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Has Privatization Worked in Latin America?

Has Privatization Worked in Latin America?. Evan Caplan and Kaitlynn Saldanha. Agenda. Former pay-as-you-go (paygo) system Chilean reform Types of privatized systems Privatization across Latin America Transition process Drawbacks Strengths Conclusions. Former PAYGO System.

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Has Privatization Worked in Latin America?

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  1. Has Privatization Worked in Latin America? Evan Caplan and Kaitlynn Saldanha

  2. Agenda • Former pay-as-you-go (paygo) system • Chilean reform • Types of privatized systems • Privatization across Latin America • Transition process • Drawbacks • Strengths • Conclusions

  3. Former PAYGO System • Public pay-as-you-go system • Payroll taxes on current workers fund current retirees’ benefits • High contribution rates averaging to 26% - 50% of wages • Issues in Chile: • Fragmentation • Limited contribution-benefit association • Significant evasion • Generous entitlements not keeping up with revenue • Deficit of 2.7% GDP needed to be funded by general budget

  4. Chilean Reform - 1981 • Workers pay 10% gross wages to individual account run by a pension fund management company. • Additional 2.6% of wages and small fixed mandatory fee for disability and survivors’ insurance and administrative costs • All contributions tax exempt • Government influence over the pension companies • Limited investment discretion > limited differentiation between firms. • Choices once retirement age reached • Annuity, programmed withdrawals or a combination • Government safety net with guaranteed minimum • 58% active participation by 1998 • 4% still contributing to the old system. 38% not covered by the system; mostly informal workers. • Average rate of return on accumulated funds 1982-1995: 12.8% • 1994-2000: 4.9%

  5. Types of Privatized Systems • Single-tier • Privatized program with individual accounts • Multi-tier • Public programs in addition to privatized • Substitutive model • Private replaces public • Parallel model • Private as alternative to public • Mixed model • Private complements public

  6. Privatization Across Latin America

  7. Transition Process • Must continue to fund current retirees’ pensions while current workers’ money is going into private accounts • Government must fund this burden from general budget • Chile gave workers recognition bonds to account for their accrued pensions at time of transition

  8. Drawbacks • Transition and Administrative costs • Coverage • Noncompliance • Gender disparities • Limited domestic investment opportunities

  9. Strengths • Capital accumulation and capital markets • Insulated from political risk • Labor market incentives • Indexed currency

  10. Conclusions • Privatized Latin American Systems too young for conclusive results and to quantitatively evaluate the performance of recent reforms. • Many problems not solved by privatization including coverage and compliance. Created the problems of high transitional and administrative costs. • Under certain conditions privatization improves capital and labor markets • There is no perfect pension plan that fits all states. Pension policy should ultimately be determined based on the specific characteristics of the state, current market conditions, and evolving demographics.

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