An Evaluation of Pension Reforms

Abstract

THE CHILEAN REVOLUTION AND ITS CONQUEST OF LATIN AMERICA AND THE WORLD BANK During the last two decades, a revolution has been sweeping across Latin America with countries pushing for a radical reform of the public pension systems. In essence, countries have made three fundamental and dramatic paradigm shifts from the inherited pay-as-you-go (PAYGO) system in an effort to imitate the so-called privatization of the Chilean scheme: they have moved from PAYGO systems to funded systems, from defined benefit (DB) schemes to defined contribution (DC) schemes, and from schemes with public management of any accumulated assets at moderate administrative cost (with certain inefficiencies) to private asset management at significantly higher costs. Countries such as Argentina, Colombia, and Peru have adopted a partial variant of the Chilean model by offering participants a choice: either an individual account, privately managed DC system or a public PAYGO DB system (Mitchell and Barreto 1997). Many countries in Asia and Eastern Europe are considering adopting some of these changes, and even the United States is discussing the creation of private retirement accounts as a supplement to, or replacement for, Social Security. Many countries and reformers (e.g., the World Bank) have made the case for privatized schemes basedon an inappropriate comparison. In seeing the potential shortcomings of a public PAYGO system, they have sought to change all aspects of the system. There appears to be amixing of issues on four key points in the design of these proposed new systems.