Printer Friendly

Privatized benefits in South America.

OVER THE LAST decade, economic conditions in South America were far from ideal: Plagued by debt, skyrocketing inflation and protectionist policies, South American nations foundered while other countries, including those in the AsiaPacific such as Korea and Taiwan, experienced robust levels of economic growth. However, the tide has begun to turn in the Western Hemisphere's southern continent as government leaders work toward privatizing their nation's economic systems.

This new trend toward free markets has led South America's governments to sell off nationalized industries, improve fiscal and monetary policies, lift crippling trade barriers and restructure sagging manufacturing sectors. In addition, the move toward privatization has sparked the interest of many U.S. corporations. "South America's booming and mostly young population has made the continent attractive to business. As a result, U.S. companies are looking at South America as a place of great growth in the future," says Anthony Gillam, vice president and regional benefit consultant with Johnson & Higgins.

The movement toward free enterprise has also led to a trend toward privatizing employee benefits plans. This transition, however, is only partially due to the new economic reformation. "Over the last 10 years, the quality of social services such as pension plans, education and health care has really deteriorated," says Mr. Gillam. "South American governments, recognizing the danger of this, are moving to privatize benefits."

In an effort to familiarize U.S. companies with the transformation of South America's benefits scene, international benefits consultant Johnson & Higgins held a briefing on the changes affecting benefits programs in Chile, Argentina and Brazil.

In many ways, Chile has served as a model for other South American countries wishing to privatize and improve the quality of their benefits programs. In 1981, Chile introduced legislation that privatized the stateadministered social security system.

According to Viviana Izquierdo, manager of benefits in Johnson & Higgins' office in Santiago, this new legislation created a private pension fund administration system. Called Pension Fund Administrators (AFPs), these funds, which are run by financial groups such as banks and insurance companies, oblige each employee to contribute 10 percent of monthly income to an individual account. To cover the years prior to 1981, employees are given a certificate called a Bono de Reconocimiento, which is based on the number of years an employee has worked. The certificate provides a certain amount of money for those years, which an employee can use for retirement. Besides the individual account and the Bono de Reconocimiento, employees can make additional voluntary tax-free contributions of up to 10 percent of 60 UF; the UF is a monetary unit corrected for inflation and is currently equivalent to about $25. "Overall, this private system has resulted in lower contributions and higher pensions for retirees, as well as better disability and survivor benefits," says Ms. Izquierdo.

The transition in 1981 to privatized pensions also extended to Chile's health care system. "Before 1981, we had a national health system that utilized public hospitals," says Ms. Izquierdo. "The quality of care was poor. But since 1981, we've moved to a more private system." Although the Chilean health care systern still utilizes public hospitals known as Fonasas - the new private system consists of private health institutions known as Isapres, which operate somewhat like HMOs. To fund the health system, employees must make mandatory contributions of 7 percent of earnings up to 60 UF to either the Fonasas or Isapres. Voluntary group insurance plans are also popular, primarily because they cover the costs of treatment that exceed the coverage offered by both Fonasas and Isapres.

Chile's impressive move toward privatization has spurred Argentina to attempt to adopt a similar pension system. Currently, the Argentine plan is up for consideration in the nation's Congress.

The Argentine plan calls for the creation of a fund administration program known as the Administrators of Funds of Retirements and Pensions (AFJPs). Modeled after Chile's AFP, AFJPs would be private pension plans based on capitalization that coexist with the nation's public plan. The proposed private system plan, which would consist of coverage for old age, disability and survivor's benefits, would require a compulsory 11 percent contribution and would be mandatory for all workers between the ages of 18 and 44, but voluntary for workers over 45.

In Brazil, benefits are administered through the National Social Security Institute (INSS). Employers contribute 20 percent of an employee's wages to the INSS; employees provide anywhere from 8 percent to 10 percent, depending on wage level.

"Due to high inflation, unemployment and generally low wage rates, the INSS is underfunded," says Amaury Cruz, senior manager at Johnson & Higgins' Benefit Department in Sao Paulo. Other problems, such as misappropriation of funds and the switching of INSS assets to other social programs, have also harmed the system's financial health.

Despite the current situation, Brazil plans to modify the INSS system. Proposals call for utilizing private plans to cover the majority of retirement and death and disability coverage, greatly limiting INSS benefits. Reformers also envision privatization of the workers' compensation system. However, time will tell if Brazil can manage to enact these reforms, says Mr. Cruz.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:employee benefits
Author:Christine, Brian
Publication:Risk Management
Date:Aug 1, 1992
Previous Article:The hi-tech fight against fire.
Next Article:The rise of financial risk management.

Related Articles
Productivity through privatization.
Privatization: American style.
The rush to privatize in the Asia-Pacific region.
How public agencies can effectively use private services.
Privatizing U.S. Social Security: some possible effects on intergenerational equity and the economy.
Cities Control Costs, Boost Efficiency.
City looks to privatize operations; Issue comes up with rising health, pension costs.
Concept of privatization changed: Qamar.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters