Revenge of the Chicago School

After the coup that killed Allende and thousands of Chileans, the economy was largely managed by American consultants from the Chicago School, who attempted to create a free market paradise.

It didn't work, and they had to roll back some of the more extreme examples of free market fundamentalism after 12-18 months due to widespread fraud and corruption.

One thing, arguably the single most disastrous "reform", did last and now Chileans are discovering that privatizing their retirement accounts has resulted in their nest eggs being eaten up by excessive fees and poor performance.

Seriously, every time someone tries to implement "Galt's Gulch", this is what happen: Corruption, fraud, incompetence, and instability:

Discontent has been brewing for years in Chile over pensions so low that most people must keep working past retirement age. All the while, privately run companies have reaped enormous profits by investing Chileans’ social security savings.

The bubbling anger boiled over in July when Chileans learned that the former wife of a Socialist Party leader was receiving a monthly pension of almost $7,800 after retiring from the prison police department. That figure dwarfs the average monthly pension of $315, which is even less than a monthly minimum-wage salary of $384.

In a country already battered by widespread political and corporate corruption, this was the last straw.

Hundreds of thousands of people marched through Santiago, the capital, and other cities to protest the privatized pension system. More than 1.3 million people, according to organizers, turned up in August, the largest demonstration since Chile’s return to civilian rule in 1990.

One protester was Luis Montero, 69, whose monthly pension is about $150. Like many Chileans, Mr. Montero has mainly worked informal jobs without a contract at wages too meager for him to save enough for retirement. He still does maintenance work at a school to make ends meet.

………

In 1981, the military dictatorship of Gen. Augusto Pinochet privatized the old pay-as-you-go pension system, in which workers, employers and the government all contributed.

Under the privatized system, which President George W. Bush hailed as an example to follow, workers must pay 10 percent of their earnings into accounts operated by private companies known as pension fund administrators, or A.F.P.s, the initials of the term in Spanish. The administrators invest the money and charge workers a commission for transactions and other fees. Employers and the government do not make any contributions to the workers’ accounts.

………

The money invested by the administrators bolstered Chile’s capital markets, which stimulated economic growth and yielded reasonable returns. Today six A.F.P.s — half of them owned by foreign companies — manage $171 billion in pension funds, equivalent to about 71 percent of Chile’s gross domestic product, according to the office of the supervisor of the pension funds.

………

A commission on pension reform, appointed in 2014 by President Michelle Bachelet, found that the median A.F.P. pension was equivalent to 34 percent of a retiree’s last average salary (24 percent in the case of women and 48 percent for men). The overall figure rose to 45 percent with supplements from a federally funded safety net established during Ms. Bachelet’s first term in office.………

“The median A.F.P. pension will be equivalent to 15 percent of the last wages,” he said. “When we have an entire generation retiring solely from the A.F.P. system, the picture gets even bleaker. We have to address this problem now.”

………

“The government’s proposals mean more of the same, and don’t solve the real problem,” said Luis Mesina, the secretary general of the Confederation of Bank Trade Unions and the face of the movement opposed to the private pension administrators. “We need to put an end to the A.F.P.s.”

………

Manuel Riesco, an economist with the National Center for Alternative Development Studies, agreed that the funds had done well — for themselves. The money they collect from salary deductions is more than twice as much as they pay out in pensions.

“That’s a huge surplus they will never give back,” Mr. Riesco said. “The state is spending large amounts of the federal budget to compensate for the failure of the private system. And as the population gets older, what do the A.F.P.s do? Reduce pensions even more. It’s a perverse and irrational system.”

This is typical, and under the Investor-state dispute settlement (ISDS) required by the Trans Pacific Partnership (TPP), any attempt to fix this would open up Chile to massive liability from the secretive tribunals.

The free market mouseketeer model is broken, and it always has been.