Social Security Privatization In Sweden And Chile Analysis Economics Essay

This research paper will cover with the issue of privatising of societal security and it will chiefly concentrate on the denationalization of the societal security that has been done in states like Chile and Sweden. The paper will take a critical and scientific position of the issue of privatising the security fund based on the studied of the mentioned states. The review position and understandings presented on the issue will include an economic position that lays an accent on mention economic prejudices and standard economic theory. The paper will over theoretical analysis of the job of privatising the societal security, empirical rating of the job and province the policy deductions of the action every bit good as offer recommendations on the lessons learnt from the two states. It will concentrate and offer recommendations on the best manner frontward sing the debatable issue of privatising of the societal security by a state.

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Behavioral economic is a field of cognition that focuses on the manner people and establishments behave with money particularly when doing economic picks sing issues of money when it comes to production, work, disbursement and investing chances. The field hence entails collective, single, emotional and cognitive prejudices that frequently affect economic determinations therefore making economic anomalousnesss with certain harmful effects that weaken standard economic paradigms that are based on hypotheses of rational determinations ( Galasso, 456 ) .

Denationalization of societal security has been a thorny issue for many states in the recent yesteryear and policy shapers have been at cross roads whether to privatise their societal security or to stay with the old system. Many states have been forced to reflect on the advancements that have been made by states that have privatized their societal security system for case states like Chile and Sweden. Therefore the subject is of arrant importance as it unravels footings that have been used by states to measure on the successes and failures that come with privatizing of societal security and hence output utile recommendations that can be used to do determinations on whether the issue is truly deserving a attempt or non.


While most of the states around the universe still rely on the traditional societal security systems, there are an increasing figure of states particularly those in Latin America and Eastern Europe that have privatized at least portion of their societal security system. Such states include Chile, Sweden, Peru, Argentina, Australia, Poland and Britain. Social security is an insurance plan that is intended to protect workers and their households from income loss particularly when they become handicapped or retire. The term denationalization as used in this paper means a societal security system in which the populace run portion of the system go in private funded and managed and compulsory histories are included in the definition given.

Chile privatized its societal security system in 1981 under the regulation of the rightist dictator Augusto Pinochet but it ‘s no longer a to the full private system as it was revamped in 2008 in order to spread out the public pensions for other ab initio left out by the system for case the low-income seniors. Sweden was the first state in the universe ‘s to implement a cosmopolitan government-run system of retirement but today its in the procedure of privatising portion of its pension strategy as it was faced with demographic and fiscal strains and decided that personal histories could offer the best mean of doing its workers enjoy a safe and comfy retirement. The Swedish theoretical account consists of four characteristics: partial denationalization, fanciful histories, safety cyberspace to protect the hapless and the passage to protect retired persons and older workers.

Both Chile and Sweden have faced jobs with the denationalization of their societal security system. Some people have described the Chilean theoretical account as successful and the Sweden as a failure as others describe both theoretical accounts to be a failure. To understand such claims this paper will try to place standards used by such policy shapers on what ‘s defined as ‘right ‘ or incorrect theoretical account when it comes to denationalization of the societal security of a state ( Gruber, et al 45 ) .

Privatization societal security in Sweden

In the old ages between 1998 and 2001, Sweden converted its pension strategy from PAYGO wage as you go which managed by the authorities financess to a system that includes money saved and invested in single financess. The current system factors in the indexing of future pensions into the GDP growing therefore guaranting sustainability even in times of unfavourable economic development in the county. The authorities pension payments are financed through an 18.5 % revenue enhancement on state ‘s taxed incomes, which partially is derived from a revenue enhancement class called the public pension fee, which is a 7 % on the gross income and a 30 % of employer fees on wages organizing 33 % of lacy income. Since January 2001, the declared 18.5 % pension revenue enhancement has been divided in to two parts. This includes 16 % which goes to current payments and a 2.5 % which goes into single retirement histories and the money saved and invested in the authorities financess and IRA ‘S that are to be used for future pension costs form a approximately five crease of the authorities one-year disbursals ( Hubbard et al 345 ) . The money intended for future retired persons are managed by five authorities financess.

Advantages and jobs with Swedish societal security


The theoretical account provides a lesson that reforms work and that they popular despite the fact that Sweden is considered the ultimate public assistance province the fact that its legislators opted for a new attack to work outing their deteriorating pension strategy and managed to win is a lesson to think with. Second, the Swedish new system provides many benefits like greater inducements to work, increased nest eggs, offers a flexible retirement age, promotes lower authorities disbursement, lower revenue enhancements, offer chances for reform, provides a greater retirement income for retired person and eventually it ‘s a fairer system that does n’t redistribute income from the hapless people to the rich 1s. The Swedish pension reform theoretical account has created a better system that benefits the workers, retired persons and the state ‘s full economic system hence same theoretical account can be adopted by states that face similar challenges with their pay-as-you-go system or societal security system.


When the personal histories were launched they were over 400 ab initio participated and such over copiousness of investing options paralyzed most Swedes go forthing them with less power to take an history accordingly doing 80-90 % of all the Swedes ended up with the default history foe neglecting to do a pick. So to avoid palsy in doing of picks policy shapers should be bale to restrict investing options and sooner should non be more than 10 in figure to promote persons to do personal pick of history ( Frontczak et al, 212 ) .

In add-on to that, the Swedish theoretical account involved narrow index financess, which saw an increased inclination for Swedish investors to apportion to a great extent to sectors that had ab initio had strong screenings hence take parting in public presentation chasing and market timing, which yielded catastrophe for the theoretical account. So, reverse can be foiled in partly privatized societal security theoretical accounts by offering a portfolio singly wide index financess, which make it impossible to overweight on certain factors therefore restricting concerns that there would be unscrupulous investing directors that are after doing unjust net incomes from the unfortunate populace as index are highly low cost and high quality. Such wide index financess will do investors to acquire a good trade as they are protected from themselves by the high quality yet low-priced index fund-based programs of retirement.

Another prejudice that the Swedish theoretical account showed was that it was implemented prior to the tech explosion hence ensuing to big losingss for most investors as most of them invested in the default fund ensued by the 30 % autumn in the stock markets. Other jobs associated with partial denationalization theoretical account include: higher administrative costs particularly there are big figure of little histories, exposure to fluctuations in the stock market, increased degree of inequality and the potentially lower benefits for those who are low-wage workers particularly the adult females.

The Chilean or Pineran theoretical account of societal security system have been described every bit successful as it

Social Security Privatization in Chile


Harmonizing to Edwards Sebastian in his research paper, the system of societal security that existed in Chile until 1981 was Pay-As-You-Go pension system ( PAYG ) . At this clip, the system was changed to a new system that was called denationalization. The system was in private managed single histories that have seen Chile to be a function theoretical account to most state around the universe.

Chile has done many alterations in its denationalization system over the twelvemonth in chase of doing it more independent to its current place. Such alterations have been particularly in the liberalisation of the investings regulations and in the add-on of the pension financess Numberss. A pension fund direction company ( Administradoa De Fondos De Pensiones AFP ) was besides formed to supervise the pension figure that will be given to the history holders. The chief challenge that the authorities of Chile experienced at the initial phase was the figure of workers who remained exposed and even those covered, had inconsistent engagement rates. This was seen to take finally to insufficient retirement benefits. Harmonizing to the international criterion, they besides realized that the Pension Fund Management Company was bear downing extortionate sum of money to the employees. Therefore, this discouraged the workers and decreased significantly the figure of the history holders who turned for the pension strategy.

Therefore, the state enacted a jurisprudence in March 2008 that ensured that the exposed group was integrated in their program. The jurisprudence provided more benefit and adequate to more people. It ensured that there was gender R proviso to heighten gender equity and enhanced competition in the field of the pension. The jurisprudence was meant to better the AFP fiscal hazard direction. This was to impart the strategy increase the workers benefit from their part and to guarantee that the regulations of financing the 1 who are left and the handicapped are changed. They made it ensured more chances were established to heighten voluntary economy and allergic workers on fiscal affairs to better their literacy towards fiscal direction ( Tanner, Michael pg 56 ) .

Therefore, the 1981 brought reforms in the manner people were to prosecute in the new method of pension strategy. The Chile authorities posed a regulation that it was compulsory for all the workers except those who were to retire within five old ages were to hold single retirement history to assist them take between pay-as-you-go ( PAYG ) and in private managed system. The authorities regulation was to guarantee that each individual come ining the labour market must fall in the new capitalisation system as he or she wish, to eliminate the PAYG system by 2050.

The workers are to lend 10 per centum of their monthly salary per month harmonizing to the jurisprudence, to their histories. The AFP, which is a Pension Fund Management Company, ensures that disposal fee ; premiums for subsisters and insurance for the handicapped s are deducted from that fund.

The workers are sent free to take the AFP to fall in. They can besides alter the AFP any clip harmonizing to their will. The workers are besides free to do any voluntary parts to their histories every bit good as to the voluntary retirement ‘s histories ( Feldstein, Martin pg 87 ) . The employers can non entree neither employee ‘s histories, nor can they lend to them. The engagement of any freelance to the strategy is voluntary.

The authorities but works as a private company formed the AFP. The authorization of the AFP is entirely to pull off the pension financess of the workers and supply benefits to them. They guarantee that the workers part is collected, their histories credited and their monies invested in conformity to the authorities waies. The AFPs besides ensures that they have an insurance company that they are working manus in manus with them in contractual footing to supervise the proviso of insurance to the subsister and the handicapped. The authorities came up with Superintendent of Pension Fund Management Companies ( SAFP ) that was used to supervise the enrollment and the licensing of the AFPs until July 2008. The bureau worked under the ministry of labour and societal security.

When a worker attains a normal retirement age, which is 65 old ages for work forces and 60 old ages for adult females, there some proviso put in topographic point on how they can utilize balance in their single histories. They can make up one’s mind to utilize it to purchase immediate rente to that will supply them with lifetime benefits. Second, they may make up one’s mind to come up with programmed backdowns. This will assist them to raise income over the clip they are expected to populate. Nevertheless, if they die before the expected life-time, their dependents inherit the balance in their single histories. The history holder may besides make up one’s mind to put a day of the month for purchasing an rente. This will go on until the day of the month becomes a programmed backdown day of the month from their histories. This is referred to us deferred rente. They may eventually make up one’s mind to utilize some balance in their history to purchase immediate rente and plan backdowns of the remainder of their money. This rente is purchased from an insurance company. They are charged excess fee for their purchase. Largely the AFPs will bear down this fee on monthly footing on programmed backdowns. If the worker decides to hold early retirement, the jurisprudence permits him/her to make so. However, this can merely go on under certain conditions. However, the worker can be able to withdrawal extra fund from their history balance if their history can be able to finance 150 % of the minimal pension ( Scheil-Adlung, Xenia pg 124 ) .

Administration warrants

The authorities recognizes those workers who switched from the old PAYG by giving them bonds when they retire that is tantamount to the value of the accumulated right of that public system. The value of these is updated on one-year footing depending with the alteration that occurs in the consumer monetary value index ( Williamson, John Pg 1 ) . They besides earn 4 % involvement dating back the twenty-four hours they joined the new system. This bond either is redeemable and added to the single history during the clip the worker retires, dies or are disabled.

Pension reforms

The Capitalization Pension System Policy was largely skewed towards the workers who had occupations that can regularly enable them to give part to single histories. Therefore, harmonizing to the germinating labour force in Chile, the authorities decided that there must be some reforms proviso to roll up this. Harmonizing to a study written on July 2006 by President ‘s Pension Advisory committee, it found that most of the people in Chile plants in less stable occupations, temporarily place and portion clip occupations and do non lend on a regular basis in their persons account. They besides found that the life anticipation and the ageing coevals are acquiring higher each twenty-four hours. In add-on, people are besides passing much clip in instruction, as higher instruction is largely available particularly to the younger coevals therefore proroguing their entryway age to the occupations. This decreases the clip that the workers use to roll up the money for retirement.

Therefore, the study provided that the authorities be supposed to spread out pension coverage to guarantee that it covers even people without regular payment. They besides recommended that they should supply equal pension to its people. Last, they said that if competition is encouraged among the AFP companies, it would take to lower workers cost which finally led to higher net rate of return and higher pension.


Chile of old ages has seen it system of pension evolved toward the better. This has made most of the state in the universe to set up their system in relation to their system. Some states in the Latin America have wholly revolutionists in their pension strategies system to be wholly or partly privatized. There are assorted grounds as to why the system is a success. The first 1 is the ability of each employee to hold the freedom to take his/her ain history independently. This boosts the workers morale and enhances the competition therefore increasing the histories. The denationalization of the company ensures that there are no political intervention in the pension strategy and increase the competition of the company therefore take downing the workers charges. The sensitisation procedure where the authorities supply money for educating the workers on how to take the right history and AFPs company has lead to increase in the figure of people who has registered in strategy.

The authorities besides expanded the pension strategy to suit even the people in the informal sector has seen the system to be really successful. The other one is the inclusion of the gender equity that ensures that adult females particularly who were for old ages sidelined by the old system are good represented. This increased the figure of the workers who participate in the strategy significantly. Last, the system gained a batch of popularity due to to the full engagement of the authorities who ever make certain that the company worked within the needed bounds. They besides ensured the history holders who changed their old history were guaranteed by offering bonds to them ( Williamson, John pg 1 ) .

States portion some issues like high administrative costs, prevalence of acute competition, adult females do no menu good every bit compared to work forces, the informal sector is big and non covered, and most investings are mostly in authorities instruments.

The Chilean theoretical account has succeeded in offering the three benefits at retirement rente and the programmed backdowns rente, which is combination the two, but the Swedish theoretical account offer merely one benefits, which is the rente option ( The World Bank, 1994 ; 123 ) .

Both states did non hold any signifier of auxiliary pensions prior to the reform period but those who had opted the Swedish theoretical account looked to the Chilean theoretical account for options as their wage as you go system were under funded hence doing the Chilean a more successful theoretical account. In add-on, the states in the eastern cardinal Europe had low had a cosmopolitan societal security while the Chilean had low coverage yet with younger populations. Its opposite numbers had older populations with lower life anticipation particularly the work forces and such differences promoted the success in the execution of the pension strategy for those who had adopted Chilean theoretical account as those who had opted for the Swedish theoretical account fell into the pit fiscal restraints as they try to cover its members.


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