Caldara dubiously pointed to Chile as example of successful social security privatization


Discussing social security privatization during his February 20 broadcast, Newsradio 850 KOA host Jon Caldara dubiously pointed to Chile as a place "where things were done right." However, dissatisfaction with Chile's pension system was a major issue in the most recent presidential election, with both candidates endorsing reform.

During the February 20 broadcast of his Newsradio 850 KOA show, host Jon Caldara dubiously cited Chile as a country that successfully has privatized social security. However, media outlets reported that both candidates in Chile's 2006 presidential runoff declared the country's pension system in need of repair -- a view that reportedly was shared by independent economists.

Caldara, who also is president of the conservative think tank the Independence Institute, was discussing government approaches to "fix[ing] things" with a caller.

From the February 20 broadcast of Newsradio 850 KOA's The Jon Caldara Show:

CALDARA: When government screws things up -- and by the way, they do -- how do they fix things?

CALLER: By taxing people.

CALDARA: Right. They -- they never say, "Whew, we -- we messed this one up. We're gonna -- we're gonna have to back off." Let -- let -- let's take a look at some of the -- some of the places where things were done right. Let's look at Chile, for instance, which has now privatized social security. What we call social security. They were on the brink of pure anarchy. You look at -- is it Estonia? I'm trying to remember which -- which Baltic nation now has a flat tax rate, à la Milton Friedman. And it was that they -- their government was bankrupt. They couldn't get anything done. So by the time it gets to the point where our reforms are taken seriously, things have to get a lot worse. So, I'm -- I'm not -- I'm not too excited about government taking over things just so that they can get screwed up in the long run.

As The New York Times reported on January 10, 2006, dissatisfaction with Chile's pension system was a major issue during the country's most recent presidential election. The Times noted that both the socialist and conservative candidates in the January 15, 2006, runoff agreed that "the country's much vaunted and much copied privatized pension system needs immediate repair." According to the Times, the conservative candidate, Sebastián Piñera -- the brother of the former labor minister who established Chile's current social security system in 1981 -- enumerated problems with the system during a January 4, 2006, debate with Socialist candidate Michelle Bachelet, who eventually won the election:

But even advocates of an untrammeled free market, like Mr. Piñera, the conservative candidate, are jumping in with criticisms, to the surprise of some here. Mr. Piñera is the brother of José Piñera, the former labor minister who imposed the personal account system during the dictatorship of Gen. Augusto Pinochet. In addition, Sebastián Piñera is backed by the large business groups that control the pension funds and have benefited from the expansion of investment capital the funds have provided.

"Chile's social security system requires deep reforms in all sectors, because half of Chileans have no pension coverage, and of those who do, 40 percent are going to find it hard to reach the minimum level," Mr. Piñera said in a televised debate with Ms. Bachelet on Wednesday. "This has to be confronted now, and we agree with Michelle Bachelet and will, I hope, join forces behind this large undertaking."

The Times also noted the negative assessment of a United Nations economist specializing in Latin America:

"The bottom line is that this system does not work with this labor market,'' said Andras Uthoff, an economist who is director of the social development division of the United Nations Economic Commission for Latin America here. If trends continue, he added, ''only a small percentage of people are going to be able to finance meaningful pensions. What happens then to the rest?''

Similarly, an article the International Herald Tribune reported on December 26, 2006, that the Chilean government has proposed reforms to the privatized pension system:

Responding to growing complaints that the privatized pension system here -- a favorite of free-enterprise enthusiasts around the world -- is failing to deliver adequate benefits, the Chilean government has recommended that it be supplanted by a system in which the state would play a much larger role.

The changes, part of a package scheduled to go to Congress early next year, include a guaranteed minimum pension for the country's poorest citizens, even those who have never contributed to the private system.

The proposal also contains measures aimed at stimulating competition and reducing costs to contributors as well as the high profits for pension fund administrators that analysts blame for some of the problems.

"This is a radical reform because it moves us from a system based solely on individual savings to one that includes a pillar of solidarity based on one's rights as a citizen, and not contributions," Labor Minister Osvaldo Andrade said when the plan was announced this month. "We are integrating systems that are fundamentally different."

The article further noted that under the current pension system, roughly half of all working Chileans will receive only a minimum payment in retirement, or none at all:

As things now stand, about half of all Chileans in the work force will not qualify for a pension or will only receive a minimum payment, for a variety of reasons, a common one being that they have not paid into the system for the minimum 20 years.

"There are a whole set of problems, strongly linked to a system that had certain presuppositions that have not come true," President Michelle Bachelet of Chile said in an interview in June. "People retire and find that they are entitled to a pension that is between 30 and 50 percent of their wages, and not the 70 percent they were promised" when the Pinochet dictatorship eliminated the previous system, she said.

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