Chile's system gives people a choice in how to save and has had great success
Roberto Candia / AP / File
I'm at the Mont Pelerin Society meeting in Buenos Aires, where I have been learning about the issues facing the future of freedom in South America. One interesting case is that of Chile, whose military government of the 1980s, perhaps surprisingly, introduced a series of free-market liberal reforms. One of these was to change Chile's hopeless chain-letter pension system – that is, one like ours – into a system based on personal savings accounts.
Overall, the system has been a fantastic success. It gave people choice in how they saved, and incentives to do so. Personal savings in Chile are up from just a few hundred million dollars to tens of trillions of dollars today.
But no system is perfect. Self-employed people were not required to join the system, so many such people saved nothing or little. Young workers often did not bother to contribute, reckoning that retirement was a long way off. Low-paid, temporary workers had patchy saving records. The government guaranteed a minimum pension for those who contributed long-term – which, like the pension credit in the UK, gave many workers no incentive to save much at all. Some retired people drew down their pension benefits too rapidly, and ran out of money.
In 2008, Chile introduced a number of reforms to try to get round these problems. There were new supplements for people with little or nothing saved in their accounts. Wealthier people, and some self-employed persons, are now obliged to participate. Younger workers were given subsidy incentives to join. New rules were introduced to make sure that pensioners did not exhaust their accounts before they died. And there were new requirements on people to buy survivors' and disability insurance.