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  • Print publication year: 2008
  • Online publication date: July 2010

1 - Welfare State Transformation: From Social Protection to the Market

Summary

It is not possible to get the government out of the pension business.

– Nicholas Barr (2002) “The Pensions Puzzle”

The “revolution” began quietly and without ceremony on the fourth of November 1980 in the unassuming South American capital of Santiago, Chile. On that day the military dictatorship led by General Augusto Pinochet published Decree Law 3500, abolishing the nation's state-run pension system and replacing it with a private system based on individual retirement accounts. Under the new “privatized” pension system, Chilean workers would no longer contribute to a national social insurance program for retirement, nor were pension benefits defined as a percentage of working income and guaranteed by the state. Instead, workers are required to contribute a fixed share of each paycheck to individual retirement accounts managed by private firms. At retirement, the average wage earner in Chile will lay claim to a pension based on his or her accumulated savings, and the return – be it positive or negative – to those invested funds.

For the architect of this reform, José Piñera, Chile's pension privatization issued the opening salvo in a “world pension revolution.” Indeed, this upheaval has proved to be neither a merely local phenomenon nor inconsequential in its transformative ambitions and implications. Not only did the fires of pension privatization ignite throughout Latin America in the 1990s, but the movement fanned across Europe as well, from Scandinavia to Central Asia. By 2006, pension privatizations of varying degrees had been implemented in twenty-six nations on five continents.