Chile Future
Elections in foreign countries have a way of capturing our imagination for a few days, reminding us briefly that there’s a big world out there, prompting some high-minded editorials and perhaps a dinner conversation or two, then fading from view.
This week’s presidential run-off in Chile promises to be one of those events. The vote made history because the winner, Michelle Bachelet, is the first woman ever to lead Chile — and only the second woman ever elected to head a Latin American nation (the first, for you trivia buffs, was Janet Rosenberg Jagan in Guyana in 1997). Bachelet’s personal story is an appealing one, as a former political prisoner and a single mother leading a socially conservative Latin nation. Foreign policy wonks are excited about her because she’s a socialist, part of the leftward trend sweeping South America, and yet she’s reassuringly close to the market-friendly European version rather than the abrasive Hugo Chavez model. The way things look, we could be talking about her for days before we move on.
But that would be a pity. We should be keeping our eyes on Bachelet for the long haul, because she’s just landed herself in the middle of a major crisis that’s going to hit us next, and how she copes with it should teach us some lessons. Simply put, her country’s social security system is collapsing.
Bachelet’s problem is going to be our problem because Chile pioneered the changeover that’s all the rage these days among economists, business leaders and Republican wonks in our country: the switch from traditional pension funds, which pay a defined monthly benefit, to individual investment accounts that reward your market savvy. Chile was actually the first nation in the hemisphere to enact a national pension on the old model, back in 1925. It adopted the new system in 1981, during the conservative dictatorship of General Augusto Pinochet, who was deeply influenced by the free-market theories of Milton Friedman. Chilean leaders have been touting its success for years. President Bush and his advisers reportedly look to Chile as the model of an efficiently privatized pension system they’d like to build here.
Except that it doesn’t work. During the past few years, as workers who joined the system have moved toward retirement, reports have been pouring out of Chile that show a pension system in meltdown. The crisis was one of the main issues in this month’s presidential campaign. Even Bachelet’s conservative opponent, Sebastián Piñera — the younger brother of the man who designed the system — admitted that it’s in crisis. Fixing it will be the number one item on Bachelet’s agenda.
It won’t be easy. It turns out that fewer than half the participants in the system have made enough payments over the years to qualify for a monthly check. Those who are collecting checks find they’re getting barely 60% of the income received by the lucky few who held onto their old-fashioned pensions. The size of the benefit depends, of course, on smart (or lucky) investing over the years, but there is a guaranteed monthly minimum — equal to about one-third of the minimum wage. Things are so bad that the government’s last-resort pension fund, which it set up to help the most unfortunate retirees — but never thought to fund adequately — is now eating up nearly a quarter of the national budget. Just about the only winner in this sorry mess is the business community. Under the current system, Chilean businesses are relieved of their former responsibility to pay a share of their employees’ retirement. The difference goes into their pockets. Not surprisingly, they’ve been making out like bandits.
That’s the road down which President Bush would have us travel, through his proposed “reform” of Social Security. It’s modeled on the same principles as the Chilean system. There’s no reason to think it would work any better. Fortunately, the president hasn’t made much headway yet in the face of determined opposition in Congress and the public. But Bush is nothing if not determined, and he’s got three more years on the job.
In a way, part of his job is being done for him already by the private sector. American companies, whose pension plans used to be a primary guarantor of Americans’ retirement security, are leaving the field in a stampede. Over the past 20 years, the percentage of the American work force covered by traditional pension plans has dropped from more than 35% to less than 20%. In 2004 alone, 71 of the nation’s top 1,000 companies froze or scrapped their pension plans, up from 45 in 2003, according to U.S. News & World Report. And the pace is accelerating. Before 2003, most companies abandoning their pensions were either small businesses squeezed by rising costs or troubled industries, like airlines, facing bankruptcy. Now the pack is led by healthy, profitable firms that simply don’t want to pay anymore. This month alone, IBM, Verizon and Alcoa backed out.
Companies say they can no longer afford to be responsible for the retirees’ plight if they hope to compete in today’s economy and maintain their stock prices. Not coincidentally, Forbes magazine reported last September that the number of billionaires in America had risen in 2005 to 346, up from 228 three years earlier (and just 79 back in 1996, “before the stock market really took off”). Forbes estimated the combined net worth of the nation’s 400 wealthiest individuals last year at $1.3 trillion. That’s equivalent to about one-eighth of the national debt.
What happens to retirees when their companies bail out on them? Some find themselves suddenly reduced to penury, their incomes suddenly cut in half or worse. Some give up dreams of retiring and keep working into their 70s.
As for those employees who are still on the job, not to worry: Most are being switched into individual investment plans such as the 401(k), which the wise men in Washington hail as the model of individual responsibility in an “ownership society.”
Yes, that would be the Chilean plan.
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