Avery Galleher ’06 Analyzes Chilean Private Pension System

Story posted June 14, 2006

Avery Galleher '06 Avery Galleher '06

Avery Galleher ’06 listened with interest to news reports touting Chile’s private pension system as something the United State should emulate. It would save social security from bankruptcy, some Congressmen said, and it would provide more stability to retirees. So Galleher decided to go to Chile to find out for herself if their system was all it was cracked up to be.

What she found, she says, would surprise some American politicians: Many Chileans who can afford to be a part of the system say it is difficult to calculate the pension they can expect to earn, and they are frustrated by the large commissions the private pension companies charge. What’s worse, the system marginalizes women and the self-employed, who are struggling just to survive from day to day.

“Although I heard a variety of opinions, the majority of Chileans I spoke with expressed dissatisfaction,” Galleher said.

The Bowdoin senior was familiar with Chile already. She had studied at the University of Valparaiso in her junior year, following in the footsteps of her father, who had spent a year at the University of Chile in Santiago. Through Bowdoin’s Latin American Studies program, Galleher received a summer travel grant to return for her independent study project.

“I stayed with friends; I knew the bus system; I knew a lot of the people I’d talk to,” said Galleher, a Spanish and education major with a minor in government and legal studies. “My Spanish is proficient, but there were a couple of Chileans who were hard to understand. I had to acquire the vocabulary.”

She started by interviewing people she knew. They, in turn, put her in touch with others. Working from a prepared questionnaire, Galleher interviewed 35 people in the capital city of Santiago in central Chile; in Valparaiso, a seaport city; and in towns such as Bahía Inglesa in northern Chile.

“Some people had so much to say, we spent up to an hour and a half talking,” she said. “Others just answered ‘yes’ and ‘no.’”

Manola Martinez of Valparaiso, for example, is a single mother with a son in high school and a daughter in college. Martinez is self-employed, earning slightly above average income housing foreign exchange students. She and her family live comfortably, but at 48, she has not started a pension savings account.

“Every month I tell myself that I am going to start a fund, but something always comes up,” she told Galleher, saying that maintaining her house, paying college tuition, and supporting her mother, who lives in a retirement home, are more immediate expenses. And Martinez is not unusual among her self-employed friends.

Galleher, looking for a broad spectrum of interview subjects, also sought people randomly in the street and asked if they would be willing to talk to her.

“These were the artists and fishermen, and they were all really nice and wanted to talk,” she said.

The system of private pension savings accounts (PSAs) was implemented in Chile in 1981 by the dictator Augusto Pinochet. At the time, people were given a choice to sign up or stay in the state-run program.

“A lot of people did sign up because of all the propaganda,” Galleher said. “I spoke to two who did not sign up because they did not trust the regime at the time. Both of them are professors and financially well off. Compared to other professors, they will be a lot better off in retirement.”

One striking thing Galleher found was how the system puts women at a disadvantage, because they have less opportunity to pay into the system but a greater need to be covered by it.

“Women earn 33 percent less than men for the same jobs,” she said. “They take off more time for childrearing and generally spend less time working. Women retire five years earlier than men. And they live longer.”

Self-employed workers, like the fishermen and artists she interviewed, simply can’t afford to be a part of the system.

“About 89 percent of them are not covered,” she said. “When a percentage of workers’ income is not automatically contributed to the PSA by an employer, it is inevitably devoted to seemingly more important needs such as food, bills, or other everyday living costs.”

Mario Gonzalez, an artisan who earns a living making and selling jewelry, is typical. He is in his mid-thirties and does not contribute to a PSA because, he says, he “has to worry about life one day at a time.” He earns most of his income during the summer tourist season. What is left in savings supports him in the winter, when his income is unreliable.

A fisherman Galleher met, Jorge Diaz, told her that if he ever had extra money, he would not invest it for retirement, but would use it to buy his own boat, which in turn would increase his income and offer more security to his family.

Galleher came away from her research wary of privatization as a solution to the problems facing social security.

“I don’t think social security should be an individual responsibility,” Galleher said. “A system of solidarity better serves society.”

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