Pinochet’s Chile: model for US pension reform?

Herman Cain, the former pizza executive surging in polls for the Republican presidential nomination, wants to replace Social Security with what he called the “Chilean model” of private pension funds. ….

Chile’s system, introduced under the 1973-1990 dictatorship of Augusto Pinochet, diverted workers’ contributions into privately run funds, slashing government revenue over the next few decades in exchange for a reduction in state pension payments 30 years down the line.

The military regime prepared for the new system in 1981 by cutting spending, building up a fiscal surplus and clamping down on all forms of dissent. ….

“For the U.S. right now it would be impossible,” said Alejandro Micco, who was the chief economist at Chile’s Finance Ministry until last year. To change to a private pension system “you either need to have a very big fiscal surplus to pay retirees without income from workers, or go into debt.” ….

José Piñera, brother of Chile’s current President Sebastián Piñera, designed the pension system when he was Pinochet’s labor minister. He now travels around the world touting its benefits …. He declined to be interviewed for this article, citing engagements in Europe.

Twenty-seven years after starting the system, … Chile’s government felt the need to reform it. In 2008, they started a minimum pension for people who had made contributions for 20 years and raised payments for people who had no pension provisions.

Sebastian Boyd, “Cain’s Social Security Model Risks Miring U.S. in Deeper Debt“, Bloomberg Businessweek, 17 October 2011.

The information in the final paragraph above is incomplete and misleading. Pinochet’s government provided – from 1975 – a small assistance pension targeted, supposedly, to the poorest 15% of the elderly population. In practice, much of this assistance went to those who were not poor, and many of the poor died waiting for a pension. The 1981 reform of José Piñera added a minimum pension for those with a contribution record of at least 240 months. This minimum pension was paid by taxpayers, was very costly, and went predominately to contributors (mostly housewives) in the upper half of the household income distribution. The 2008 reform replaces the poorly-targeted assistance pension and the regressive minimum pension with a single, flat “Solidarity Pension” for those in the lowest 60% of the income distribution. The Solidarity Pension functions almost as a universal minimum pension because it is recovered from other pension income.

Thanks to Andrew Biggs for the pointer.

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