Chile: Reform Success South of the Border

CHILE IS LATIN AMERICA'S MOST prosperous country, and it seems it will remain that way for long time: not even its current socialist government has dared to tamper with the free-market reforms created in the 1980s.

How did this country of just 16 million people achieve such success? Two ways:

For decades, Chile had a pay-as-you-go plan much like the current U.S. Social Security system: workers' contributions were not savings for their own retirements. Rather, they were used to pay the pensions of those already retired.

Citizens Had a Choice

But in 1980, the Chilean government gave its citizens a choice. They could either stay in the state-run system or choose new personal accounts. With the exception of a relatively small number of near-retirees, most Chileans switched. They started contributing 10 percent of their wages to their own retirement accounts, which did not start from zero but from an amount that was roughly equal to the workers' past contributions in the old state-run system. Employers do not contribute to those accounts, but workers have a choice of contributing up to an additional 10 percent of their salaries. Their savings grow tax free until their retirements.