Sarah Hagberg
INTS 4763 Paper #4

An analysis of Chile's pensions scheme in a post-Pinochet society

Chile's transition to democracy following almost two decades of military dictatorship began under the slogan of "Growth with Equity", a catchphrase synonymous with President Aylwin's government.  Before the demise of General Pinochet's military regime, the number of Chileans living in poverty reached figures as high as 44.4% for the year ending in 1987, a legacy of Pinochet's neoliberal economic policies.  These policies essentially opened Chile's economy to free market competition but, concerned with the detrimental effects of an expensive social welfare system, Pinochet attempted to condition the economic environment via wage controls and most notably the privatization of pensions commencing in 1982.  Via these measures, the government reduced fiscal burdens on itself and employers.  Whilst the motives of Pinochet's self-interested, the privatization of pensions has been hailed world over economic advisers were undoubtedly as a model of fiscal success.  This paper analyses the transition of Chile's political regime and the transfer of economic measures already in place and the problems of successfully combining the two forces.  By looking at the structure of the pension scheme fromand the transition to democracy following the end of the military regime I will argue that inception Chile emerges as a 'success'.  However, I will examine the formidable task Chile faces between balancing societal demands realized in its new democratic environment with sustained economic prosperity and the steps it must take to ensure that it can achieve growth and equality.  A problem that is common for countries with any system of public welfare concerns sustained funding of expensive social programs.  The welfare systems introduced in the first of half of the into financial burdens for many countries especially due to the increasing old age population, this century are evolving declining fertility rates and changing production factors.   In a world where firms are less labor intensive due to modernization of production practices, new demands on government resources, namely military/security concerns, consume large portions ofmoney, and active participants contributing to public schemes do not parallel the public number of back, there is a heightened need to retrench social welfare. Chile has been hailed as old-age people claiming the first country in the WesternHemisphere to introduce social security based around public provisions for the elderly, as well as health benefits (Kritzer, 1996:45).  Chile was also the first country to realize the popular 'pay-as-you-go' schemes thatfinancial reserves for welfare schemes needed to be replaced.  Thus, in 1982 Pinochet left little to no introduced the scheme that was the regime's attempt to decrease the fiscal responsibility on its own private pension resources and transfer it to the individual.  Pinochet ventured where many governments feared to tread.  The welfare state is an inherentlyconcept and, arguably, a realization of a government responsibility for its citizens (I use patriarchal the term citizens intentionally asseveral countries preclude non-citizens from welfare entitlement and place varying criteria on assistance).  Even the United States, the country closest to the liberal regime-type residents that seek espoused bymaintains old-age social security based on significant government funding (see Esping-Anderson Esping-Anderson, 1990).  That Pinochet should challenge this common consensus was an innovative move.  Given the type of1982 however, Heller, Keefer and McCubbins argue that such a move should regime in existence in Chile in was not surprising:veto players, are seemingly unconstrained by institutional checks and can thus, set "Dictators, as sole policy as they like" (Heller,and McCubbins, 1998) Apart from Pinochet's capacity as a dictator, there were Keefer severalsuccessful introduction of a private pension scheme in Chile.  Firstly, the economy factors that facilitated the suffered a severe economicin the early 1970's that resulted in high unemployment and ultimately reduced the recession number of social security funds via income tax.  Pinochet assumed control during the height of workers contributing to thisaverage wages were declining, and growth rates were actually negative (see Cortazar, economic downturn when 1997 for figures).  This, in turn,resulted in a social security deficit of twenty-five per cent of GDP. Furthermore, under the old system, workers and employers were contributing over twenty per cent of wages in taxes to social security (cite: du phenomenon that did little to encourage participation or diminish illegal labor recruitment in a climate Pont, 1996), a where real wages were declining as costs increased. Finally, Pinochet replaced the process of wage negotiation between employers and workers and centralized them via the implementation of government authorities.  This was another 'advantage' toPinochet's dominant authority, as he effectively reduced the legal channels of resistance by undermining the unions and collective bargaining (Cortazar, 1997:236-7). The characteristics of the new power of scheme, therefore, were favorable given the economic and political climate.  The system introduced a two-tier program: The first tier comprises that every employee contributes a minimum of ten per cent of earnings into a private plan.  Under thePension Funds (AFP), the government authorized 21 companies who act as agents, or Association of middlemen, to (Mitchell, 1998; du Pont, 1996, Kritzer, 1996).  Workers also contribute additional administer funds money todisability insurance and are permitted to defer additional contributions to a separate their plans to buy life and AFP account.  The AFP's aremonitored heavily by the government and in order to keep them competitive, workers are allowed to switch AFP's up to three or four times a year (Kritzer, 1996).  Upon retirement, the choice is either a lump sum orearly retirement is only permitted if substantial funding exists to facilitate a minimum annuity payment, and standard of living as determined bythe government.  The second tier comprises the governments minimum pension to cover those who do not have enough saved in their AFP plan to sustain a minimum standard of living upon retirement (Kritzer, 1996; Mitchell,Overall, the system places the responsibility of pensions on the individual (although a 1998).  government insures against the potential that private businesses will corrupt the scheme via floor still exists) and restrictions on the AFP's ranging from stringent requirements in order to register as an AFP to monitoring the competitive environment.  In terms of the political changes that occurred in Chile, once again Pinochet's self-interested motives emerge.  In much the same way heattempted to (and successfully) reduce the financial burden of social security on the government, the influence of the regimes supporters in the political environment when it he acted to safeguard became obviousThe regime had slowly reintroduced party based politics during the 1980's that it was unsustainable.  after outlawing them completely in 1973 butwithin the legal framework of the constitution placed limitations upon any move towards democracy. Valenzuela Scully support the hypothesis that extreme ideological divide no longer exists and in Chile of the past twenty years.  They suggest that the return to democracy occurred following the military government via a general combination of center-leftparties that had a common objective to remove Pinochet but also recognize that Pinochet himself successfully manipulated the constitution to guarantee that institutional mechanisms for the government elite were(Valenzuela and Scully, 1997).  Nevertheless, the constitutional requirement to hold a national maintained plebiscite (referendum) in1988 was effectively a vote of confidence for or against Pinochet and the opposition groups facilitated enough support to remove him from power in the national election of 1989. The problems confronting Chile, however, may begin to bubble near the surface of its stability.  On one side, the economic legacy of Pinochet has been the successful of government and employer responsibility for social security within the parameters of reduction governmentpolitical changes have reintroduced party politics within a restricted environment that regulation.  The essentially generates 'a system of fairly balanced elite competition' (Munck and Leff, 1997: 347).   The paradox of such change is that it has been formulated to introduce change whilst safeguarding against the potential for extremes, either political orChile should prepare for the possibility that economically, the success of the private pensions economically.  can only be sustained if more steps are taken to ensure that workers do not 'opt-out' and that the high administrative costs of the AFP's do not become a grain of contention to those contributing.  Politically, Chilean party politics are in danger ofgiven the progression further and further away from the old regime.  The criticisms of the fragmentation pension scheme with the high administrative costs associated with the AFP agents.  For example, as much a lie primarily three per cent of a worker's contribution may go towards maintaining the 'middle man' or AFP agent responsible for administering an individualspension plan.  Furthermore, the actual rate of return on contributions made over the lifetime of a fund may be as low as 0.3 per cent once commissions have been factored in to the equation.  Although effectively underlining a lack confidence in the Chilean pension scheme Stephen Kay does present a harsh mathematical reality of that the commission paid on an AFP fund reduces the rate of return on average from 12.7 per cent to 7.4 per cent (Kay, 1997 citing World Bank figures).  The scheme also suffers from a high rate of evasion, ironically one factor that privatizationreduce.  Workers may not declare ten per cent of their actual earnings but instead may only aimed to contribute ten per cent of a lesser sum. 

Politically, the new government of President Aylwin that came to power in 1990 met the challenge of increasing its role in society following Pinochet's attempts at minimal government.  In order to do more than pay lip service to his promise of 'Growth with Equity', Aylwin raised taxes to pay for new social programs designed to reduce the number of people living in poverty.  Despite the apparent success of the pension scheme, it is important to view it in context with the rampant neglect of other social programs such as health care, education, child-care, and job training.  The Aylwin government introduced progressive taxes and raised VAT (value added tax) in order to raise enough money to rebuild such programs (Weyland, 1997).  The number of Chileans living in poverty declined by 800, 000 by 1992 and the current government under President Frei is continuing to develop social programs with a particular emphasis on education.  Are the fears that Chile faces an uncertain future justifiable? Clearly, the governments under Aylwin and Frei are determined to thrust Chile into the global market as a serious contender.  The declining number of people living in poverty, the progressive taxation schemes, the continued success of the private pension scheme and the rebirth of party politics all suggest that Chile may be strong enough to overcome the challenges it has faced in its transitionary period.  Unemployment figures are now at around 6 per cent, (compare this with Germany's 12 per cent). The GDP growth rate is currently around 7 per cent, a far cry from the negative figures experienced under the Pinochet regime.  It is ironic that the restrictive economic and political measures introduced have actually maintained a stable society albeit Pinochet's original intentions were not to promote democracy but to guarantee the influence of the elite.  The threat being posed emerges as Chile continues to compete in the global arena and, as income and wages increase, there will be increased demand for access to international markets.  Furthermore, the current lack of distinct party ideologies may evolve into greater numbers of fragmented groups as niches develop in society.  But these are problems common to developed democracies and it seems premature to underestimate the potential success of Chile before it has had time to reap the rewards and progress made so far.

References:
1. Boylan, D. (1998) "Central Bank Reform in Chile's Transition from Authoritarian Rule," _Comparative Politics_, Vol.30, No.4, pp.443-462
2. Drake, P. W., and McCubbins, M. D., (1998) _The Origins of Liberty_(Princeton: Princeton University Press)
3. Du Pont, P. (1996) "Privatizing social security: it can work: the Chile experience," _Vital Speeches_, Vol.62, No.20, p637(3)
4. Edwards, S., and Lustig, N. C., (1997) _Labor Markets in Latin America_ (Washington D.C.; Brookings Institution Press)
5. Esping-Anderson, G., (1990) _Three Worlds of Welfare Capitalism_, (Princeton; Princeton University Press)
6. Gruber, J. (1997) "The Incidence of Payroll Taxation: Evidence from Chile," _Journal of Labor Economics_, Vol.15, No.3, pp.72-101
7. Kay, S. (1997) "The Chile con: Privatizing social security in South America," _The American Prospect_, No.33, pp48-51
8. Kritzer, B. (1996) "Privatizing Social Security: The Chilean Experience," _Social Security Bulletin_, Vol.59, No.3, p45(11)
9. Mitchell, O. S., (1998) "Social Security Reform in Latin America," _Federal Reserve Bank of St.. Louis Review_, Vol.80, No.2, pp15-18
10. Munck, G. L., & Leff, C. S., (1997) "Modes of Transition and Democratization; South America and Eastern Europe in Comparative Perspective," _Comparative Politics_, Vol.29, No.3, pp.343-362

11. Valenzuela, J. S., & Scully, T. R., (1997) "Electoral Choices and the Party System in Chile: Continuities and Changes at the Recovery of Democracy," _Comparative Politics_, Vol.29, No.4, pp.511-527
12. Weyland, K. (1997) "Growth with Equity" in Chile's New Democracy?', _Latin America Research Review_, Vol.32, No.1, pp.37-67

Internet sources
1. Country Factbook, USA, Chile, Germany, (http://www.odct.gov/cia/publications/factbooks/chile.html)