Chile's Privatized SS Plan

Trish Regan Reports 3.6M Chileans Have Private Retirement Accounts

(CBS)  In the heart of the Andes Mountains is an example of a fully-privatized social security system.

Hector Espinoza, 48, is one of the 3.6 million Chileans with a private retirement account.

The biggest benefit, he says, is "the chance to control my retirement."

In 1980, Chile's traditional pay-as-you-go social security system was about to go under. In response, the government created a program that required workers to save for their own retirement through private investment accounts.

As CBS News Correspondent Trish Regan reports, 10 percent of every paycheck must now be deposited into an individual account - an AFP - as it's known in Spanish. Workers have to pay an additional 2.3 percent of their wages to cover administrative costs and health and disability insurance. The money in the account grows tax-free until the worker retires.

With annual returns topping 10 percent since the program began, advocates of privatization deem Chile a success story.

Nearly $60 billion worth of retirement assets have been put to work in the Chilean stock market. Supporters of private accounts say all this investment in local companies has helped fuel an unprecedented economic boom.

"You have Sweden, you have Poland, you have Mexico," says Jose Pinera, Chile's former labor secretary.

Pinera designed the program.

"I believe it gives people ownership, freedom, choice," he says. "I believe it is such an American system."

But critics say it's a system with serious flaws.

Asked what he thinks of AFP, a tomato salesman says in Spanish, "It's something that's not worth the trouble."

Many of Chile's poorest workers, like this tomato farmer, say they can't afford to put away 10 percent of their pay.

Nearly half of Chile's workforce is self-employed and many are seasonal workers who rarely declare income, pay taxes or contribute to their pensions. These people have little to retire on, other than the government's guaranteed payment of $150 a month.

Still, most of the people who consistently contribute to their accounts, like Espinoza, say the system works.

"I hope to put more money in the system in order to obtain a better pension," says Espinoza.

But that pension depends on the Chilean markets sustaining their impressive returns. Still, Espinoza says, the risk is worth it because for him and millions of Chileans like him, ownership of a retirement account means ownership of their future.