De Castro was the leader of "the Chicago boys," a score of Chileans who studied economics at the University of Chicago in the 1950s and '60s and became enamored with the free-market ideology of Milton Friedman, a Nobel laureate then teaching at the school. Once installed in the highest reaches of the Pinochet regime, the Chicago boys put into practice neo-capitalist notions beyond anything Friedman was advocating.
"Maybe the most radical of these ideas was to privatize the social security system," says de Castro. To be sure, by the time the Allende government was overthrown in 1973, payments to retirees had become virtually worthless because of hyperinflation. But nowhere in the world had private pension funds replaced a state-run social security system. Under the system put in place in 1981, employees hand over 12.5 percent of their monthly salaries to the fund management company of their choice. The company invests the money into stocks and bonds. In theory, these investments guarantee "a dignified retirement"—as the system's slogan asserts—after a quarter-century of contributions. President Bush, who visited Chile in November 2004, praised the country's privatized pension system and suggested it could offer guidance for the Social Security overhaul that he was then advocating at home.
The positive effects on the Chilean economy became apparent much sooner. As pension fund contributions mushroomed into billions of dollars, Chile created the only domestic capital market in Latin America. Rather than having to depend on high-interest loans from global banks, Chilean firms could raise money by selling their stocks and bonds to private pension fund management companies. "This was a crucial element in our economic growth," says de Castro. Government emissaries from elsewhere in Latin America and as far away as Eastern Europe flocked to Santiago to learn about the system—and install versions in their own countries.
But seven years ago Yazmir Fariña, an accountant at the University of Chile, began to notice something amiss. Retired university professors, administrators and blue-collar employees were complaining that they were receiving much less than they expected, while the small minority who stayed with the old, maligned, state-run social security system were doing quite well. "We began doing research across the country, just among public employees," says Fariña, 53. "More than 12,000 retirees immediately sent us complaints that they were making a fraction of what they had been promised. We discovered a nationwide catastrophe." According to spokespersons for the private pension funds, only those retirees who failed to make regular contributions are suffering a shortfall in their retirement checks. But this is disputed by many retirees.
Graciela Ortíz, 65, a retired government lawyer, gets a pension of $600 a month—less than a third of what she expected. Her friend, María Bustos, 63, the former chief public accountant for Chile's internal revenue service, lives on $500 a month. And Abraham Balda, 66, a night guard at the university for 35 years, subsists on a monthly pension of $170. "The private pension funds are helping the country grow," says Fariña, who formed an association of retirees to lobby for lost benefits and pension reform. "But whatever happened to a ‘dignified retirement'?"
Fariña's association has ballooned to 120,000 members. More important, their complaints became the biggest issue of the recent presidential campaign. The retirees probably gave Bachelet a decisive edge in her victory.
On that March 12 evening following her inauguration, the new president made a long list of promises to the many thousands of spectators gathered below the balcony of the presidential palace. Their loudest cheers erupted when she promised to fix the private pension system. "What could be better than finishing off in 2010 with a great social protection system for all citizens?" she asked. And what could be better than a major economic reform that a freely elected Chilean government could call its own?
Jonathan Kandell, a New York Times correspondent in Chile during the 1970s, writes about economics and culture.