Chile's Social Security Fund Investment And Management

Along the history of modern social security (SS) system,one of the most radical and important reform was the privatization of the Chilean pension system in 1981.It was the first privatization in the world that completely substituted the old public PAYGO collective pension scheme with a new private fully-funded individual pension system.The scope,depth and speed of Chilean reform have attracted world-wide attention,and is having significant influence in Latin America and other developing as well as developed countries.Chilean is often presented as a model for structure pension reform offering interesting experiences.This paper emphasizes on the investment process of Chilean pension fund.By analyzing the practical effect of pension fund in the past 25 years, the paper summarizes and comments on the"Chilean model".There are six chapters in this article:The first chapter offers a theoretical framework for analyzing SS and pension fund.The author divides the history of SS system into three periods in which the"Chilean model"has acted as an important role. To demonstrate the privatization tendency of SS, three concepts were put forward:"property right of SS","comprehensive insurance"and"time consistency".The author argues that the investment plan of pension fund depends on the characteristics of SS system.The privately managed pension fund was distinguished from public pension fund.Chapter 2 analyzes Chilean pension reform process in 1981 and illuminates the new system.Before 1981, the old pension system was becoming insolvent. The new system was put into force by the army ruled government.It was a three-pillar structure in which the individual account plan acts as a mainstay. Pension fund was managed by AFPs and superintended by SAFP.Chapter 3 discusses the institutional arrangement of pension fund investment and explains the investment policy.The agency theory can be used to analyze the governance structure of pension fund. SAFP adopts a series strict policy to regulate AFPs.Gradually more financial instruments were permitted for pension fund investment.An important improvement in pension fund management was the Multifunds investment rule set up in 2002.In the fourth chapter the practical effect of pension fund investment is analized.In the past 25 years, Chile has accumulated a huge amount of pension fund which was attributed to a high investment return.At the same time, the cost of pension fund management has droped down.As for the AFP industry,conclusions can be made that the market concentration is holding on, investment"herding effect"is intensified, and salesmen take an negative role in market competition.The fifth chapter describes the relationship between pension fund and macro-economy.Since 1981, pension fund has grown into the most important institutional investor in Chilean capital market and significantly influenced other financial systems.By increasing saving,encouraging employment and promoting TFP, pension reform has boosted the GDP growth.The last chapter comments on the"Chilean model".The author agrees on some successful facts in Chilean pension reform, espiecally for the high investment return and the positive effects on the development of capital market as well as macro-economy brought forth by pension fund.However, there are still some difficulties and problems unsolved in Chilean pension system, such as the low coverage of pension plan, high management cost, pension income gap, the fiscal burden and so on. So there are still lots of work to do for the Chilean government to improve the pension system.