From Bismarck to Friedman

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1 From Bismarck to Friedman Lessons from Chile Do you see the difference between a private attendant and a court servant? The latter will put up with much more, for he has a pension to expect. -Otto von Bismarck

2 From Bismarck to Friedman Allensbach: >90% have little or no confidence in the public Pay As You Go pension

3 From Bismarck to Friedman Allensbach: >90% have little or no confidence in the public Pay As You Go pension but more than half of the same people regard the public Pay As You Go pension as ideal

4 From Bismarck to Friedman Allensbach: >90% have little or no confidence in the public Pay As You Go pension but more than half of the same people regard the public Pay As You Go pension as ideal people know little about alternatives!

5 The Chilean Alternative

6 The Chilean Alternative 10% of monthly gross earnings in a personal retirement account

7 The Chilean Alternative 10% of monthly gross earnings in a personal retirement account accounts managed by specialised companies (AFPs)

8 The Chilean Alternative 10% of monthly gross earnings in a personal retirement account accounts managed by specialised companies (AFPs) investment in stocks and bonds

9 The Chilean Alternative 10% of monthly gross earnings in a personal retirement account accounts managed by specialised companies (AFPs) investment in stocks and bonds various fund types, differing in risk and return

10 People are free to choose

11 People are free to choose between different companies (6 AFPs)

12 People are free to choose between different companies (6 AFPs) between different types of funds (A-E)

13 People are free to choose between different companies (6 AFPs) between different types of funds (A-E) between different payment options

14 The transition no change for retirees of the PAYGO system

15 The transition no change for retirees of the PAYGO system mandatory private saving for new entrants to the labour force

16 The transition no change for retirees of the PAYGO system mandatory private saving for new entrants to the labour force current contributors could either remain in the old system or switch to the new one with a compensation bond

17 The benefits of the reform Real returns p.a.: 10% (s=8.3)

18 The benefits of the reform Real returns p.a.: 10% (s=8.3) Private pensions are 25% higher than state pensions

19 The benefits of the reform Real returns p.a.: 10% (s=8.3) Private pensions are 25% higher than state pensions Contribution rates are 10 percentage points lower

20 The benefits of the reform Real returns p.a.: 10% (s=8.3) Private pensions are 25% higher than state pensions Contribution rates are 10 percentage points lower Investment, employment and productivity have been boosted

21 Myth 1: Private pensions are unstable

22 Myth 1: Private pensions are unstable Chilean pensions are very stable because AFP s portfolios are strongly diversified.

23 Myth 1: Private pensions are unstable Chilean pensions are very stable because AFP s portfolios are strongly diversified. Chilean pensions are no longer subject to incalculable political intervention.

24 Myth 2: If pension fund companies fail, peoples pensions are lost

25 Myth 2: If pension fund companies fail, people s pensions are lost Retirement funds and AFP s patrimony are seperate judicial entities.

26 Myth 2: If pension fund companies fail, people s pensions are lost Retirement funds and AFP s patrimony are seperate judicial entities. Bankruptcies of AFPs have already ocurred.

27 Myth 3: One generation pays twice

28 Myth 3: One generation pays twice An implicit debt became explicit

29 Myth 3: One generation pays twice An implicit debt became explicit -by discouraging spending, the transition deficit has an in-built self-containing

30 Myth 4: Capital markets cannot absorb such large amounts of capital.

31 Myth 4: Capital markets cannot absorb such large amounts of capital. The pension reform has greatly boosted investment.

32 Myth 4: Capital markets cannot absorb such large amounts of capital. The pension reform has greatly boosted investment. Developed capital markets channel capital to where it is most scarce.

33 Myth 4: Capital markets cannot absorb such large amounts of capital. The pension reform has greatly boosted investment. Developed capital markets channel capital to where it is most scarce. Pension funds have contributed to the development of capital markets.

34 Myth 5: Privatising pensions breaks the social consensus between workers and capitalists

35 Myth 5: Privatising pensions breaks the social consensus between workers and capitalists Means-tested welfare pensions provide a minimum safety net.

36 Myth 5: Privatising pensions breaks the social consensus between workers and capitalists Means-tested welfare pensions provide a minimum safety net. The combination of pension reform and industry privatisations turned workers into capitalists.

37 Myth 5: Privatising pensions breaks the social consensus between workers and capitalists Means-tested welfare pensions provide a minimum safety net. The combination of pension reform and industry privatisations turned workers into capitalists.

38

39 What should NOT be copied from Chile:

40 What should NOT be copied from Chile: regulation of investment depresses returns

41 What should NOT be copied from Chile: regulation of investment depresses returns only specialised traders, no supermarkets permitted higher prices than necessary

42 What should NOT be copied from Chile: regulation of investment depresses returns only specialised traders, no supermarkets permitted higher prices than necessary excemption of the self-employed creates contribution gaps

43 What should NOT be copied from Chile: regulation of investment depresses returns only specialised traders, no supermarkets permitted higher prices than necessary excemption of the self-employed creates contribution gaps no group contracts or other discounts permitted

44 General insights: Private pensions are stable. The transition can be managed. The economic benefits are substantial.

45 General insights: Private pensions are stable. The transition can be managed. The economic benefits are substantial. Private pension systems rest on property ownership, personal independence, and freedom.

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