by José Piñera (International Center for
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A specter is haunting the world. It is the specter of bankrupt
government-run pension systems.
The pay-as-you-go system that reigned supreme through most
of the 20th century has a fundamental flaw: it destroys, at
the individual level, the link between contributions and benefits-in
other words, between effort and reward. Whenever that happens
on a massive scale and for a long period of time, the final
result is disaster.
Two factors external to the system aggravate the consequences
of that flaw: the global demographic trend toward decreasing
fertility rates and medical advances that are lengthening
life. As a result, fewer workers have to support more and
more retirees. Since increasing payroll taxes generates unemployment,
sooner or later promised benefits have to be reduced, a telltale
sign of a bankrupt system. Whether benefits are reduced through
inflation, as in most developing countries, or through legislation,
the result is the same: anguish about old age is created,
paradoxically, by the inherent insecurity of an unfunded "social
In Chile, the Pension Reform of November 4, 1980 introduced
a revolutionary innovation. The Reform gave every worker the
choice of opting out fully from the government-run pension
system and instead putting the former payroll tax (10% of
wages) in a privately managed personal retirement account
(PRA). Since 95 percent of the workers chose the PRA system,
the end result was a "privatization from below"
of Chile's social security system.
After 26 years, this comprehensive Reform has changed dramatically
Chile's economy and society. Six million workers (95% of the
labor force) have a PRA and, unless they are very poor, they
will not depend at all on the government for their retirement.
The PRAs annual average rate of return for the past 26 years
has been around 10% above inflation. Retirement benefits in
the PRA system already are 50 to 100 percent higher-depending
on whether they are old-age, disability, or survivors' retirement
benefits-than they were in the pay-as-you-go system. The resources
accumulated in the workers PRAs and the life annuity reserves
of the insurance companies amount to $93 billion, or around
80% of Chile's GDP. By increasing savings and improving the
functioning of both the capital and the labor markets, this
Reform has been the single most important structural change
that has contributed to the doubling of the growth rate of
the economy once the reform matured (in the 1985-1997 period
the historic annual growth rate of the economy went from 3%
How It Works
Under Chile's new pension system, what determines a worker's
retirement benefit is the amount of money he accumulates in
his PRA during his working years. Neither the worker nor the
employer pays a payroll tax. Nor does the worker collect a
government-funded benefit (unless he is eligible for the minimum
Instead, 10 percent of his wage coming from the previous
payroll tax is deposited, tax free, by his employer each month
in his own PRA.(1) The 10 percent rate was calculated on the
assumption of a 4 percent average real return on a PRA during
a whole working life, so that the typical worker would have
sufficient money in his account to fund a retirement benefit
equal to approximately 70 percent of his final salary. A worker
may contribute up to an additional 10 percent of his wage
each month also deductible from taxable income, as a form
of voluntary savings. The return on the PRA is tax-free. Upon
retirement, when funds are withdrawn, taxes are paid according
to the income tax bracket at that moment.
A worker may choose any one of the private pension fund companies
(called Administradoras de Fondos de Pensiones, or AFPs) to
manage his PRA. A key provision is totally free entry to the
AFP industry, for both domestic and foreign companies (foreign
companies can own up to 100 percent of an AFP) in order to
provide competition and thus benefit workers. Those companies
can engage in no other activities and are subject to strict
supervision by a government entity, the Superintendency of
AFP, that was created to provide highly technical oversight
to prevent theft or fraud.(2)
Each AFP operates five investment funds, with different bond/share
proportions (the original scheme allowed only one fund for
each AFP). Older workers have to own funds highly invested
in fixed income securities, while young workers can have a
much higher percentage of their funds in shares. Investment
decisions are made by the AFP, but the worker can choose both
the AFP and, within limits, the preferred fund. The law sets
only maximum percentage limits both for specific types of
instruments and for the overall mix of the portfolio; and
the spirit of the reform is that those regulations should
be reduced progressively as the AFP companies gain experience
and capital markets work better. There is no obligation whatsoever
to invest in government bonds or any other specific private
or government security. Legally, the AFP companies and the
investment funds are separate entities. Thus, should an AFP
go under, the assets of the funds - that is, the workers'
investments - are not affected at all and only the AFP's shareholders
lose their capital.
Workers are free to change from one AFP company to another,
and from one fund to another. There is then competition among
the companies to provide a higher return on investment, better
customer service, or a lower commission. Each worker is given
a PRA passbook (to use if he wants to update his balance by
visiting his AFP) and receives a statement by mail every three
months informing him of how much money has been accumulated
in his retirement account and how well his investment fund
has performed. The account bears the worker's name, is his
property, and will be used to pay his old-age retirement benefit
(with a provision for traditional survivors' pension benefits).
As should be expected, individual preferences about old age
differ as much as any other preferences. Some people want
to work forever; others cannot wait to cease working and indulge
in their true vocations or hobbies. The pay-as-you-go system
does not permit the satisfaction of such preferences, except
when powerful political constituencies exert collective pressure
to have, for example, an early retirement age. It is a one-size-fits-all
scheme that may exact a high price in human happiness.
The PRA system, on the other hand, allows individual preferences
to be translated into individual decisions that will produce
the desired outcome. In the branch offices of many AFPs, there
are user-friendly computer terminals on which a worker can
calculate the expected value of his future retirement benefit,
based on the money in his account, the life expectancy of
his age group, and the year in which he wishes to retire.
Alternatively, the worker can specify the retirement benefit
he wishes to receive and determine how much extra money he
must deposit each month if he wants to retire at a given age.
Once he gets the answer, he simply asks his employer to withdraw
that new percentage from his salary. Of course, he can adjust
that figure as time goes on, depending on the actual yield
of his pension fund or other relevant variables (for example,
longer life expectancies).
All workers, whether employed by private companies or by
the government, were given the opportunity to opt out of the
pay-as-you-go system.3 Self-employed workers are not compelled
to participate in the PRA system, as they were not in the
government pay-as-you-go system, because of the practical
difficulties in a country like Chile of enforcing any mandatory
system for self-employed people. But the pension reform allows
them to enter the PRA system if they wish, thus creating an
incentive for informal workers to join the formal economy.
The government ensures a "safety net". A worker
who has contributed for at least 20 years but whose benefit,
upon reaching retirement age, is below what the law defines
as a "minimum pension" is entitled to receive that
benefit level from general government revenue sources once
his PRA has been depleted. There is a second floor for those
without 20 years of contributions, who are eligible for a
welfare-type retirement benefit at a lower level.
A key feature of the reform was the change in the meaning
of "retirement". The legal retirement age is 65
for men and 60 for women (those were the ages in the former
pay-as-you-go system and were not discussed or changed during
the reform process because they are not a structural characteristic
of the PRA system). But in the PRA system, workers with sufficient
savings in their accounts to buy a "reasonable annuity"
(defined as 50 percent of the average salary of the previous
10 years, as long as it is higher than the "minimum pension")
can cease working, begin withdrawing their money, and stop
contributing to their accounts. Of course, workers can continue
working after beginning to withdraw their money. A worker
must reach the legal retirement age to be eligible for the
government subsidy that guarantees the minimum pension. But
in no way is there an obligation to cease working, at any
age, nor is there an obligation to continue working or saving
for retirement benefit purposes once you have assured yourself
a "reasonable" benefit as described above.
Upon retiring, a worker may choose from three payout options.
In the first case, a retiree may use the capital in his PRA
to purchase an annuity from any private life insurance company.
The annuity must guarantee a constant monthly income for life,
indexed to inflation (there are indexed bonds available in
the Chilean capital market so that companies can invest accordingly),
plus survivors' benefits for the worker's dependents (wife
and orphans under the age of 21). Second, a retiree may leave
his funds in the PRA and make programmed withdrawals, subject
to limits based on the life expectancy of the retiree and
his dependents; with this option, if he dies, the remaining
funds in his account form a part of his estate and can be
given to his heirs basically tax-free. In both cases, he can
withdraw as a lump sum the capital in excess of that needed
to obtain an annuity or programmed withdrawal equal to 70
percent of his last wages. And third, he can choose any mix
he wishes of the previous two.
The PRA system solves the typical problem of pay-as-you-go
systems with respect to labor demographics: in an aging population
the number of workers per retiree decreases. Under the PRA
system, the working population does not pay taxes to finance
the retired population. Thus, in contrast with the pay-as-you-go
system, the potential for intergenerational conflict and eventual
bankruptcy is avoided. The problem that many countries face
- huge unfunded government social security liabilities - does
not exist under the PRA system.
In contrast to company-based pension systems that generally
impose costs on workers who leave the company before a given
number of years and that sometimes result in the loss of the
workers' retirement funds-thus depriving workers of both their
jobs and their pension rights (such as in the infamous Enron
case in the United States)-the PRA system is completely independent
of the company employing the worker. Since the PRA is tied
to the worker, not the company, the account is fully portable.
Given that the pension funds must be invested in tradable
securities, the PRA has a daily value and therefore is easy
to transfer from one AFP to another. The problem of "job
lock" is entirely avoided. By helping labor mobility,
the PRA system increases labor market flexibility. And it
neither subsidizes nor penalizes immigrants, who receive what
they have contributed even if they return to their homelands.
As PRA systems spread around the world, I envision portability
between countries as well, which will help people who are
more internationally mobile (such as professionals or unassimilated
A PRA system also can accommodate flexible labor styles.
In fact, some people are deciding to work only a few hours
a day or to interrupt their working lives-especially women
and youngsters. In pay-as-you-go systems, those decisions
create the problem of filling the gaps in contributions and,
in some cases, may entail no right at all to a retirement
benefit, despite years of contributing to the system. Not
so in a PRA scheme where stop-and-go contributions do not
impinge on the right to get back the totality of (plus the
return on) one's contribution.
In countries that already have a pay-as-you-go system, one
crucial challenge is to design and implement the transition
to a PRA system. In Chile we set three basic policy rules:
1. The government guaranteed those already receiving a social
security check that their benefits would not be touched by
the reform. It would be unfair to the elderly to break the
promises made. I stated this basic rule in this way: "Nobody
will take away your grandmother's check".
2. Every worker was given the choice of staying in the pay-as-you-go
system or moving to the new PRA system. Those who opted out
of the former system were given a "recognition bond"
that was deposited in their new PRAs. That bond was indexed
to inflation and carried a 4 percent real interest rate. It
was basically a zero-coupon Treasury bill maturing when the
worker reaches the legal retirement age. The bonds can be
traded in secondary markets, so as to allow the worker to
use them to build the capital necessary for early retirement.
The bond was calculated to reflect the contributions the worker
had already paid in the pay-as-you-go system. The exact formula
was in the law and was extensively and simply explained to
the people. Thus, a worker who had paid social security contributions
for years did not have to start at zero when he entered the
3. All new entrants to the labor force were required to enter
the PRA system. This requirement ensured the complete end
of the pay-as-you-go system once the last worker who remained
in it reaches retirement age. From then on, the government
has to pay benefits to retirees of the old system only for
a limited period of time.
To give all those who might be interested in doing so an
equal opportunity to create AFPs, the law established a six-month
period during which no AFP could begin operations (not even
advertising). Thus, the AFP industry is unique in that it
had a clear day of conception (November 4, 1980) and a clear
date of birth (May 1, 1981). Note that in this way we transformed
May Day into a day celebrating the empowerment of workers
through social security choice.
Together with the creation of the new system, all wages were
redefined so as to include in the gross wage most of the employer's
contribution to the old pension system. (The rest of the employer's
contribution was turned into a transitory tax on the use of
labor to help the financing of the transition; once that tax
was completely phased out, as established in the pension reform
law, the cost to the employer of hiring workers decreased).
The worker's contribution was then deducted from the increased
gross wage. Because the total contribution was lower in the
new system than in the old, net salaries for those who moved
to the new system increased by around 5 percent.
In that way, we ended the illusion that both the employer
and the worker contribute to social security, a device that
allows political manipulation of those rates. From an economic
standpoint, all the contributions are ultimately paid by the
worker, because employers take into account all labor costs
- whether termed salary or social security contributions -
in making their hiring and pay decisions. So, by renaming
the employer's contribution and by including it in the gross
wage, our reform made it clear - without reducing workers'
take-home pay - that all contributions are paid ultimately
by the worker. Of course, at the end of the day, wage levels
will be determined by the interplay of market forces.
The financing of the transition is a complex technical issue
that we addressed successfully without raising taxes and that
each country must resolve according to its own circumstances.
The key insight in this regard is that, contrary to the widely
held belief, there is no "economic" transition cost,
because there is no cost to GNP due to this reform (on the
contrary). A completely different, and relevant, issue is
how to confront the "cash-flow" transition cost
to the government that emerges not from this reform but from
the fact that there is an enormous unfunded liability created
by the pay-as-you-go-system.
The implicit pay-as-you-go debt of the Chilean system in
1980 has been estimated by a World Bank study at around 80
percent of GDP. As that study states, "Chile shows
that a country with a reasonably competitive banking system,
a well-functioning debt market, and a fair degree of macroeconomic
stability can finance large transition deficits without large
interest rate repercussions".(4)
We used five "sources" to finance the fiscal costs
of changing to a PRA system:
1. Using debt, the transition cost was shared by future generations.
In Chile, roughly 40 percent of the cost has been financed
by issuing government bonds at market rates of interest. These
bonds have been bought mainly by the AFPs as part of their
investment portfolios, and that "bridge debt" should
be completely redeemed when the beneficiaries of the old system
are no longer with us (a source of sadness for their families
and friends but, undoubtedly, a source of relief for future
2. Since the savings rate needed in a defined-contribution
system, like the PRA, to finance adequate retirement benefit
levels was lower than the existing payroll taxes, a fraction
of the difference between them was used as a temporary "transition
tax" (which was gradually reduced to zero, lowering the
cost of hiring labor and leading to more employment).
3. In a government's balance sheet there are liabilities-such
as social security and health obligations-but also government-owned
enterprises, land, and other types of assets. Since we were
also at that time privatizing government-owned assets, especially
companies, that was one way to finance the transition that
had several additional benefits, such as increasing efficiency,
empowering workers with ownership, and depoliticizing the
4. The need to finance the transition was a powerful incentive
to reduce wasteful government spending. Prior to the reform,
the government deliberately created a budget surplus, and
for many years afterwards the treasury minister could legitimately
use the need to "finance the transition" as a powerful
argument to contain the permanent pressure from all sources
to increase government expenditures.
5. The increased economic growth fueled by the PRA system
substantially increased tax revenues, especially those from
the value-added tax, and this has allowed Chile to even run
budget surpluses in these last years.
Since the system began to operate on May 1, 1981, the average
real return on investment has been 10 percent per year (during
26 years). Of course, the annual yield has shown the oscillations
that are intrinsic to the free market-ranging from minus 3
percent to plus 30 percent in real terms-but the important
yield is the average one over the working life of a person
(say 40-45 years) or the full working plus retired life (say
55-60 years) if a person chooses the programmed withdrawal
Retirement benefits under the PRA system (with a mandatory
savings rate of only 10 percent) have been significantly higher
than under the old, state-administered system, which required
a much higher payroll tax. According to one study, the average
AFP retiree was receiving, after 15 years of operation of
the system, a retirement benefit equal to 78 percent of his
mean annual income over the previous 10 years of his working
life. Upon retirement, workers may withdraw in a lump sum
their "excess savings" (above the 70 percent of
salary threshold). If that money were included in calculating
the value of the retirement benefit, the total value would
come close to 84 percent of working income. Recipients of
disability retirement benefits also receive, on average, 70
percent of their working income.(5)
The pension funds have already accumulated an investment
fund equivalent of 80 percent of GNP, and some experts forecast
that that percentage will rise to 100 percent of GNP when
the system reaches full maturity. This long-term investment
capital not only has helped fund economic growth but has spurred
the development of efficient financial markets and institutions.
The decision to create the PRA system first, and then privatize
the large state-owned companies second, resulted in a "virtuous
sequence". It gave workers the possibility of benefiting
handsomely from the enormous increase in productivity of the
privatized companies by allowing workers, through higher stock
prices that increased the yield of their PRAs, to capture
a large share of the wealth created by the privatization process.
One of the key results of the new system has been, then,
to increase the productivity of capital and thus the rate
of economic growth in the Chilean economy. The vast resources
administered by the AFPs have encouraged the creation of new
kinds of financial instruments while enhancing others already
in existence but not fully developed. Another of Chile's pension
reform contributions to the sound operation and transparency
of the capital market has been the creation of a domestic
risk-rating industry and the improvement of corporate governance.
(The AFPs appoint independent directors of the companies in
which they own shares, thus shattering complacency at board
The new social security system has made a significant contribution
to the reduction of poverty by increasing the size and certainty
of old-age, survivors', and disability benefits; by the indirect
but very powerful effect of promoting economic growth and
employment; and by eliminating the unfairness of the old system.
According to conventional wisdom, pay-as-you-go schemes redistribute
income from the rich to the poor. However, when certain income-specific
characteristics of workers and the modus operandi of the political
system are taken into account, those systems generally redistribute
income to the most powerful groups of workers, who are obviously
not the most vulnerable or poor.
Pension issues in Chile have ceased to concentrate the energy
and focus of the government, thus depoliticizing a huge sector
of the economy and giving individuals more control over their
It is not surprising that the PRA system has survived intact
four center-left governments in the last 16 years, since it
really has become the "untouchable" pillar of the
Chilean economy. Not only has it been left untouched in its
structural design, but technical adjustments have improved
it, for example, by allowing more competition in the management
of voluntary retirement savings and enlarging the choices
of funds from one to five.
When the PRA system was inaugurated in May 1981, one-fourth
of the eligible workforce signed up in the first month of
operation alone, and today 95 percent of covered Chilean workers
are in the PRA system. When given a choice, Chilean workers
have voted with their money overwhelmingly for a free-market-based
For Chileans, their PRAs now represent real and visible property
rights-indeed they are the primary sources of security for
retirement, and the typical Chilean worker's main asset is
not his used car or even his small house (probably still mortgaged)
but the capital in his PRA. The new pension system has given
Chileans a personal stake in the economy. A typical Chilean
worker is not indifferent to the behavior of the stock market
or interest rates. He knows that a bad economic policy can
harm his retirement benefits. When workers feel that they
themselves own a part of their country's assets, not through
party bosses or a Politburo, they are much more attached to
the free market and a free society.
The overwhelming majority of Chilean workers who chose to
move into the new system freely decided to abandon the government
system even though some of the national trade union leaders
and most of the political class advised against it. I have
always believed that common workers care deeply about and
pay a lot of attention to matters close to their lives, such
as social security, education, and health, and make their
decisions for the well-being of their families, not according
to political allegiances or collectivist ideologies.
The ultimate lesson of the Chilean experience is that the
only revolutions that are successful are those that trust
the individual and the wonders that individuals can do when
they are free.
Why first in Chile? What was the political context? How did
you manage to do it? Those are invariably the first questions
I am asked whenever I explain the Chilean social security
reform in my travels around the world. So let me answer them
It all began in 1956 when the Faculty of Economic Sciences
of the Catholic University of Chile signed a three-year agreement
of cooperation with the Department of Economics of the University
of Chicago. The agreement was renewed twice, for a total of
nine years. The extraordinary transfer of ideas that took
place created the best economics faculty in Latin America.
In the 1960s hundreds of students such as myself were learning
rigorous economics and discovering public policy ideas based
on individual freedom and private enterprise.
Soon there was a critical mass of free-market economists,
with a common diagnosis of the country's economic problems
and similar views on the needed solutions. Since ideas have
consequences, this group began to influence the public debate
and began to be referred to as the "Chicago Boys".
When I got my economics degree in Chile in 1970, I decided
that after four years of intensive and rewarding study in
a faculty that, from an intellectual point of view, was a
"wholly owned subsidiary" of the University of Chicago,
it would be enriching to go to another university for my postgraduate
studies. So, breaking tradition, I went to Harvard University
for my M.A. and Ph.D. in economics. Years later, when I was
already a minister, some newspapers began calling me not a
"Chicago Boy" but a "Harvard Man". I am
really proud of being both.
In my four years in Cambridge (Massachusetts), not only did
I deepen my knowledge of economics and other social sciences,
but I immersed myself in the exhilarating climate of freedom
of American society. In search of the ultimate causes of the
success of America, I became a passionate admirer of the Founding
Fathers and their two great legacies to all the world: the
Declaration of Independence and the Constitution of the United
States. I also found great inspiration in the works of thinkers
on liberty such as John Locke, Adam Smith, Frederic Bastiat,
Friedrich Hayek, Karl Popper, Ludwig von Mises, and Milton
Friedman (in whose 1962 book, Capitalism and Freedom, I first
read about the idea of privatizing social security). During
those years, I became convinced that only fundamental economic
and political reforms based on individual freedom could deliver
my country from poverty and all forms of oppression.
In the meantime, the communist takeover of Cuba in 1959 and
its government's efforts to create, in the words of Che Guevara,
"multiple Vietnams" in Latin America, led ultimately
to the breakdown of democracy in Chile. Soon after, the new
military government decided to invite some of the "Chicago
Boys" to help reconstruct a destroyed economy and the
real revolution began in Chile: a radical, comprehensive,
and sustained move toward free markets. This "Chilean
Revolution" doubled Chile's historic rate of economic
growth (to an average of 7 percent a year from 1984 to 1998),
drastically reduced the proportion of people living in poverty,
and unleashed the forces that brought liberal democracy and
the rule of law.
At the end of 1974, I faced a very difficult choice: remain
in Boston enjoying the academic life I loved so much or go
back to help found a new country from the ashes of the old
one. When I went back, I knew the road ahead was full of dangers
and risks. Almost immediately, I became very active in promoting
the ideas of economic, social, and political liberty in public
debate. Two years later, in 1977, I gave a speech in which
I described a possible future for the country should we choose
to make a dash for economic freedom. The next day, I was invited
by the president, whom I had never met before, to repeat the
speech to him and the full cabinet, and in December 1978,
I became Chile's secretary of labor and social security with
two big goals: creating a new social security system and reforming
the rigid and anti-employment labor law of my country.(7)
My ideas for pension reform were then part of an overall
vision of a free market and a free society in Chile. At the
ministry, I assembled an excellent team to help me design
not only the new system but also a transition strategy. For
decades in Chile, those striving for social security reform
had failed, because their plans were biased and flawed. I
decided that we should "take the bull by the horns".
My motto was that we needed a "radical reform with a
conservative execution". I remember often reiterating
to my team that there was nothing as satisfying in life as
to do something others deem impossible. We were bound together
by our faith in the power of ideas and by the conviction that
we could make a difference for millions of Chilean workers.
During my two years in the ministry, I divided my seven-day
workweek equally between excruciating work with my team, perfecting
every detail of the reform project, and educating people on
the values and logic of those ideas. I had countless meetings
with workers across the country, and I began a weekly, three-minute
explanation of the reform on one of the prime-time TV news
programs. Those TV appearances, promoting the reform in the
most simple and truthful terms, were crucial to building the
popularity of pension reform among the nation's workers.
Let me share two revealing anecdotes regarding the temptations
a reformer faces and must avoid. At some moment, it seemed
very likely that the pension reform would finally be approved,
as the idea was gaining support everywhere. But some special
interest groups thought they could hash out some last-minute
compromises. One day, I was petitioned to attend, by myself,
a closed-door meeting with the top union leaders of the country.
After a round of cordial greetings, their spokesman explained
that, although they were ideologically opposed to the reform,
they knew that it was likely to be passed. "We have
come to suggest to you that our support could be helpful in
the future. After all, you are a young man of 30, maybe with
a promising political career in front of you. . . . So, we
are willing to immediately give you our public support, as
long as you are reasonable and modify a single detail in your
project: instead of giving workers the right to choose the
manager of their individual accounts, it should be the exclusive
decision of the directors of the unions to which workers belong."
He continued: "The workers, Mr. Minister, do not know
how to make a decision of that nature. If we can come to an
agreement about this, we will be very pleased to be of use
to you in the future."
I must confess to having been surprised, not only by the brazen
nature of the offer, but also by the Olympian contempt they
showed for the freedom and dignity of the workers. In formulating
a response, I opted for humor. "Unfortunately, I cannot
accept the offer that you have come to tender, because I am
concerned with saving your souls." "How is
that, by God?" shouted several of them at the same
time. "It's just as you heard it, gentlemen. As we
all know, union leadership in our country has always been
highly politicized, but it is not corrupt. If the manager
selection becomes a union leader decision-as opposed to one
made by each worker-you directors would be inundated by so
many pressures that it would not be easy to maintain your
integrity. The pension managers, who would love to manage
the retirement savings of large groups, will find it much
cheaper to corrupt union officials than to compete for the
accounts in the free market by offering better returns or
lower commissions. I will not accept that, because it will
lend itself to temptations which none of you would want to
face." Nobody raised his voice after that. The meeting
was quietly adjourned, though much less cordially than it
The next visit was that of the chairmen of the most powerful
banks in Chile. They told me they fully supported the concept
of private individual retirement accounts, but that they wanted
the system to be managed only by the banks. One of them even
made an impassioned argument against allowing "foreign"
financial institutions to manage the workers' retirement savings.
As I had the trade union leaders', I pondered their arguments
but rejected their position completely. Competition was crucial
to providing good service. And it was out of the question
for me to restrict workers' choices to grant Chilean financial
businessmen a monopoly on managing the system. I knew I was
creating adversaries, but there is nothing more dangerous
than diluting the coherence of a reform in order to please
those with vested interests. It is not only moral and intellectual
dishonesty, but also very bad policy.
Those two meetings reminded me of Thomas Jefferson's words,
which had been engraved on my mind and soul since I first
read them: "Whenever a man casts a longing eye on public
office, a rot begins in his conduct." The key phrase
here is "a longing eye", by which Jefferson distinguished
between the necessary role of public men and the illegitimate
desire to hold office for reasons of private gain. In fact,
a Republic needs patriots willing to sacrifice themselves
in public service working hard, honestly and truthfully in
the quest for the common good. But a Republic is corrupted
when individuals use a public office to serve their own appetite
for power, money or glory, or to favor relatives, friends
or political colleagues. America's Founding Father saw the
need for real leaders - leaders who are willing in other words
to place the common good above everything else - in order
for a republic to survive and prosper. And in this statement,
he also illuminated clearly the difference between this type
of leadership and the mere quest for power that is the curse
of most of today's politics.
On November 4, 1980, the reform was finally approved. The
law gave the pension fund companies six months to start up,
which would have set May 4 as the date. An idea suddenly hit
me: to move the inauguration date up to May 1, the international
Labor Day. It is a date that historically has had a special
meaning for workers but that regrettably had been turned into
an occasion for protest fueled by the rhetoric of class warfare.
For Chile in the future, I foresaw that day as one of celebration
of a reform that gave freedom and dignity to our nation's
With this minor adjustment approved, I rushed to my office
to share the good news with the rest of the team. In the midst
of all the cheering, a voice broke through the noise: "We
did it! We took the bull by the horns! Viva Chile!"
I arrived home very late that evening. I was extremely happy
but completely exhausted. To relax, I turned on the TV news.
They were announcing the breaking news that Ronald Reagan
had just been elected president of the United States. As I
slept that night, my dreams were filled with hope for Chile
and hope for the world.
(Presentation by economist José Luis Daza of José
Piñera, keynote speaker at the Annual Dinner of the
North-American Chamber of Commerce, Drake Hotel, New York,
February 19, 2004)
José Piñera, a freedom fighter
It is not the first time that I introduce José; on
previous occasions it has usually meant an enormous effort
followed by great pleasure. In order to get this man to speak
in forums I had organized, I had to pursue him all over the
world. Fortunately, this time the Chamber exerted the effort
in getting him to speak to us tonight, and I am keeping the
As always, I have an enormous sense of excitement at the
prospect of listening to José, for, every single time
I have been with him, heard him or read him I have learnt
something new. As I said a year ago, when the Chamber graciously
invited me to be the keynote speaker, José has profoundly
influenced my thinking.
When we are young, I believe most of us dream of having an
opportunity to leave a positive mark on the world, we all
dream of having a chance to make the world a better place.
Some people achieve it through ideas, others through actions
in the policy arena, and others through the influence they
exert in their daily human interaction.
Well, José has impacted the world, through every one
of these avenues. But today I would like to highlight what
is perhaps his greatest contribution of all; something that
is not sufficiently mentioned: his contribution to democracy,
I am sure you are all aware of his role as "the father"
of Chile's spectacularly successful pension fund system; of
his role as the author of the mining code which led to Chile's
quadrupling of copper output since the early 1980s (by the
way, almost all of this increase carried out by the private
sector). Of his role in reforming the labor market.
I am also sure you are aware of his role as advisor to governments
all over the world, from the USA to Russia, from China to
Mexico, etc, etc.
Unfortunately, his advice was not always followed. I remember
an episode in September of 2001; just three months before
Argentina's massive default. Finance Minister Domingo Cavallo
was addressing a group of about two hundred investors in Bariloche.
All of a sudden he noticed that Jose was in the audience.
He stopped reading, he looked up and said "I see José
Piñera in the audience; José, if we had only
followed your advice we wouldn't be in the mess we are in
now". He looked down and continued reading; we all know
the ending of that story.
However, tonight I would like to recognize José's
efforts in one front which is not mentioned sufficiently.
His role in helping establish a solid, stable democracy in
Last year I said that I believed that, from its foundations,
Latin America evolved in a perverse universe, in a perverse
political and economic equilibrium where poorly designed institutions
and bad economic policies led to bad economic outcomes, which
in turn created the conditions for populist demagogues, which
in turn led to poor economic results, and on and on and on.
I also mentioned that Chile was the only country in the region
had been able to break away from this perverse equilibrium,
to a new virtuous, political and economic equilibrium. The
negative shocks that have hit Chile's economy and political
system over the last few years have prompted a benign, positive
response by the key players, and its democracy has been strengthened.
There is no doubt that individuals deserve great credit for
these actions, but there is also no doubt that all incentives
were in the right direction.
I honestly believe that the seeds for these responses where
planted in the late 1970s and 1980s by a group of idealistic
individuals who implemented revolutionary reforms that led
to the creation of the institutions essential for democracy.
Their ultimate motive was the promotion of individual freedom,
in all its spheres. José was a vocal defender of freedom
of the press and of human rights at all times. José
was one of those individuals who played a critical role creating
the institutions that have been the basis for the best functioning
democracy in Chile's history.
So José, while everyone admires you for your role
in the economy, I thank you for your role in helping make
Chile, if not the only one, one of the few functioning, stable
democracies in Latin America.
Notes to the Main Text:
1. This mandatory percentage applies only to the first $15,000
of annual income. Therefore, as wages go up with economic
growth, the "mandatory savings" content of the system
decreases as a percentage of the worker's total wage. It should
be noted that this cap, which is expressed in the law in indexed
pesos, has not been touched in 26 years by four different
2. For complete statistical information on the 26 years of
the system, visit the website of the Superintendency of AFP,
3. Members of the armed forces and the national police were
not given the choice to opt out. Since then, the deficit of
their pay-as-you-go system has increased to unsustainable
levels. The original pension reform project included them,
but that provision was vetoed by the Defense Ministry on the
grounds that it was its legal prerogative to introduce such
4. World Bank, Averting the Old Age Crisis (New York: Oxford
University Press, 1994), p. 268.
5. Sergio Baeza, Quince Anos Después: Una Mirada al
Sistema Privado de Pensiones (Santiago: Centro de Estudios
6. For more information, see L. Jacobo Rodriguez, "Chile's
Private Pension System at 18: Its Current State and Future
Challenges", Cato Institute - Social Security Choice,
Paper no. 17, July 30, 1999.
7. The labor reform was approved in 1979, and the full story
is in my book, La Revolucion Laboral en Chile (Santiago: Zig
Zag, 1990). I told the story about the social security reform
in a companion book, El Cascabel al Gato (Santiago: Zig Zag,
1991). The anecdotes of the meetings with the trade union
leaders and the top bankers were published in that book.
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