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Policy makers continue to struggle to address changing demographics and aging populations amid much disagreement regarding the best path for pension reform. This article describes the social security reform efforts of several nations in the Americas, which, since Chile's pension reform, have become a global laboratory for pension reform. The authors review the many lessons of this new "postprivatization" era of pension policy, in which the euphoria of the initial phase of reform is clearly over and a decade or more of experience has proven pension reform to be an ongoing project.
A WORLD OF REFORMS
Well over a century ago, Chancellor Otto von Bismarck introduced a state-sponsored pay-as-you-go (PAYGO) pension system in Germany in order to reduce poverty among the aged. This primary goal is true today, even as policy makers struggle to address changing demographics and aging populations amid much disagreement regarding the best path for reform. This situation holds especially true in the Americas, which have become a global laboratory for pension reform since Chile's pension reform.
In 1981, Chile took the unprecedented step of switching from a PAYGO to a substitutive prefunded pension system. It continued to pay benefits promised under the old system by issuing recognition bonds and running budget surpluses during the initial years to finance these bonds. In 1994, Argentina and Colombia followed suit. With the publication of the landmark study Averting the Old-Age Crisis that same year, individual prefunded accounts were now officially encouraged by the World Bank and other leading international organizations (World Bank 1994). Since then, the World Bank has helped more than 80 countries make changes in their pension systems (Holzmann and Hinz 2005). Of these, about a dozen countries in Latin America have passed laws introducing mandatory saving, while a similar number in Europe and central Asia-mainly in the post-Soviet "transition economies"-have also made legal provisions for individual accounts.
Beginning in 2004, a fundamental shift in thinking became evident in the process of pension reform, in international organizations such as the World Bank, as well as in countries such as Chile that have undertaken reform. The first element of such a shift became evident with the watershed publications of Keeping the Promise of Social security in Latin America by Indermit Gill,...