Could It Happen Here?

The Chilean pension system, adopted in the early 1980s, was once heralded as a “model of privatization” and imitated by other countries, but has recently been derided for failing to provide the promised benefits. The pension plan is a defined contribution system that depends on employees having access as well as making contributions in order to receive the benefit. Sound familiar?

More than 1 million Chileans have marched through the streets of the capital city, Santiago, protesting all sorts of social issues, including the country’s pension system. Workers are asked to pay 10% of their wages each month to for-profit funds called AFPs. Regrettably, many workers are not able to contribute enough to their plans to provide for an adequate retirement benefit. Compounding the issue are the roughly 1/3 of Chileans who have a less formal working arrangement, the unemployed, and women leaving the workforce to raise their children.

The prior pension system was a pay-as-you-go defined benefit plan. Many Chileans switched to the new plan on the promise that they would be able to retire on a full pension for life. Instead, it has basically left millions struggling in their golden years. The supporters of the system say that the real issues are low wages, a weak job market, an aging population, and long retirement periods relative to the worker’s career. Again, I ask, does this sound familiar?

The U.S. has witnessed the collapse of the defined benefit pension system in the private sector and public fund and multiemployer plans that are struggling under low funding status and escalating contribution expenses. The private sector has shifted a significant percentage of the workforce into DC plans, but a large percentage of workers don’t have access to an employer-sponsored plan. They, too, are struggling with decades of weak wage growth, a changing workforce, longer longevity, and the burden, and it is a burden, of our retirees having to manage the disbursement of retirement assets through an uncertain retirement life cycle.

We are reminded nearly daily of the wealth gap that has been created in our country, as the bottom 50% of Baby Boomers only have 1% of the wealth among the members of this cohort. We are also told that the Millennial generation is fairing no better. At what point do we see millions of Americans marching through our capital cities? Think that can’t happen? Please don’t kid yourself. DC plans were once used as supplemental benefits for middle-level executives that wouldn’t spend enough time at their new employer to make the DB plan an attractive retention tool. Oh, how times have changed. Asking untrained individuals to fund, manage, and then disburse the proceeds from a DC plan is a math problem too hard for most of our citizens. The outcome is not going to be positive!

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