HOW CHILE GOT IT RIGHT

By SUNEEL RATAN WASHINGTON

THE "TWO-TIER SYSTEM'' THAT MANY EXPERTS ON SOCIAL Security recommend for the U.S. was pioneered in Chile. Having passed through years of military dictatorship before becoming a democracy, that country isn't normally regarded as a showcase of social policy. Yet its 14-year-old retirement system is being adopted by a number of other nations, including Argentina, Australia and Sweden, that have graying populations and overburdened pension plans. The enforced savings and investment features of the new system are already credited with one remarkable outcome: the net worth of the average Chilean--$21,000--is almost four times the worker's average annual salary. By comparison, the average American has a net worth just about equal to the average U.S. salary of $36,000.

Chile's earlier pension system was based on the American model. By the mid-1970s it faced a financing meltdown that presented the government of General Augusto Pinochet with two familiar options: cut benefits or raise taxes. Instead Pinochet scrapped the payroll tax-financed system altogether and replaced it with a small, flat stipend, funded out of the government's general revenues, that goes to only the poorest pensioners. Everyone else is required to put 12% of salary into one of 24 large investment funds that the government tightly regulates. The results, say boosters of the Chilean solution, are all on the upside. Individual Chileans now enjoy retirement benefits that are 40% higher than those paid under the old system. The Chilean economy gains as well. Assisted by the assets stashed away under the pension plan, the nation's once anemic savings rate is up to a healthy 29%. (In the U.S. it's just 3%.) That in turn has been a factor in helping sustain Chile's enviable 8% annual growth rate.

The jury is still out on whether Chile's social safety net for the elderly poor is sufficient or will prove enduring in the face of other budgetary priorities. But in October the World Bank released an international study of pension systems that deemed the Chilean approach instructive not only to the developing countries the bank serves but also to advanced industrial nations with troubled government-financed pension systems, such as France, Germany, Italy--and the U.S. Social Security scholars assert that there is not the same urgency for change in the U.S. But, says Robert Genetski, a Chicago-based economic consultant, "when the American worker finds out that the typical worker in Chile has more assets than we have, the American worker is going to get very upset.''