Banker-bashing, hedge-fund bashing, speculator-bashing: one of the legacies of the
financial crisis will surely be a hugely negative perception of financial markets. These are now widely perceived as strongholds of short-termism, irrationality and self-indulgence, inherently unstable and volatility-prone. A casualty might well be political reforms that look to a greater role for markets, whether this is in terms of the
pension system, the
NHS or the
social care system. This is a great pity. As the case of Chile’s pension scheme shows, the mechanism by which something is funded is important and competition has an important part to play. One of the world’s purest examples of a savings-based pension system,
Chile ’s scheme shows that these systems can weather a major crisis remarkably well.
While many laud Chile’s pension system, much less is heard about how the pension funds are taking huge percentages of the money from the pension contributers, making the pension fund company executives rich, while preventing Chile’s contributers from saving enough money to actually retire on.
In other words, the bankers are getting rich, the rest are getting poorer.
“…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” http://www.nytimes.com/2006/01/10/world/americas/10iht-chile.html
I have to say, I wouldn’t be happy if the government was mandating me investing my money in an account that gets charged 25% in fees, commissions and insurance.
Chile has also experienced problems with low rates of contributions, esp for the poor, women and self employed. Self employed Chileans are going to me mandated to join, phased in over a period of time.
One of the problems, of course, is the young, some of whom believe that they will stay young forever, and tend not to worry about something so far away as retirement. This is a problem in almost every country.
I was thinking that my own country (Canada), should encourage young adults and even teenagers to contribute by matching contributions between the ages of, say, 16 and 25, or up to age 25, to a maximum amount of money, to be determined. The money would be unavailable except in dire emergency. Just $5000 put away for a long enough time can build to a considerable amount of money if invested well. And most teenagers have one thing that no amount of money can buy… more time. The government should be able to make this money back by saving money from pensions in the future, and taxes on the money when it is eventually spent.
I think having more elderly who have their own funded pensions can only be a good thing, for governments and society at large. But we have to remember that there are always unintended consequences to any system that we create, and we need to acknowledge those consequences, and any problems or downsides so we can make informed decisions.