It's Labor Day

It’s Labor Day! Today, I think it is appropriate to honour José Pinera. Unions may be up in arms. Who is José Pinera then? Pinera was Minister of Labor and Social Security (1978–1980), and later on, Minister of Mining under the vile dictatorship of Augusto Pinochet. He put some of the idea’s of the Chicago Boys - a group of, let’s call them, free market fundamentalists, from the University of Chicago led by Milton Friedman. One of those idea’s was a privatized pension system. Everyone can now image I think why unions should be up in arms.

Nevertheless, when we look a little bit closer it’s hard to see why. His labor reforms for instance reinstituted free labor unions. And they were succesfull, leading to an era of social peace. Pinera was also a leading advocate for the 1980 Constitution that established a bill of rights and a gradual transition path to a return to democracy. But the topic I want to emphasize here is the one of privatizing pensions. Interestingly, Milton Friedman was not the one who proposed the scheme. He was against a state-run social security, but apart from a negative income tax (also a state instrument of course), he did not propose an alternative.

Under the new scheme, funds invested by workers would go into individual accounts owned by the workers. Employees were required to contribute 10% of their wages, but could invest up tot 20% voluntarily. When the workers reach retirement aged - determined by the worker himself, as there is no retirement age in Chile - they can transfer the value of their account into an annuity through an approved insurance company that pays them a fixed amount of income for the rest of their lives.

Workers are free to manage their own accounts by choosing among 20 mutual funds, managed by private investment companies. Still, the system is not every market fundamentalist’s dream, as the private investment companies are heavily regulated. All for the best probably because as a result none have gone bankrupt. No subprime or other crisis in the Chilian pension system. As Pinera points out it was not the goal of the pension funds to invest the worker’s money in derivatives in Singapore.

The privatized pension system started on Labor Day, 1981. This is why we should commemorate it today. By choosing this date, Pinera made it clear the reform was pro-labour, not against it:

I explained that May 1 had always been celebrated all over the world as a day of class confrontation, when workers fight employers as if their interests were completely divergent. But in a free-market economy, their interests are convergent. "Let’s begin this system on May 1," I said, "so that in the future, Labor Day can be celebrated as a day when workers freed themselves from the state and moved to a privately managed capitalization system." That’s what we did.

Indeed, today 93% of the labour force is part of the system. Annual real returns have avaraged over 10 percent since 1981. It deepened Chile’s capital market and stimulated economic growth. It’s part of Chile’s growth miracle with the country actually becoming a developed nation. Thirty other countries have followed in Chile’s foodsteps. It’s time for the other developed countries to take the lessons of Chile’s reform at heart. Why not start doing this at Labor Day?