concentrated brain power in the government.” More
professional oversight, complemented by increased
participation of interest groups, has already begun to
reduce the influence of pension fund managers over the
“regulatory politics” of Chile’s pension system.
Further changes in the private systems are still
needed. Pension funds across the region remain heavily
invested in public bonds. In Mexico, for instance, government paper represents 80 percent of all holdings. This
concentration raises doubts about the “private” nature
of pensions, since nearly all these savings are effectively
tied to public institutions. It also raises doubts about the
kind of “investment management” conducted by funds
that charge high commission fees for acting essentially
as brokers for government issues. Finally, such investment dampens returns and fund account growth, particularly with the recent decline in interest rates around
the region. The state has an important role in revising
regulations and providin g incentives for better finan-
The new Thinking
abouT pensions
offers a way
To address The
limi Ta Tions of The
privaTe social
securi Ty model
wi Thou T having To
dismember iT.
cial management and more diverse portfolios.
But more important than these regulatory changes
is the strengthening—or reassertion, in some cases—of
the state’s role in social security planning. Private pen-sion-fund managers should welcome this change. By
providing for those that the market fails—especially
when they represent a majority of the voting population—a public safety net will soften opposition to private management. This more sustainable model will
ultimately benefit market interests. The Chilean AFP
Association recognizes this political reality, and publicly supports state-provided retirement benefits for the
“poorer” segments of society (defined as 60 percent of
the population). Other industry executives should follow their lead. Despite taking a smaller piece, it will
mean a more stable financial pie.
The new thinking about pensions offers a way to
address the limitations of the private social security
model without having to dismember it. Recent legislation in Argentina not withstanding, private pensions
are not likely to disappear. Individual accounts are an
important factor in the continued financial growth of the
region. But combined with a strong public component,
pension systems can fulfill their most important social
role: relieving today’s working generation from the burden of supporting its elders, and enabling younger generations to postpone work and remain in school.
Establishing an effective safety net is even more
vital as Latin America ages. While still relatively young,
the region is rapidly transitioning toward an older
demographic profile. The next 30 years will provide a
“demographic bonus,” a time with few dependent children (due to lower birthrates) and a still low number of
retired adults. East Asian countries passed through this
period in the last few decades, leveraging the opportunity to achieve spectacular growth rates and to permanently improve the quality of life for their societies.
But to follow this path, Latin American nations must
also invest in physical and human capital. Upgrading
their social safety nets—including pensions, healthcare,
and other assistance programs—is essential to this process. Time is crucial, because Latin America needs to
grow rich before it grows too old to secure a better
future for its citizens.
