The Private Chilean Pension System- a Model Worthy Of Imitation?
by Paloma González Bosque
Two factors are responsible for the Chilean Pension System being considered as a model:
In this paper these two perspectives will be analysed in order to discuss what is the so called Chilean Model is and it´s origins, with a view to explaining why it has been considered a model system.
All this provides the instruments to analyse whether the aims have been fulfilled after 17 years in Chile, whether the model is the solution for other Pension Systems in crises and whether the conditions for the establishment of the model in other countries are favourable.
1. The crises of the old Pension System
During the eighties takes place in Latin America a double crises originated by, first: "the heavy debt burden and the halting of credit from industrialised countries, and (second:) a deep recession induced by the implementation of adjustment and economic restructuring policies" (Mesa-Lago, Carmelo, 1997, page 497). From this point of view the Latin American states were unable to finance the old Social Welfare Systems, i.e. the Pension Systems, and this Social Welfare System wasn’t able to answer to the Social Debt originated by the new Economical Model either.
In other words, the old System shows neither capacity to fulfil its original aims nor to react to the new economical conjuncture. Facing this Chile is one of the first countries in Latin America to react with a Pension System. This new Pension System was successful from a certain perspective. This perspective will be analysed in the next point.
1.1. The old Pension Systems problems
Although the old Systems structural problems can be generalised for Latin America, it cannot be forgotten that the different problems have different weight in the different countries. Another point not to forget is that although all the Pension Systems are sustained by the Development-leader-state, they were characterised by particular traditions and participation of determined interest groups.
-Universality isn’t fulfilled. Informality and rurality weren’t reached and free-lance workers either.
-Generational solidarity is destroyed by the systems dispersion.
-Efficiency and efficacy don’t exist in a System with corporativism characteristics.
-Management unity doesn’t exist when there is more than a kind of rent, just some of them obligatory and many different funds (remember the chilean case, and in Bolivia there are 35,000 actives and 35 Complementary Funds Administrators).
-Resources Economy. The old Pension System creates natural affiliation monopolies according to economical sectors because of the ruling of the Labour Thesis.
-Disfunctionality of the Pension System as concerns the national economy. Capital Markets are strengthened by inversions made by AFPs, which catch resources in the long-term through Share Exchange. Resource transference becomes "intermediación financiera" (financial intervention). The long-term saving is increased and the inversion is ordered. The inversion implies economical growth and new work places. This role wasn’t supposed to be played by the old system.
1.2. Variables: the different dimensions of the chilean problematic
For a comparison between the chilean system and the rest of the Latin American countries is necessary to determine the variables that defined the situation of the chilean Pension System in that moment. These variables made possible the crystallisation of the reform. This variable proposition belongs to Huáscar Cajías article about the bolivian case.
Economical dimension:
-Population: not being a great market, the chilean one isn’t the smallest of Latin America. The population assures a number of members within the Pension System, so that the new Pension System becomes viable.
-Employment Structure: industry and formal employment in Chile in the early eighties comprehended more than two thirds of the economic active population. This is not common in most of the countries of the continent.
-Income Level: the chilean income level is one of the highest of the continent and during the strong crises phase in the early eighties it doesn’t become the lowest one.
-Economically Active Population (EAP): the chilean EAP is high in comparison with the one of the rest of the Latin American countries.
-Geographical Concentration: the chilean population is concentrated in the Central Valley.
Political dimension:
-Chilean State: there are institutional structures that supported a certain "citizen culture" since the middle of the XIX century.
-Chilean Government: there was a dictatorship. It was necessary neither to dialog, nor to conciliate, nor to respect the constitution. The measures that prejudiced the workers interests had no real impediment. The obstacle represented by a democratic interest game is not such a thing other countries can or want to eliminate.
Population dimension:
-Culture: there is homogeneity. Individualism an money worth are accepted values and intrinsic. i. e., the reform is based on values that became consensual in the chilean society. This is important to consider if one thinks about culturally much more heterogeneous societies than the chilean one, like the most of the Latin American societies. Maybe the exception of Argentina has to be made.
Reform-by-itself dimension:
-It is necessary to remember that the Reform is a part of a deep adjust of the economy.
-It keeps the integrity of the Loan System impacting this way all the regimes. i.e. the Pension System becomes linked through the Reform to all the components of the Social Politics.
Three aspects of the model are appropriate to comparison:
-It is answered to only one Pension logic, one economical logic and within only one action plan:
-The logic is the logic of the efficiency, the logic of the economy and the sustainability of a Social Welfare System that has to consider the limited available resources.
-Finally it is worthwhile to remember what Cajías said: "Chile teaches that the success of a Market Liberalisation policy has as a fundamental protagonist a state and a strongly instituted government".
According to this, it could be concluded that it is necessary to be consequent in what it is applied and that the pathway of the democratic decision has been always shown in Latin America as the open possibility for the prebendalism and the advantage taking by interest groups.
2. The New Development Model
The New Development Model of Latin America is one more of the coordinates that define the Reform of the Social Welfare System in the continent. This concept (New Development Model) can be defined as a bigger and better insertion of these countries economies in the International Market. The way to this goal passes through the "Structural Adjustment".
The Structural Adjustment is supported basically by two agreements: the Financial Stabilisation Program from the International Monetary Fund (IMF) (stand by) and the Structural Reform Program from the World Bank (WB). It is important to emphasise the fact that IMF and WB have a concept for the Social Welfare System Reform.
Aims and Instruments defined by the WB and IMF. It helps to understand the logic of the Pension System Reform and this way what is a successful Reform in this case.
2.1. Concept of success
From the article by Raúl Guerrero, París 93 in Cahier des Ameriques Latines n° 15 page 61:
"Les Fonds due pensions se sont révélé d´efficaces stimulants du capitalisme national. Au milieu de 1991, ils comptaient près de quatre millions d´adhérents, et les fonds accumulés représentaient plus de 30% dun Produit interne brut du pays et plus de 50% des placements du système financier. Le potefeuille des Fonds se diversifie : 41% en valeurs publiques, 17% en actions d´enterprises, 15% en titres hypothécaires. Actuellement, les Fonds sont autorisés à investir à l´étranger en titres garantis par l´État et les banques internationales."
From this perspective the success of the model corresponds to the agreements with MF and WB. This successful functionality is taken as an experience to be proposed by these institutions to the rest of the Pension Systems in Latin America: It is talked about three pillars that sustain a successful Pension System:
-Assistance (minimal pension)
-Obligatory private saving (AFPs)
-Voluntary saving, which has to play an encouraging role within the system. For instance offering fiscal advantages would stimulate the saving.
2.2. Critics to the model
The critics to the Chilean Model, that is, to the Pension System Reform was a subject for a paper in this seminar. Thus this point deals with the question of what has concretely meant the consideration of this model as a model to imitate for the countries that have initiated their Pension System Reform:
-Unifying the norm doesn’t imply necessarily to change the Pension System. This change implies costs that could be very high for the state, because the latter is responsible for the costs of liquidation of the old system, in front of their users and for those who cannot obtain a pension from the new system.
-The necessity of consider the limitation of the resources cannot be put before the people needs in countries with the Latin American poverty degrees. One has to be careful about a "economicista" view of the social problem of an adequate Pension System.
-The Pension System in Chile today is far distant from the universal coverage. The informal and free-lance workers don’t mean a significant quantity of the new system users (2,4 % of the affiliates to the chilean system).
-The AFPs are new institutions, without a past. That means first that it is not possible to learn from the experience and second that it is necessary a negotiation in order to obtain a social support. The latter could be difficult if one thinks about the social costs of the model, and the reaction capacity of interest groups, which are favoured by the old system.
-An appropriated controlling organism is responsible for many of the advantages shown until now by the Pension System. i.e. the free competence of these private organisms assures neither their positive action for the affiliates or the country economy nor the orientation or security of their financial activities.
-The market size is determining to avoid oligopolies.
-One of the main critics to the Reform is that it is a question of, again, the old practice of subsidising certain sectors of the economy. Solution: democracy and transparency of the decision process and recognising of the implication for the citizens life quality.
-According to the International Labour Office (ILO) the high rentability of the AFPs System is in the long-term not sustainable. In fact the system showed rentabilities ascending to –0,5 %, which was the basis for increasing the competence of the controlling organism.
3. Cases:
In no one of the countries where the Pension System was chosen to be privatised have been reached high quantities of users, like in Chile. The coverage has not been no increased either.
In Colombia and Peru "the presidents failed to introduce a substitutive private pension à la Chile and accepted parallel or selective systems." ( Mesa-Lago, page 515) and "The reformed systems in both countries lack mechanisms to help vulnerable groups affected by economic reform."
In Colombia the state has shown sympathy for the old system and the people distrust the new one. In the Peruvian case the costs have been very high and this stops the flow towards the new system. The old system used to limit the amount of the pension, but the new one has eliminated this limit. So people who could obtain a high pension for they can pay for it, are stimulated to come into the new system.
In the argentinian case "President Menem succeeded in eliminating privileges and reforming the pension system, based on his leadership of the peronist party, success in structural adjustment and economic recovery, and extraordinary powers granted to him. Yet the new argentinian system is mixed and congressional approval was gained at the price of significant compromises in the bill and concessions to interest groups." ( Mesa- Lago, page 515 ). According to Ruiz-Tagle in Argentina they learned from the chilean mistakes through public discussion. So Argentina has a reformed solidary public Pension System and another one of individual capitalisation. Public enterprises, like "Banco Nacional de Argentina" participate in the Financial Market. This is not allowed until now in Chile. The users amount remains low: 2 millions in 1996.
Literature
Cajías, Huascar: La reforma del sistema boliviano de seguridad social, una descripción, una crítica y una propuesta. In: Aportes en torno a la reforma de pensiones, Comisión de Política Social de La H. Cámara de Diputados, La Paz, Junio 1996
Ensignia, Jaime/ Nolte, Detlef 1991: Modellfall Chile ? Ein Jahr nach dem demokratischen Neuanfang, Hamburg
Friedmann, Reinhard 1990: Chile unter Pinochet. Das autoritäre Experiment, Freiburg
Gerrero, Raúl: Les politiques sociales au Chili, in: Cahiers des Amérique Latines, Paris 1993 n° 15, pp 51-68
Mesa- Lago, Carmelo: Social Welfare Reform in the Context of Economic- Political Liberalization: Latin American Cases. In: World Development, Vol. 25, n° 4- 1997, 497- 517
Nohlen, Dieter/ Nolte, Detlef 1995: Chile, in : Nohlen, Dieter/ Nuscheler, Franz (Hrsg.): Handbuch der Dritten Welt, Bd. 2; Südamerika, 277- 338
Ruiz- Tagle, Jaime: La experiencia de la reforma del sistema de pensiones- una evaluación provisoria, aportes en torno a la reforma de pensiones, Comisión de Política Social de la H. Cámara de Diputados, La Paz, Junio 1996