The January 10 New York Times reported that all of the candidates in Chile's presidential contest agree: "the country's much vaunted and much copied privatized pension system needs immediate repair." In other words, contrary to what we have been told by advocates of Social Security privatization, Chile's system is no model for the United States. The Century Foundation has been making that case for years. 

We have been part of a small minority of analysts who argued that Chile's system has led to serious disappointments: lower pensions than predicted and higher, not lower, public spending. (Find complete TCF resources on privatization around the world here.) We argued back in 1997 that privatization had hardly been a panacea for the government financing problems which led to the reforms in the first place: "The Chilean government's financial liabilities include large future pension obligations for retirees who participated in the old system, generous guaranteed minimum pensions (85 to 90 percent of the minimum wage), and additional pensions, like those for the military, which have not been privatized. The government has financed some of these costs through a budget surplus but has also borrowed, selling many of the new bonds to the new pension fund managers."

As we recently noted, the transition costs of shifting to a privatized system in Chile averaged 6.1 percent of GDP in the 1980s, 4.8 percent in the 1990s, and are expected to average 4.3 percent from 1999 to 2037. Those costs are far higher than originally projected, in part because the government is obligated to provide subsidies for workers failing to accumulate enough money in their accounts to earn a minimum pension.

In addition, we related how voracious commissions and other administrative costs have swallowed up large shares of personal accounts. One measure estimates roughly 28 to 33 percent of contributions made by employees retiring in 2000 went toward fees.

As Chile continues to distance itself from its privatization program, it is clear that what we should learn from these examples is to be skeptical of the false promise of a free lunch for retirees. Privatizers trumpet these programs, apparently, either because they are blinded by ideology and theory or because they are confident that the truth will be lost in translation.

For more on privatization around the world, view TCF's work here, or visit the Social Security Network for further resources.