The Performance of Chile’s Retirement Privatization

Jose Pinera’s Retiring in Chile states:

Since the system started on May 1, 1981, the average real return on the personal accounts has been 10 percent a year.

The Performance of the Funded Pension Systems in Latin America by Juan Yermo, which can found on this page discusses the privatized retirement plans of various Latin American nations including Chile. On page 12, we see table 3: Average Rates of Return by AFP in Chile: 1981-2000. While it is true that the arithmetic average of real returns was 10.9% over the 1981 to 2000 period in Chile, we should also remember that the U.S. S&P500 had real returns that averaged about 13% over the same period.

Yermo presents on page 14, table 5 comparing average returns and standard deviations for funds in Argentina, Chile, Mexico, Peru, and Uruguay. He also notes:

While these high returns are likely to generate high pensions (as long as contribution periods are also long), their volatility will lead to significant differences in pensions across different retirement cohorts.

Simply put – these average real returns are accompanied by substantial volatility so some cohorts may do quite well, while others will fare poorly.

Paul Krugman noted in his December 17 oped the high administrative costs of Chile’s system. Yermo provides more details.

Critics of privatization note that the higher expected returns from investing in the stock market come with greater risks. The Chile experiment bears this out as well as the possibility that administrative costs will be higher. Odd that the proponents of privatization tout the alleged success of the Chile experiment, but fail to point out the higher average returns are before considerations of risk and transaction costs.