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Wednesday, Mar 02, 2005

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Chileans labour past retirement

By Indira A.R. Lakshmanan

Based on Chile's experience, one conclusion is that the Government will have to play a bigger role in any reformed pension system than the proponents of privatisation suggest.

IRMA MOYA Benech has worked 40 years in public hospitals caring for the sick and elderly, and now that she is both, she says the state is not taking care of her. Already five years past the legal retirement age for women in Chile, Ms. Benech, 65, continues to toil as a medical technician for patients with AIDS, tuberculosis, and other infectious diseases, though her immune system is weak from radiation therapy for breast cancer. She desperately wants to retire but cannot, she says, because her private pension would be less than 30 per cent of her $1,738 monthly salary. She would no longer be able to afford quality health insurance to cover chemotherapy and prescriptions.

Her 71-year-old-husband, who has leukaemia, is still working as an accountant at the University of Santiago, because his pension would be only 20 per cent of his $2,127 monthly salary. "I think we have done our duty and should be allowed to rest after working for 40 years," says Ms. Benech, tears streaming down her face.

At a time when President George W. Bush has made overhauling Social Security a central objective of his second administration, he and other proponents of privatisation have held out Chile, the first in the world to privatise pensions in 1981, as a role model.

By transforming its system, the country of 16 million people fended off a looming pension debt owed to its ageing population and fuelled domestic capital markets, contributing to high growth rates and a halving of poverty in what has become one of the most affluent nations in Latin America. For steadily employed Chileans who consistently channel 10 per cent of their salaries into private retirement accounts, as required by law — and preferably top it up with more, tax-free contributions — pensions could reach 70 per cent of salaries, providing a comfortable standard of living in retirement, according to estimates by the pension fund managers' association.

But what supporters of Chile's model have not advertised is that for poor, seasonal, and itinerant workers, and even for a great part of the middle-class and self-employed, the private system has proved inadequate, largely because those workers are unable to contribute enough to their private accounts. More than 17 per cent of Chileans aged 65 and older keep working because their pensions are inadequate, according to a government-commissioned study.

Based on Chile's experience — and that of more than 20 countries mostly in Latin America and Eastern Europe that followed its lead by privatising part or all of their pension systems — one conclusion from a new World Bank report is that the Government will have to play a bigger role in any reformed pension system than proponents of privatisation suggest. Private accounts can be one pillar of a Social Security system, but the state will have to provide a safety net.

Over two decades, Chile's privately managed pension funds, whose combined assets total $60 billion, have yielded impressive annual returns. But recent Government and independent studies found that about half of the seven million current subscribers are not contributing for the 20 years necessary to qualify for the minimum pension: they will become burdens on the state or simply fall through the cracks.

Other apparent shortcomings of the Chilean experience, from money-management fees that critics say are too high, to a huge transition cost, offer lessons to anyone hoping to adapt the model to the United States.

Critics note that the military government that imposed the privatised system on the advice of free-market economists — and without the obstacle of political opposition — kept members of the armed forces covered by the old, taxpayer-financed system, where they remain to this day. And far from being freed of its fiscal obligation, 24 years later the state is paying a staggering 30 per cent of its annual budget toward pensions — as much as it spends on health and education combined.

"It's a fiction to say there's no cost to financing a transition," said Ricardo Solari, Minister of Labour and Social Security.

Those taxpayer dollars go to retirees still covered by the old system, to compensation bonds for employees who left the old system, and to workers whose private accounts have not accumulated enough after 20 years to generate the "minimum pension" of $150 a month, roughly two-thirds of Chile's minimum wage. Chile also pays "assistance pensions" of $50 a month to indigent elderly. But many more who are middle-class, but whose employers erred in calculating their pension deductions — such as Ms. Benech — have been forced to work past their retirement age to maintain a decent life or skimp to survive.

Willy Contreras, an investment adviser at one of the large private pension funds, attributes low pensions to low wages. "If your salary is low, there is no system that can help you retire decently."

The challenge, Mr. Solari said, "is to design a real social security system that allows people who can finance their own retirement to do so, while dealing with those who cannot."

With one-third of Chilean workers self-employed, and many more moving in and out of short-term jobs, "over half of the workforce contributes less than four months a year" to their pensions, according to an analysis by Chile's Center for National Studies of Alternative Development.

Guillermo Arthur Errazuriz, president of the association of Pension Fund Administrators, contends that "those who aren't paying in must be taken care of by the state. That's not our responsibility. We can't criticise this system by asking why I don't pay poor people who don't contribute."

For Rafael Tapia, a 49-year-old senior executive for a multinational corporation, Chile's system seems fair enough. Mr. Tapia has taken advantage of the tax break for adding extra contributions to his account and has amassed half a million dollars, about half of which is interest his money has earned, he estimated. "I'd much rather stick with this system, which gives you a prize for your own work in life," he said, sitting by his pool. "It's always a problem of personal responsibility."

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