It wouldn't be an election year in the US if the controversial topic of Social Security didn't come up.
In March, the trustees of US Social Security said in their annual report that, although the forecast for the retirement program is slightly better than previous estimations, immediate action is necessary to fix its underlying weaknesses. The program is expected to go bankrupt in 2041.
Chile's private pension system is looked at by some as a model of how the US should address the long-term solvency of Social Security, though detractors say the South American country's program still has significant flaws.
In 1981, Chile's state-sponsored pension plan faced bankruptcy. A group of US-trained, conservative economists convinced then-dictator Gen. Augusto Pinochet to privatize the system.
Chile abolished its mandatory, state-sponsored pension plan and created what amounts to a giant 401(k) plan.
The system requires 13 percent of a worker's wage to be automatically deducted and sent to one of seven independently managed mutual-fund companies selected by the worker, with a small part of the contribution going towards disability insurance. Neither employers nor the government contribute to the individual accounts. The contributions are tax-deferred and remain under the workers' control if they change jobs.
The system has proven successful, according to Luis Larraín, a member of the board of directors of Habitat, Chile's second-largest pension fund. "There has not been a bankruptcy," he says. "Nobody has stolen the money from the workers. That was the typical argument against private administration."
The returns for Chile's program have exceeded the Chilean stock market since 1981, and far outpace the previous system. The funds' investments have grown an average of 10.7 percent over the past 21 years. This has allowed retirees to receive pensions amounting to 78 percent of their mean income over the previous 10 years, according to a 1995 academic study.
Guillermo Arthur, president of the association of Chile's pension mutual funds, says the US should follow Chile's lead. "It would be a big advance," he says.
But critics say the good statistics are misleading because people hope to retire with an income close to their earnings during the final few years of employment.
Also, the system still requires federal subsidies.
"Without doubt, the Chilean government has created a very sick child," says Jorge Millan, pension specialist with Chile's largest trade union federation. "If we don't operate, the child will die."
Mr. Millan would like to see the return to a system in which employers are obligated to make matching contributions to their employees' plans.
Former high school teacher Olga Seguel's pension amounts to less than half her salary when she retired. Ms. Seguel has friends who, in 1981, opted to remain in the traditional teacher retirement fund. They are getting pensions close to their final salary, she says. Under the old system, employers had to match the teachers' monthly contribution, thus increasing the pension. Anyone becoming a teacher after 1981 had to join the privatized system.
Authorities realized that, given Chile's poverty rate of 21 percent, some workers would never be able to save much toward retirement. So the government guarantees a minimum pension to anyone who has worked as a regular employee for 20 years.
The government subsidizes the difference between what workers receive from their mutual funds and the guaranteed minimum. That minimum pension, although indexed for inflation, is now $110 per month, compared to a minimum wage of $156.
Juan Gumucio, a law professor at the Bolivarian University, says that by 2010 as many as 60 percent of retirees will only qualify for the minimum pension. Mr. Larraín disputes that figure, saying minimum pensions will account for 15 to 18 percent of the total.
Even Larraín admits, however, that the system has another major problem. Forty-two percent of the workforce isn't covered by any pension system, according to government statistics. These are mostly independent contractors and workers in the informal economy. They can make voluntary contributions to the system, but almost none do because their incomes are so low.
Larraín says the government should create tax incentives to encourage the participation of this sector.