Opting Out by Country: Chile Leads the Way

The United States is not unique in instituting mandatory government-sponsored pension systems. Such programs were actually started in 1870s Germany by Chancellor Otto von Bismarck. He arbitrarily selected 65 as the retirement age, which is striking when one considers that life expectancies were under 50 at the time. Clearly, Bismarck and the original designers of the government retirement systems expected few benefits to be paid.

In the 20th century, government pension programs have become an important part of the "social safety net" in many developed countries. A number of countries, such as Chile in South America, started their programs before the United States created Social Security. But the inexorable dynamics of lower birth rates, longer life expectancies, and the political appeal of greater retirement benefits have put increasing burdens on government-funded pension programs in every country that has one.

In 1980, the pressures on Chile’s government system became too great and a new system was introduced which allowed Chileans to opt out in favor of private investment. Large numbers of Chileans chose to leave the failing government system, and the results have been greatly increased benefits paid out to Chilean retirees.

Other countries including Great Britain and Australia have revised their programs to include a small guaranteed government pension supplemented by a combination of employer-sponsored and personal pension plans under private management. Participation rates in the partially privatized systems are in excess of 90 percent and assets are growing at greater market return rates.