the debate. It is reported that Pinochet’s former cabinet minister, Jose Pinera, was one of the advisors of the Republican reform plan. Among other publications, The Washington Post, The New York Times, and The Economist have referred to the Chilean example as Social Security’s supposed successes or to warn about its shortcomings. Estella James, former Clinton administration advisor, in a Washington Post article, “How Chile Did It: Private Retirement Accounts and their Secret Requirements” (reported in El Mercurio February 16, 2005) declares that she is in favor of Chilean-style individual accounts and wants to see them in the US. However, she warns that Bush’s claims that privatization will give retirees more independence and reduce government debt are illusions. She invokes the Chilean experience to conclude that important public resources will be needed during the transition period from one system to another, and to subsidize beneficiaries who will be hurt by the change.
New York Times columnist Larry Rother frankly titled his article “The Failure of Private Funds in Chile,” and pointed out that the minimum guaranteed benefit for privatized members of the system is no more than $140 per month (a third of the Chilean minimum wage) while government spending on pensions has grown to nearly 25 percent of the national budget, almost as much as spent on education and health together. He had to add that this was due to the growth of spending on “assistance” pensions that the government offers to the many older individuals who can no longer work and, who, without a work-related pension, lack means to survive. These subsidies are totally discretionary, temporary and depend on mayors and other public officials, exposing recipients to all sorts of political pressures.
Of course, in her Post article James does not mention the political circumstances that surrounded the pension counter-reform in Chile. It was in 1981,during the Pinochet dictatorship. Thousands were arrested, disappeared, shot, and tortured. Public freedoms were strangled, labor unions frozen out, political parties prohibited, and opponents had been forced into exile. Critics had been expelled from the universities: criticism and the media were totally censored. Without the possibility of public debate, strong pressure and disinformation from the business sector and the dictatorship, workers – who supposedly could opt for the old system – were forced to enroll in the new system, together with those who entered the workforce for the first time. Nonetheless, not everyone yielded, and some (even though a minority) rejected the change and stayed under the old law. Oddly enough, the dictatorship excluded military pensions from privatization.
Time has proven that those who resisted joining the new system were the winners, and are receiving pensions that are far above those offered by pension fund administration companies. While the average privatized pension averaged 274,087 Chilean Pesos per month ($472), pensions under the old system stayed at 439,504 Pesos per month ($757). Seen in another way, the employee who changed to the privatized system is receiving a pension that is barely 62 percent of that of his or her workmate who stayed with the public system. Some 21,000 public employees have already retired under the privatized system, and every day they curse the moment that they believed the dictatorship when it promised they would be better off. Meanwhile some 157,000 government employees who have reached or who are reaching retirement age are refusing to retire in order to avoid a catastrophic loss of income, which in turn has the unintended result of denying employment opportunities to new jobseekers. There has been a growing movement of agitation forming among those employees who have suffered or who will suffer from what they call “pension damage.” The government has recognized the problem and says that it is studying a solution.
A second problem that proves the serious shortcomings of privatization is the degree of coverage that it offers to the working population. Virtually the entire workforce of the country is enrolled. Nonetheless, out of a total of 6.15 million enrolled, only 2.7 million are regular contributors. According to the government-run Pension Normalization Institute, some 3.5 million members of the system contribute only 4.2 months per year. This means that an average worker needs to work and pay into the system for almost 50 years in order to meet the minimum 240 months of contributions to qualify for a pension. In this situation 56 percent, that is, an absolute majority of those enrolled in privatized pension plans, will never qualify to receive even a minimum pension. Jose Pinera and his Chicago boys knew that one of the pillars of the neoliberal system is built-in high unemployment, the spread of temporary and part-time work, and easy firings, but they underestimated its effects on the viability of the system. They did not take into account bankruptcies and closings of small businesses, or the impunity with which bosses violate labor laws, hiring workers without contracts or simply pocketing employees’ contributions without turning them over to the private pension plans at all. They underestimated the continuous economic fluctuations that are inherent to capitalism, as aggravated in its Friedman version.
From the above one may deduce that private pension plans only protect a small portion of their contributors, those who occupy management positions, executives, or specialists, those whose high incomes allow for large contributions. As a consequence, a midterm result will be a resurgence of extreme poverty in the country, and an aggravation of the divide between a minority and the majority, particularly among seniors and especially women, who will not have enough income to get along.
The business world is fiercely opposed to financing these holes in the safety net, since they regard it as a historic victory that “reform” has exempted employers from making any contributions at all to pension funds. Of course, the law dictates that the public budget will have to cover the shortfall in order to offer the minimum pension to the vast number of working people whose privatized funds are not enough to cover it. But, for that majority of workers who do not manage to make 20 continuous years of contributions, no solution has yet been offered. This means that, one way or another, the need arises for a real universal social security, which proves the failure of the private investment funds.
The World Bank, in a report by its advisor, Indermint Gill, recognized the grave shortcomings of the privatization process in Latin America, affirming that it did not increase the general coverage of the system and that it has turned out to be extremely costly for low-income workers. It also admitted failure in another stated objective of the reforms: the financing of the system has not been assured, nor has government responsibility been reduced, nor much less have inequalities among pensioners been reduced. In the Chilean case, Pinochet’s followers achieved their goals by making workers finance their retirement from their own pockets, while creating a private, for-profit long-term capital market financed with other people’s money. In the latter case, the principal beneficiaries were the transnational corporations and Chilean financial groups.
Much has been made of the fact that the private pension fund administrators have been successful in administering workers’ money, offering them increased yields on the money they have deposited. But, as has already been pointed out, no matter how high these yields may have been, they have precious little to do with the final accumulation of the funds, which individually have much more to do with amounts saved individually, and this, in turn, with salary levels received. No doubt, the rapid growth of the Chilean economy (if we ignore the five years of recession since the Asian crisis) has been a determining factor in the yield rate of the funds. To this add high prices on raw materials and foodstuffs that we export, together with a significant increase in the productivity of the prolonged, intensive and poorly-paid Chilean workday, one of the longest in the world. Thus, the profit rates of the 200 most powerful companies are among the highest on the world market, while the ratio of salaries to value added is one of the lowest in the world.
The immense profitability of capital in Chile is also due to a reduced level of taxes on added value. This explains the rapid accumulation of private riches in the hands of a small number of corporations, and the consequent growth of stock capital and other stock market instruments. This explains the enthusiasm with which the Chilean model is greeted among financial circles.
On the other hand, data processing technology permits the management of vast flows of money in numberless individual accounts, at minimum cost. Financial portfolio management methods are well known and all financial companies apply them in a similar way. Fund administration is not an exclusive virtue of private enterprise. A public or nonprofit entity can achieve the same results. It is also possible to establish a certain degree of public security against fraud, by means of strict regulations. The problem is not at the microeconomic level, but is rather in the evolution of the global economy, which is subject to constant fluctuations and financial or production crises. These can be catastrophic for voluntary savers, and even worse for those who are obliged to participate, as are members of private systems who cannot withdraw their funds.
In Chile after the Asian crisis of 1997 the economy cooled quickly, fell into recession, and the previously high yields generated by the funds were drastically reduced. Many employees, forced to retire at the same moment the market was falling, saw part of their savings, put away at the cost of long years of sacrifice, vanish overnight. In the same way, if privatization reform had been established in the US at the beginning of the Clinton administration, the fall of the stock market at the end of the decade would have been disastrous for working people, especially for those whose funds were invested in tech stocks which had speculative gains without any real basis, a bubble which eventually ended up bursting. In Chile, supposedly in order to overcome this problem, investments were diversified according to the degree of risk, leaving it up to the individual contributor to choose the type of fund he or she preferred. But neither the most astute working person nor the most sophisticated financial companies can avoid the risks of a financial investment that depends on an erratic, ever more insecure and unstable globalization.
The availability of a large investment fund generated by workers’ contributions is neither a discovery nor an exclusive attribute of private investment funds. In the old system, there were also surpluses. In some cases, they served to finance productive government projects, as was the case of the forest industries and other public infrastructure works. But, the majority of these accumulated funds were placed into mortgage loans benefiting the members of so-called “cajas de prevision” (mortgage savings plans), with which tens of thousands of working families were able to obtain houses of their own, as well as pensions. Private pension plans invest wage-earners’ funds in corporate stocks and bonds, in which the plan administrators themselves can exercise an executive role, which increases their economic and political power. And, for administering these accounts they charge contributors commissions that are much steeper than the ordinary commissions charged by other brokers to maintain investment accounts.
This privilege has caused banks and insurance companies to constantly press to enter the private pension account market, which is set up as a legal monopoly. Private pension account administrators have become fewer in number due to mergers and hostile takeovers. At present, two or three of them, transnational companies, control all of the funds. Due to its monopolistic and super-concentrated character, the “private industry” of privatized pension administration enjoys one of the highest profit rates in the country. One can easily understand financial capital’s interest in imposing this system on the USA.