The debate over the past few days has focused, from various angles, on the pension system. Today, two bills related to this issue are being discussed in Congress: the so-called “fourth withdrawal” and the short-term pension bill. In both cases, we have heard a great many arguments, which on many occasions have surely caused headaches and disbelief among those who know anything about social security systems.

Since there are many such issues, I would like to address the concept of mandatory savings today. During the debate on the short-term pension bill, I heard a congresswoman speak negatively about it, calling it “a misappropriation of Chilean workers’ wages.” This argument has also been used by some members of the public, based on the premise that “if the money is mine, I can do whatever I want with it.” The curious thing is that eliminating mandatory savings amounts to rejecting a social security system, based on the assumption that individuals alone are capable of taking responsibility for their future and their decisions (reaping the benefits, but also bearing the costs). In other words, the freest of free-market systems—without intervention, without regulations: pure, unadulterated laissez-faire.

However, for various reasons, people do not voluntarily save enough to provide for their golden years. It has been demonstrated—both under the principles of traditional and behavioral economics—that because of our tendency to undervalue the future relative to the present (I’ll start my diet on Monday—until Monday actually arrives), we do not set aside the resources that our future selves will need to finance their consumption. Furthermore, we face various risks, such as economic, longevity, and behavioral risks, among others. Therefore, in general, people do not save enough for their old age. We might think that this is their problem—that they have to take responsibility for their own decisions—but as a society, we have decided that we do not want that and that, in one way or another, we must all help meet certain needs of retirees. In fact, if it’s not by funding a pension, it’s by funding healthcare, housing, and social assistance systems, among others. In other words, at the end of the day, someone other than those who made the private decision ends up paying for part of that decision: the government. And the government is all of us, and it is funded by our taxes.

Thus, in the 19th century, the first social security system as such was established in Germany, even though various systems to assist those past working age have existed since the dawn of humanity. In 1881, Chancellor Otto von Bismarck established an insurance system in the form of annuities paid in the event of illness or old age—a measure that, interestingly, was implemented to appease the social demands of labor unions and halt the spread of Marxist ideas. Since then, we have developed different ways of managing pensions, ranging from pure pay-as-you-go systems to individually funded systems. In the former, pensions are financed from the nation’s general funds, which come from tax revenue. I don’t know about you, but I’m not familiar with any voluntary taxes. The latter rely on mandatory contributions that each worker makes to their own fund, which is managed by a third party.

If you think about it—without showing a preference for one system over another and simply on the premise that we want a social security system (because, mind you, we might not want one)—contributions must be mandatory, since as individuals we tend to under-save, face risks, and often lack the incentives to do so voluntarily. Therefore, whether because there is an intergenerational social contract or because you have to contribute to an account for your old age (and for that reason alone), saving in any pension system must be mandatory.

Nathan Pincheira 

Chief Economist at Fynsa