Jose Piñera: Take advantage of your pension now

Balancing pay-as-you-go finances would likely require significant tax increases or pension cuts for workers. This nightmarish scenario vividly depicts the nature of the coercion this can cause. “In 2050, in order to save money and free up valuable workers, the German Bundestag will vote to abolish the bureaucracy that governs the pension system. From then on, each retiree will be assigned a ‘labor slave’ who will receive half their salary each month” (Stefan Teil, Newsweek, June 30, 2003). I see a serious conflict between a Europe that has sustainable pension systems and a Europe that does not. The first group includes countries with significant funded pension systems (Netherlands, Denmark). Countries that have partially adopted the Chilean capitalization system (Sweden, Poland, Slovakia). and countries with strong fiscal conditions (Ireland, Luxembourg). The second group includes the four largest eurozone countries: France, Germany, Italy and Spain.

European leaders, saddled with huge pension debts, may be forced to resort to the old Latin American recipe: pressuring the European Central Bank to support monetary expansion that implies a devaluation of the euro, and the resulting inflation reducing the purchasing power of pensions. No doubt Europe, with its sustainable systems, will firmly oppose this action. Such conflicts will erupt within the ECB Council and will be difficult to resolve between sovereign states. The fundamental problem is that pay-as-you-go pension systems destroy the essential link between effort and reward, contributions and benefits, which destroys the right incentives and opens the door to political manipulation, evasion, and vested interests. Furthermore, relying on birth rates and life expectancy puts us in the opposite direction of the 21st century’s demographic realities of declining birth rates and aging populations.

The solution is a funded pension system. In other words, it allows workers to accumulate capital in their pension savings accounts using personal contributions. This re-establishes the essential link between effort and reward, which is the basis of life itself. Chile’s funding system is a model for a true pension revolution taking place around the world. In Chile, the system of individual capitalism has throughout its history meant maximum wealth creation for the direct benefit of workers. In fact, the capital generated by this system amounts to $250 billion, and of its workers’ capital, 72 percent ($180 billion) comes from the capitalization of contributions with compound interest, and 28 percent comes from the contributions themselves.

This new paradigm created modern capital markets, increased economic growth rates, and prevented the Chilean state from bankruptcy. It also created a worker-owner state, weakening the dynamics of Marxist “class struggle” and contributing to the maintenance of a free market economic model in a democracy. Klaus Schmidhebbel, former chief economist at the OECD, argues that “the number of countries with private savings pension systems has increased from 17 in 1999 to 51 in 2022. Pension assets managed by private companies (such as Chile’s AFP) in OECD countries have almost doubled in 20 years as a percentage of GDP, increasing from 59% in 2001 to 105%.” In 2021».

In the 90s, several countries in Latin America followed the path started by Chile. For example, in Mexico, accumulated retirement savings funds already represent 15% of GDP. 45.6% comes from returns generated by capitalization schemes (called retirement savings schemes) and 54.4% comes from donations. Thanks to this reform, 60 million Mexican workers became owners of real wealth by owning retirement savings accounts.

After the fall of the Berlin Wall, almost all former communist countries introduced capitalism, albeit partially, into their pension systems. Two developed countries have already followed the Chilean model: Australia (‘superannuation’) in 1992 and Sweden in 2001. When Hong Kong introduced capitalization in 2000, China’s process towards this system accelerated. Presidents Clinton and Bush both agreed with this logic and proposed starting it in the United States.

The impact of the rapid decline in birth rates around the world varies greatly depending on whether a country has a pay-as-you-go pension system or a funded pension system. In the first case, it is very difficult to raise the retirement age if someone else is paying the pension, look at what is happening in France. In funded systems, there are strong incentives for individuals to postpone their retirement age or seek ways to increase their pension savings.

We see a horizon where the world is divided into pay-as-you-go countries with permanent debt crises and countries with capitalist systems that strengthen capital markets and growth. Therefore, it is time to abandon the Bismarckian pension paradigm and build a new paradigm based on ownership of retirement savings, personal freedom, and personal responsibility. Victor Hugo wrote, “There is nothing stronger than the power of an idea whose time has come.”