Introduction

A group of nearly thirty countries in Latin America and Eastern Europe launched ambitious programs of privatization of their pension systems in the 1990s and 2000s. At that time, they were very receptive to the recommendations of the Washington Consensus of market deregulation, privatization of state assets and external sector opening because several governments were in need of the loans from international financial institutions. Latin America was emerging from the “lost decade” of the 1980s that led to a severe slowdown in economic growth, high inflation, fiscal deficits, debt servicing problems, increased poverty and higher inequality. Governments were, apparently, lured by the Chilean model of a private capitalization system introduced in the early 1980s by the Pinochet regime. This restructuring was far more radical than the adjustment to social security adopted by mature capitalist economies in North America and Europe (reviewed in the previous chapter). Within the framework of pay-as-you-go systems, they have focused on “parametric reforms”— rather than wholesale restructuring— increasing the retirement age, adjusting benefits and introducing of voluntary pension pillars; nonetheless, the social contract on which social security systems was built was not eschewed.

In contrast, the privatization experiments in developing and post-socialist countries went much further and brought in the financial sector to transfer the pension funds of wage earners to the corporate sector enabling massive funding and eventually wealth reallocation to capital owners.

The creation of mandatory individual accounts was seen as way to inject new savings to the local capital market in the expectation that with more financing available this would reinvigorate capital formation and accelerate economic growth. On the other side of the Atlantic, Eastern European nations— after the fall of the Berlin Wall and the end of the Soviet Union— embarked on an uncharted transition from centrally planned socialism to deregulated capitalism. Under these conditions, the privatization of social security was viewed by free market economists and the emerging financial industry as a way to develop internal capital markets (virtually inexistent under central planning) and provide investment financing for private firms. Issues of high administration costs, declining coverage of social security benefits, adequacy of pension benefits and new intermediation costs were either downplayed or just considered as of limited relevance when privatized pension systems were launched.