BY ARA KHANJIAN, PH.D.
On Sunday, August 21, in Chile, hundreds of thousands, and according to the organizers, more than one million people participated in demonstrations across the country demanding the dismantlement of the private pension system.
The growing discontent with the existing private pension system is caused by the low pension benefits. According to the Wall Street Journal, 80% of the Chilean retirees receive monthly pensions, which are less than the monthly minimum wage salary and 44% receive monthly pension benefits which are less than the poverty line. Many Chilean elderly couldn’t retire and continue to work, because their pension benefits are not enough to have a dignified retirement.
In 1981, The military dictatorship of Augusto Pinochet established an extreme model of a pension system, where 100% of employee pension contributions are allocated to private individual accounts. In a traditional pension system, such as in the U.S.A. 100% of the employee pension contributions go to the government. During the last few decades, some countries adopted pension systems where part of the employee pension contribution goes to the government and another part to private individual pension accounts. Very few countries adopted the extreme model of Chile. Armenia is one of them.
Chile’s private pension system’s turmoil is highly relevant for Armenia, because during the last few decades Chile was used as the poster child of private pension system. Now, this poster child is on the verge of abandoning the extreme private pension system.
Chile’s president Michelle Bachelet created a pension commission in order to design a new pension system. Economist David Bravo, who is the head of this pension commission said that “Chile is now moving towards a more balanced system that could eventually be reasonable.”
It is not just Chile who is having second thoughts about private pension systems. The government of Peru who adopted private pension system, is planning to set up a commission which will propose changes in their private pension system.
Private pension systems have many problems; however, recently a new major problem emerged, which is the near zero interest rates in developed countries. Low interest rates reduce the rate of returns of private pension funds all over the world and hurt employees who depend on them. At this stage, the general expectation is that the low interest rates will stay with us for many years.
In 2014, Armenia’s government adopted an extreme pension system similar to Chile, where 100% of employees’ pension contributions are allocated to the private pension accounts. However, faced with strong public opposition, the government decided to implement the new privatized pension system only to the 65,000 public sector employees and postponed its implementation to the private sector to July 2017. On May 5, 2016, Armenia’s government once again decided to postpone its complete implementation to July 2018.
Obviously Armenia should learn from the mistakes and experiences of other countries including Chile. Before adopting the extreme private pension system in July 2018, as a nation, we should discuss, debate and adopt a balanced pension system.
Meanwhile, the opponents of the private pension system in Chile are organizing a general strike and major demonstrations for November 4. We, Armenians, should follow the pension crisis in Chile closely.