Center for a Stateless Society
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Classical Liberalism and Conservatism

Classical Liberalism and Conservatism: How is Chile’s “private” Pension System Best Conceptualised?

Download a PDF copy of Dr. Mark Hyde’s study Classical Liberalism and Conservatism: How is Chile’s “private” Pension System Best Conceptualised?

Introduction

At the start of the 1980s, the Chilean state replaced a long-standing publicly-administered pension arrangement with a multi-pillar retirement system. Centrally, this new arrangement provided for a second pillar of privately-administered, defined contribution (DC) individual accounts. According to a wide spectrum of scholarly opinion, the new “private” pension arrangement was and continues to be the institutional embodiment of the classical liberal blueprint for the reform of retirement income protection. On the left of the ideological spectrum, the kinds of measures deployed by pension reform were integral to the “neoliberal” counter-revolution that (allegedly) dismantled the social democratic welfare state, violently in Chile’s case (Harvey, 2005; Crouch, 2011). Crucially for this article, classical liberal scholars of retirement have defended Chile’s “private” pension pillar on the grounds that its design corresponded in important ways to their core values and principles (Tanner, 2004; Shapiro, 2010). For much of the classical liberal mainstream, Chile’s “private” pension pillar plays a vital role in providing a practical illustration of the measures that are necessary to reform retirement income protection in other national jurisdictions.

We reject this characterisation of Chile’s “private” pension pillar, arguing that any resemblance between its design and the core principles of classical liberalism is superficial. When evaluated in detail against relevant criteria, it is clear that Chile’s “private” pension pillar falls far short of the classical liberal ideal of liberty. This argument is developed in two specific ways. First, we provide a brief contextual overview of the scholarly pensions literature which has maintained that Chile’s experiment in pensions privatisation has exemplified the classical liberal reform model. Second, we evaluate the Chilean second pillar pension arrangement against the requirements of pension design principles that would be suggested by the classical liberal corpus, focussing on the pension fund management industry—the state-licensed agents who have been responsible for running the “private” system. In particular, we appraise their role in managing worker’s savings in terms of classical liberal principles regarding price and performance during the period 1981 and 2008.

Our findings lead us to argue that Chile’s experiment in pensions “privatisation” during this period of analysis did not correspond substantially to any of the core principles of classical liberalism, contrary to what many believe. In characterising the “private” pension arrangement as conservative, we concur with classical liberal critics of state capitalism who regard today’s corporate economy as a state-organised system of market privilege rent-seeking that is systematically biased in favour of big business. Instead of pursuing a policy of laissez faire with regard to retirement income protection, the Chilean state has rigged the “private” pensions pillar in order give preferential treatment to the financial services industry incumbents who manage it. This has meant that rather than striving to satisfy the preferences of sovereign consumers, Chile’s pension fund managers have been insulated from market competition, and have thus been able to impose excessive charges for sub-optimal performance. …

Download a PDF copy of Dr. Mark Hyde’s study Classical Liberalism and Conservatism: How is Chile’s “private” Pension System Best Conceptualised?

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