A properly implemented social-security system can benefit South Africa even more than it has Chile, Dr José Piñera — former minister of mining, former presidential candidate and architect of Chile’s highly successful social-security system — said on Thursday.
He said South Africa has two main advantages over Chile — a country that has seen pension reform of 26 years provide rates of return on average 10% above inflation. These are: no transition problems from a pay-as-you-go system and a highly developed financial market.
He said Chile had to battle with the first huge problem and had no effective financial market when reforms were first implemented.
He pointed out that the spectre of bankrupt, government-run social-security systems is haunting the world.
“The pay-as-you-go system that reigned supreme through most of the 20th century has a fundamental flaw, one rooted in a false conception of how human beings behave: it destroys, at the individual level, the link between contributions and benefits — in other words, between effort and reward. Whenever that happens on a massive scale and for a long period of time, the final result is disaster,” emphasised Piñera.
South Africa’s finance minister had mentioned the basic concept of the system in his budget speech — “he spoke about creating a culture of saving, which is exactly a pillar of this system”.
Piñera explained that the Chilean model was not followed by any other country for 10 years, but that it is now benefiting 30 countries around the world.
He has discussed the issue with US presidents Bill Clinton and George Bush and hopes for an export of the idea from south to north at some stage. However, he said he is more pessimistic about Western Europe — which is moving to an iceberg of an old-age problem, he indicated.
China — which has a huge problem due to the one-child-per-family policy ultimately resulting in one worker subsidising two old people — is moving in this direction too.
Money accumulated
Piñera said what determines workers’ retirement benefit under the Chilean system is the amount of money accumulated in their personal retirement account (PRA) during their working years.
“Neither the worker nor the employer pays a payroll tax, nor does the worker collect a government-funded benefit. Instead, 10% of his wage coming from the previous payroll tax is deposited, tax free, by his employer every month in his own PRA.”
The 10% provides a benefit equal to approximately 70% of final salary. A worker may contribute up to an additional 10% of his wages, also deductible from taxable income, as a form of voluntary savings.
The return of the PRA is tax free, and on retirement when funds are withdrawn, taxes are paid according to the income-tax bracket at that moment, explained Piñera.
He said a worker chooses one of a number of the registered private pension companies — a key pillar of the system. “The system must not break the link between effort and reward, else it is a disaster,” he emphasised. “The final result is a society where people are empowered with financial capital. But you must invest heavily in education. I am not in favour of grants, which creates a culture of dependence.”
He added: “Workers must have some level of ownership — if the market goes up or the country does well, it’s not someone else who benefits; the worker also benefits.”
He said the power of compounding over the working life has led to some normal workers in Chile boasting savings accounts of $500 000.
Piñera was the keynote speaker at the Sanlam Employee Benefits Symposium on his first visit to South Africa. — I-Net Bridge