14ymedio, Carlos Alberto Montaner, Santiago de Chile, 28 August 2016 – I have arrived in the country in the middle of a cacophony, fortunately peaceful and civilized. It is Sunday, and tens of thousands of people are protesting against the AFPs.
They complain about the “Pension Fund Administrators,” a retirement system founded on individual capital accounts, more or less like the 401(k) and the American IRA. One contributes a part of his salary to an account that belongs to him, and thus, after a certain age, he can dispose of his resources or leave them to his heirs when he dies. The money is his. It does not come from the benevolence of other workers.
The AFPs are private financial companies that invest the money that the workers entrust to them in reasonably safe instruments, so that the risks are minimal. They charge about 1.5% to manage these resources. There are a few so that competition exists in price and services.
Since the economist Jose Pinera created the AFPs at the beginning of the 1980’s, the average annual return has been 8.4%. The government merely establishes strict rules and carefully monitors the financial entities. So far, in 35 years, there has been no collapse or scandal.
Today the mass of savings generated by the AFPs is approximately 167 billion dollars. That is very convenient for the stability of the country. A third of these funds comes from workers’ direct deposits. Two-thirds, the rest, are interest generated by these deposits. Without doubt, it has been a great business for the prospective retirees.
Until the creation of the AFPs, the distributed funds model prevailed in Chile, as in almost the whole world. The worker’s investment went to a general fund that was used to pay the pensions of retirees or finance the fixed expenses of the growing public workforce. In many countries, often, the money of elderly retired people ends up in the pockets of devious politicians and officials or is dedicated to other purposes.
As happens in Europe and the United States, the relationship between the number of workers and retirees is more problematic with each passing year. Fewer people are born, especially in developed or developing countries, and they live many more years.
Hence the retirement systems based on the distribution model are in crisis or heading towards it. They tank just as “Ponzi Schemes” always end badly; named for Charles Ponzi, a creative scammer who paid good dividends to investors … as long as there were new investors to meet the commitments.
When the capitalization system began, there were seven workers in Chile for every retiree. Today there are fewer than five. By mid-21st Century there will be two. The individual capitalization system, rather than a maniacal predilection of liberals dictated by ideological convictions, is the only possible model of retirement in the medium term. It is much safer for a worker to have control of his savings than to leave that sensitive task to intergenerational solidarity or the decisions of politicians.
What has happened in Chile? Why are they complaining? Half of Chilean workers, especially women, do not regularly save, or they have not done so in a long time, and since they have not saved enough, the pensions they receive, consequently, are small, and they are not enough for them to survive. That is why they protest and want the state to assume responsibility for their old age and give them a “dignified” pension, without stopping to think that the supposed right that they are angrily soliciting consists of an obligation for others: those who work must give them part of their wealth.
At the same time, students passionately demand free university studies, while many Chileans demand the “decent” living promised by politicians in the electoral fracas, to which are added modern and effective medical services, also “free,” proper to a middle class country like Chile currently is. It is not well understood why, by the same reasoning, they do not seek free food, water, clothes, electricity, and telephones, all items of absolute necessity.
It is a shame. A few years ago it appeared that Chile, after a 20th Century of populism from the right and left, with a population dominated by an incompetent and greedy government that had bogged down in underdevelopment and poverty, finally had discovered the correct road of individual responsibility, the market, the opening up and the empowerment of civil society as a great entrepreneurial player and the only wealth creator.
There was enthusiastic talk of the “Chilean model” as the Latin American road to reaching the First World. With 23,500 dollars per capita GDP (measured in purchasing power), Chile has put itself at the head of Latin America and boasts a low crime rate, honest administration and respect for institutions. It would not take long to reach that development threshold that economists set at about 28 to 30 thousand dollars per capita GDP.
It may never happen. A recent survey shows the growing irresponsibility of many Chileans convinced that society is obliged to transfer to them the resources that they demand from the state, which means from other Chileans.
It is a pity. A substantial part of the population has returned to populist ways typified by claiming rights and evading responsibilities. If Chile again sinks into the populist quagmire, we Latin Americans all will lose a lot. Prosperity and, who knows, even liberty. We will be left without a model, aimless, and in some sense, without a destination.
Translated by Mary Lou Keel