The re-engineering of Social Security

Nation's Business, May, 1997 by James Worsham, Robert T. Gray

The transition period is not without its costs, however. Pinera says that to fund the transition, during which current retirees would be paid under the old system, an additional 5 percent payroll tax was levied on all workers. The tax has since expired.

But Carmelo Mesa-Lago, a professor of economics at the University of Pittsburgh and an expert on Latin America, says the transition period is proving to be a challenge for Chile. "The costs of the transition are enormous," he says.

To fund the transition, the government is drawing on general revenues, Mesa-Lago says, because costs have exceeded expectations.

Even when there are fewer retirees under the old system to receive benefits, the government will still have to honor the "recognition bonds," he adds. Moreover, he says, many low-income workers are now minimizing their contributions under the new system so they can maximize their government-paid guaranteed minimum pension. Mesa-Lago also notes that earnings on the privatized pensions could be slower in the future because of the shortage of new investment opportunities in Chile. And, he notes there's always the possibility of a major downturn in the Chilean economy.

"So far so good," says Mesa-Lago. "But there are serious medium- and long-term problems."