WORKERS FREED! Presented by Carlos A. Gomez Africa Director International Center for Pension Reform THE 3 rd INTERNATIONAL ANNUAL RETIREMENT.

WORKERS FREED!

Presented by Carlos A. GomezAfrica DirectorInternational Center for Pension Reformwww.josepinera.com

THE 3rd INTERNATIONAL ANNUAL RETIREMENT REFORM CONFERENCESOUTH AFRICA 2011Cape Town, South Africa26, 27 & 28th October 2011

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In 1889, at the age of 74, German Chancellor Otto von Bismark, created the pay-as-you-go pension system

Thus, Bismark destroyed the key human link betweeneffort and reward Today, workers citizens support the heavy weight of unfunded state obligationsIn Bismark´s times, life expectancy was 48 years and retirement age 70, set arbitrarily by Bismark himself

…A State sponsored Ponzi scheme

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EU 25: LIFE EXPECTANCY INCREASES & FERTLITY RATE DROPS

* 2.1 is the replacement rate just to maintain population constant

European trends are similar to the rest of the World

Source: European Commission, Oct 11, 2011

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In 60 years, active workers to pensioner ratio fell dramatically.

Source: 2010 OASDI (Old Age Survivors & Disability Insurance) Trustee Report, Social Security administration, USA

And it will continue to fall……adding still more state unfunded obligations on workers of the world

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CURRENT GOVERNMENT DEBT OVER GDP IS UNSUSTAINABLE

Source: European Commission, May 17, 2011

Government Debt to GDP is above 60% agreed on the Maastricht Treaty

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EUROPE GOVERNMENTS: UNFUNDED OBLIGATIONS* (% of GDP)Greece 875%

France 549%

Portugal 492%

United Kingdom 442%

Germany 418%

Ireland 405%

Italy 364%

Spain 244%

Source: Measuring the Unfunded Obligations of European Countries, Jagadeesh Gokhale, National Center for Policy Analysis , 2009

Real Debt of Europe

The average EU country needs to have over 4 times (434 %) its current GDP in the bank today, earning interest, to fund current policies indefinitely

*Difference between the projected cost of continuing current government programs (official + pensions + health + welfare) and net expected tax revenues

EU 25 Average 434%

0

200

400

600

800

1000

1200

140081 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

AccummulatedReturns (1981: 100)

The Power of Compound InterestIn 30 years (1981-2010), the results are:

Assets reached $ 150 Billion, 70% of GDP

Annual real return for Chilean workers retirement accounts was 9.2%

Chile PRAs Real

9.2%

Source: Central Bank of Chile; S&P; Superintendency of Pension Fund Management

CHILE 1980: CHANGE THE PARADIGM!

• At retirement: annuity for life, programmed withdrawal, or mix

• “Retirement” is redefined to enhance personal choices (age, benefit level, inheritance)

• System managed by competitive private companies

• Workers choose among 5 mutual funds, with highly diversified portfolios

• Role of government: market-friendly regulation, technical supervision, and safety net paid with general tax revenues

• Zero payroll tax

• Every worker has a mandatory personal retirement account

• Saves 10% (substituted a payroll tax) of his monthly wage and

• Benefit from the extraordinary power of compound interest

Fairness: Guarantee current retirees benefits (“protect your

grandmother’s check”)

THE TRANSITION: IT CAN BE DONE!

Leadership: Moral courage and use of social media (facebook, twitter) and traditional channels to speak the truth to citizens and explain this ‘common sense’ solution

Fiscal challenge: No “economic cost” and need to devise a long term plan to finance transition

Responsibility: Close door of bankrupt system to new entrants

Choice: Voluntary opt out, with “recognition bond”

•Empowered workers: 9,2% annual average real return for 30 years, multiple choices (incl. retirement age), ownership of capital, inheritance

•Strengthen the economy: capital pool (US$ 208 billion; 70% of GDP), less unemployment, fiscal responsibility, and faster growth

•Stabilize society: workers turned into small capitalists; political/cultural change and stability

•Increase freedom: Chile ranks N° 7 in 2011 Economic Freedom of the World Report

•Amazing result: Workers capital saved in their own PRAs for the enjoyment of future retirement, enjoy TODAY benefits for those same workers: PRAs invest in telecommunications, power, public works, health, education that increases economic development and social inclusion

CHILE 1980-2010: KEY RESULTS

• Latin America: 10 (largest: Mexico)

• CEE: 14 (largest: Poland)

• Developed: Australia & Sweden

• Asia: Hong Kong & India (only gov)

• Africa: Nigeria

• Middle East: Egypt (2012)

• W. Europe: Only parametric reforms

• The Race: USA or China first?

ATLAS FREED

Source: Economic Freedom of the World, 2011 Report, Fraser Institute, 141 countries measured

World Economic Freedom

Most free

2nd Quartile

3rd Quartile

Least free

Source: Economic Freedom of the World, 2011 Report, Fraser Institute, 141 countries measured

CHILE TOP 7 INWORLD ECONOMIC FREEDOM

30 YEARS, 30 COUNTRIES

WORKERS FREED!