Chile's pensions system: a model for the world

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.

Will this work? My worry is that two-thirds of all pensioners will now receive some government pension support – which must reduce the incentive to save. Public benefits will comprise half the retirement income of the poorest households. The new survivors' and disability insurance will impose a new financial burden on families, which will eat into their savings. The public benefits will cost a noticeable fraction of the government budget – and paying for them will impose an effective tax, and quite a hefty one, on private pensions.

Chile's pension system was a commonsense breakthrough that many other countries have copied. As a pioneering system, it is not surprising that it threw up some problems to solve. But the solutions, I believe, should have been more in the direction of extending market principles rather than extending government interventions. It will be interesting to see what happens – and it will provide a lesson for us all.

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