Pension
Today is International Labour Day, a day to celebrate “the social achievements of the workers”. Or so they say. Unfortunately, in much of the Western world, 1 May is simply an opportunity for trade union leaders to blaze out their political agenda of higher taxes, higher public spending and more government regulation with great fanfare. It is, in fact, a great irony: this day was once meant to celebrate the pride and independence of the great workers’ movement. But today, it is used to promote an agenda which squeezes the workers into ever greater dependency on government bureaucracies.

However, there is a country in the world where Labour Day deserves its name. 1 May 1981 was the day when Chile gave its workers the opportunity to opt out of the patronage-driven public pension system, and become individual property-owners instead. Widespread ownership of stocks and bonds was to replace the unreliable promises of the public system – a labyrinth of different pension formulas and entitlement programmes even experts were unable to comprehend. Acquisition of private property via personal retirement savings accounts, with free choice of fund management company, investment strategy and pension payout mode was the new mantra.

And it worked. Historical real returns since May 1981 were around 9%, despite the losses from the current global crisis. Diversification of investment portfolios increased steadily while management fees fell. Ever more people joined the scheme, and the total accumulated asset wealth went through the roof.

Clearly, especially from a liberal perspective, there remains much to be criticised about compulsory saving systems. In countries that have attempted to imitate the Chilean way, pension fund markets are often rigidly regulated. Governments draft people into one particular way of providing for their old age, and prevent the emergence of possibly better ways of doing so. The discovery function of the market is thus severely disabled. Standardisation prevails where flexibility, diversity and adaptability would be required. This raises the question whether government should be involved in old-age provision at all. But the point is that mandatory saving schemes can at least be improved from within through liberalisation, while public PAYGO systems are intrinsically defective.

Chile’s reform did not only create a reliable, lucrative way to secure people’s twilight years. It also took old-age provision largely out of the political machinery, and gave workers a degree of personal autonomy and self-determination that was previously inconceivable. In this sense:  Viva el día de los trabajadores!

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Head of Health and Welfare

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.

2 thoughts on “An alternative Labour Day: Chile’s private pension system turns 28”

  1. Posted 04/05/2009 at 07:05 | Permalink

    I did not know that 1st of May is the day Chile introduced Fully Paid pension system. It is indeed the best pension system in the world. Kazakhstan has opted for the same type of FPPS, while other states gradually moving in this direction.

  2. Posted 04/05/2009 at 07:05 | Permalink

    I did not know that 1st of May is the day Chile introduced Fully Paid pension system. It is indeed the best pension system in the world. Kazakhstan has opted for the same type of FPPS, while other states gradually moving in this direction.

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