Chapters 4 and 5 explored the relative operations of funded versus pay-go retirement programs under a range of alternative demographic and economic scenarios. The economic and demographic conditions leading up to the 1960s and 1970s allowed public policymakers to rationalize the operation of national retirement systems on a pay-go basis. By the early 1990s, however, financial market operations and changing demographic outlooks significantly altered the terrain of pension financing. In its 1994 study that set off much of the world discussion about pensions, the World Bank advocated basing national retirement structures on three “pillars” of income security. The first pillar should be a pay-go, publicly managed defined benefit system. The second pillar should be a funded defined contribution system, in which the assets are privately managed. The third pillar should be private savings. By the end of the 1990s, the model envisaged by the World Bank was up and running in several countries.

Case Studies of Nations Shifting to Funded Pensions

The approach that probably has received the most attention and has been emulated most widely is that of Chile. Chile's May 1981 reform of its pay-go retirement plans was truly radical. The Chileans basically transformed their system into private individual retirement accounts, which are mandatory, fully funded, fully vested, and portable. Workers must contribute 10 percent of earnings to their retirement accounts.