As a 30-year-old economist, José Piñera revolutionized Chile's pension system in 1980 while he was secretary of labor and social security during the country's dictatorship...

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SANTIAGO, Chile — As a 30-year-old economist, José Piñera revolutionized Chile’s pension system in 1980 while he was secretary of labor and social security during the country’s dictatorship under Gen. Augusto Pinochet.


Piñera, the architect of the country’s privatized system, is now an internationally recognized advocate of replacing government “pay as you go” social security with private pensions where workers bankroll their retirements with investments in mutual funds.


The Harvard and University of Chicago-educated Piñera is also the founder of the International Center for Pension Reform.


Here are excerpts from an interview Piñera recently gave to The Associated Press:


AP: Chile’s military and police decided not to be part of the privatized system when it was established, and kept their government-funded pensions. Did the military and police get a better deal?


Piñera: Because of ignorance, prejudice and Prussian military formation, they inflicted themselves the worst possible deal. … The military have missed a 10 percent real return on their contributions over 23 years! And their bankrupt pay-as-you-go, government-run system … leaves them hostage — and very, very pliable — to whoever is in government. … The incident proves how difficult (it) was making these reforms in a military government, given that their formation is generally pro-government and pro-centralization.


AP: The similarities between the Chilean system and American voluntary 401(k) retirement funds are striking, yet one element is missing from the Chilean system that motivates Americans to participate in their 401(k) plans: employer matches. Yes, businesses would scream if they had to participate, but wouldn’t it be a psychological impact that would increase savings?


Piñera: No. There is a fundamental difference. In many 401k (plans), the employer decides or influences the investment allocation and generally ends up putting a large fraction of the workers’ retirement money in their own stock (i.e., Enron). That is putting your job and your pension in the same risk basket. A huge mistake of concept. The beauty of the Chilean system is the complete divorce from the company where you work and the companies where your pension is invested.


AP:
Chileans of all classes seem to lack knowledge or interest determining savings needed to reach retirement goals. What is the extent of this problem and how can it be overcome?


Piñera: Of course, the government, the (fund administrators) association, modern trade union leaders, etc., should do more to create a culture of responsibility in societies that have had a weak one for 500 years. And it takes time. What is absolutely clear is that a defined-contribution system, or capitalization system, clearly encourages responsibility, while a defined-benefit system, whether government or private, clearly encourages indifference.