By Mario Velasco, M.A. New York University (mariovelasco@gmail.com)

Larry Rohter, the same "journalist" that gratuitously and falsely insulted the President of Brazil, former trade union leader Lula, by calling him "alcoholic" in print in the NYT, published a hatchet-job on Chile's pioneering and highly succesfull private retirement system. Here I will "deconstruct" his article to expose its fallacies, misrepresentations, innuendos and lies (Rohter text is in italics and preceded by the > sign, and then goes my answer to each of his statements). Let´s see:

>Under the Chilean program - which President Bush has cited as a model for his plans to overhaul Social Security -the promise was that such investments, by helping to spur economic growth and generating higher returns, would deliver monthly pension benefits larger than what the traditional system could offer.

First mistake. A defined-contribution system of personal retirement accounts (PRAs) makes no "promises" about benefits levels, either in absolute or relative terms. Each person gets what he has saved increased by the compounded return during his working years. By simple arithmetic it can be proved that, given the 10% annual real returns of the funds, the private system will deliver monthly benefits much larger than the traditional paygo system. And first revelation: the NYT attacks Chile as a way to attack President Bush's plans.

>But now that the first generation of workers to depend on the new system is beginning to retire, Chileans are finding that it is falling far short of what was originally advertised

False. Nobody has yet retired with a full working life in the PRA system, since the system is only 24 years old. The first generation of workers retiring from the PRA system will do it circa 2020-2025. The only parameter that was originally "advertised" was a 4% real rate of return, only as a reference (since it is resultant return, not a promised one). Official numbers show that that return has been not 4% but 10.1% real on average during 24 years. Indeed, an extraordinary achievement.

>For all the program's success in economic terms, the government continues to direct billions of dollars to a safety net for those whose contributions were not large enough to ensure even a minimum pension approaching $140 a month.

The government contribution to the safety net of the private system was US$ 70 million in 2004, so far from "billions". Maybe the NYT is confusing pears with apples, and including all benefits paid to retirees of the paygo system, the armed forces system, the poor people safety need (independent of the pension system),etc,etc. All these categories have no relation whatsoever with the PRA system.

>Many others - because they earned much of their income in the underground economy, are self-employed, or work only seasonally - remain outside the system altogether. Combined, those groups constitute roughly half the Chilean labor force. Only half of workers are captured by the system.

More than were covered before in the paygo gov. system. The private system is only mandatory for employed workers, as the old one was. The rest save on their own, as they did before, or do not save, as they did before. So, this issue has nothing to do with the PRA system. (Note: in the USA, Social Security is mandatory for the self employed).

>Even many middle-class workers who contributed regularly are finding that their private accounts - burdened with hidden fees

A lie. There is no "hidden fee" whatsoever. Few financial industries in the world, if any, are more transparenet than the AFP industry, as designed by law. All fees have to be published in newspapers, and when changed the managers have to advertise it months in advance, and every worker can decide to move with his pension assets to another pension manager.

>that may have soaked up as much as a third of their original investment

Not so, and an irrelevant comparison (that of course is dependent of the level of mandatory savings, the level of income per capita of the country, etc). In a funded system, the relevant fee base is as a proportion of assets managed. Fees in Chile are 0.66% of assets managed, lower than most american mutual funds. They could even be lower if the current center left government were to lighten the regulations enacted recently.

>are failing to deliver as much in benefits as they would have received if they had stayed in the old system.

Sergio Baeza in a well known study (CEP) has shown that benefits in the private system are between 50% and a 100% higher, on average, than those under the unsustainable promises of the old system. Since people were free to remain or opt out from the old system, Larry is saying then that most Chileans are fools. Dont be so arrogant Larry. You are helping to discredit Americans.

>Dagoberto Sáez, for example,

Here he goes. The usual discredited trick of finding one person and trying to derive general conclusions from his case. Of course, nobody can check the special circumstances of Mr. Saez.

>is a 66-year-old laboratory technician here who plans, because of a recent heart attack,

...the irrelevant but dramatic fact to soften the minds of readers,

>to retire in March. He earns just under $950 a month; his pension fund has told him that his nearly 24 years of contributions will finance a 20-year annuity paying only $315 a month.

$315 a month is above the Chilean median montly income and with only 24 years of contributions is a very good result indeed! So, if he had worked 40-45, the average working life, and given compound interest, he would have easily achieved a pension higher than his last wage! You found the very wrong example Larry. Since the USA has 7 times the GNP per capita of Chile, $350 in Chile is equivalent to $ 2.450 in USA). Not bad (the average SS check in the USA is less than $1000 monthly). You are so confused Larry.

>"It is evident the system requires reform," the minister of labor and social security, Ricardo Scolari, said in an interview here.

The man is called Ricardo Solari, not "Scolari", Larry. Can you trust a journalist that spend NYT money to dine and drink in Santiago and then cannot even spell well the name of the Minister? And no editors who check it with a single visit to Google. And a man like Larry pretends to "know" what Chilean retirees think about the PRA system. The "fatal arrogance" of socialists as the great Hayek would have said.

> Chile's current approach based on private pension funds has "important strengths," he said, but "it is absolutely impossible to think that a system of this nature is going to resolve the income needs of Chileans when they reach old age."

What are the "income needs" of Chileans for a member of the Socialist Party of Chile like Minister Solari? Incidentally, that party still has not dropped, as the Spanish one did with Felipe Gonzalez, its Marxist inspiration. Of course, Larry does not tell NYT readers this "little fact" about his Socialist buddies.

>Over all, Chile has spent more than $66 billion on benefits since privatization was introduced.

And so what? That is called "keeping the promises" Larry, paying our grandmothers their checks, even if the old system was bankrupt. Of course, that amounts to $2.75 b. a year in a country with a GDP of $ 80 billion. But Larry thinks he will scare NYT readers adding them over 24 years. And has nothing to do with privatization, so this is another dishonest linkage of Larry.

>Despite initial projections that the system would be self-sustaining by now,

Whose "projections" Larry? There are no NYT rules to be explict about that?. You detect a desperate man when he switches from facts to "projections". And what is "self sustaining"? Zero governments payments? To reach that in 24 years, do you suggest Larry killing all the pensioners from the old system?

>spending on pensions makes up more than a quarter of the national budget, nearly as much as the spending on education and health combined.

Again, keeping the promises Larry plus the center left government irresponsible increase in pensions, grating pensions to politcal friends, etc,etc. Absolutely nothing to do, again and again, with the PRA system.

>Faced with the likelihood of the gap remaining as it is or, as Mr. Scolari said, "perhaps even widening,"

Well, if the Socialist continue in power, their Big Government instincts may widen any gap. Nothing to do with the PRA system.

>the Chilean government is contemplating a new round of pension changes. Suggestions that have been floated include many also under consideration in the United States and Europe, like reducing benefits or setting a higher retirement age.

So Solari is advocating reducing the benefits of the old system? They have been winning elections for a decade doing exactly the opposite. Interesting piece of information (I hope Chilean newspapers ask Solari about this benefit reduction). Which is the relation to the PRA system?

>The problems have emerged despite what all here agree is the main strength of the privatized system: an average 10 percent annual return on investments.

So, a PRA system that has produced 10% real returns for 24 years and yet Larry tells us "Chileans dont like it". How can his editors buy this utter nonsense?

>Those results have been achieved by the pension funds largely through the purchase of stocks and corporate and government bonds - investments that helped fuel an economic expansion giving Chile the highest growth rate in Latin America over the last 20 years.

Of course, Larry, you finally got something right.

>"The great success of the system is its high profit rate, more than double what was initially projected," said Guillermo Arthur Errázuriz, executive director of the Association of Pension Fund Administrators. "In total, workers have set aside nearly $61 billion, which is invested in the sectors of the economy that show the most potential."

Hear, hear.

>Among the admirers of the privatized system here is Mr. Bush, who on a visit in November called Chile "a great example" for other countries. On other occasions, he has suggested that the United States could "take some lessons from Chile, particularly when it comes to how to run our pension plans."

A visionary man Larry, despite the NYT endorsing Kerry. Also Clinton liked the Chilean system. As Greenspan. Etc,etc So are Bush, Clinton and Greenspan fools? Or is Larry Rohter just an untalented Michael Moore?

>Mr. Piñera declined repeated requests to be interviewed for this article.

A wise man indeed. He probably anticipated the result. Or maybe he respects President Lula. Or maybe he has read enough about the Jayson Blair scandal. Will ask him when he returns from his travels.

>In an article on the Op-Ed page of The New York Times last month, though, he extolled the Chilean system as one based on ownership, choice and responsibility and one that is widely popular because it gives workers a stake in the economy.

What an extraordinary Op Ed Larry! You should read it every morning and every night. I admire the Op Ed page decision of publishing, once in a while, articles from different perspectives than the editorial page.

>Among other achievements emphasized here by advocates of the privatized funds are the creation of a modern capital market, cheaper credit for companies that formerly could turn only to banks when they wanted to expand, and a brake on deficit spending by the government.

Hear, hear.

>"What we have is a system that is good for Chile but bad for most Chileans," said a government official

What a contradictory statement!

>who specializes in pension issues and who spoke on condition of anonymity, fearing retaliation from corporate interests.

Retaliation to a government official? Are you smoking something not entirely legal Larry?

>"If people really had freedom of choice, 90 percent of them would opt to go back to the old system."

Well, if the Lagos "government official" was going to utter such a nonsense, I understand his demand for anonymity. It must be one of the government admirers of Cuba or North Korea. But that does not excuse you Larry for publishing it.

>Among the complaints most often heard here is that contributors are forced to pay exorbitant commissions to the pension funds. Exactly how much goes to such fees is a subject of debate,

They are "exorbitant"-Larry knows-but he cannot give a number because it is "a subject of debate". Patience My Lord, patience.

> but a recent World Bank study

There are staffers of the WB writing studies. Which staffers? Which day of the week? I can provide you Larry with contradictory "WB studies" on this issue. It all depends on what goes as politically correct.

>calculated that a quarter to a third of all contributions paid by a person retiring in 2000 would have gone to pay such charges.

And those were rebutted by Martin Gerson and Salvador Valdes who found enormous mistakes, and those staffers had to republish the study (in the private sector their salary or job would have been at risk).

>But most Chileans are unaware of how much they are paying to the funds because the lengthy quarterly financial balance sheet they receive "is not comprehensible," according to Guillermo Larraín, director of the Superintendency of Pension Funds, a government agency.

But Larrain is in charge of regulating those sheets. So, what is Larrain doing during his work day that he is incapable of solving this infinitesimal problem, if there is one. I fully understand my statement, but I agree it must be also understandable to your Chilean friends Larry.

>Government officials like Mr. Larraín and Mr. Scolari acknowledge that "commissions are high and need to come down." They say that "more competition is needed" to foster lower fees. But existing regulations frustrate the creation of new funds -

As Salvador Valdes wrote in El Mercurio, those regulations were put in place by another Concertacion government, the center left coalition to which belong both Mr. Larrain and "Mr. Scolari". So they can remove them easily...if they do their jobs instead of courting leftists NYT journalists and constantly playing politcs in the media.

>"The dynamic of the market," Mr. Larraín said, "is one of consolidation and concentration."

With such a confused Superintendent, and such a socialist Minister, would you create a new pension fund? Maybe Mr. Sulzberger should come to Chile to make "exorbitant profits" out of "exorbitant fees". Remember that there is total free entry to the industry by law. Citibank is here, Banco Santander, BBVA, ING, etc, etc. Come on Larry!

>Some other problems of the Chilean system stem from factors that do not apply with the same force in the United States and other advanced economies. Nearly half of Chilean workers, for example, are employed off the books in the so-called informal sector, while many others are hired as independent contractors, who are not required to contribute to a pension account and do not do so regularly because they cannot afford it. By the government's own calculations, only about half the work force contributes to a pension fund. "We are aware there is a big hole and that we need to take corrective measures," Mr. Larraín said.

The other half is saving in their own way, investing in their small companies, etc, or unemployed due to the rigid labor policies of the government of Mr. Solari. And Mr. Larrain should by law be supervising the pension funds rather than entering in public policy debates about the coverage of the system, a duty of the Ministry but not of a regulator of the PRA system.

>Because many of the claims initially made on behalf of the privatized system proved exaggerated or inaccurate,

Which "claims" Larry? You have not been capable to mention even one.

>the transition period has turned out to be longer and more expensive than anticipated. The annual cost to the government, still the guarantor of last resort, has remained steady at 5 to 6 percent of the nation's economic output.

No, half that number. Part keeping the promises to retirees of the old system, part new benefis and beneficiaries created by the center left government to get votes. Politics, politics. Absolutely nothing to do with the PRA system.

>Chile spends about $2 billion a year to pay retirees from its armed forces, according to Mr. Scolari. The military imposed privatization on the rest of the country, but was careful to preserve its own advantages and exclude fellow soldiers from the system.

It is $1 billion a year, only 50% of your figure, of course a negligible exageration to you Larry. And the PRA system was not imposed but introduced as voluntary. The armed forces damaged themselves by not allowing their members to join the PRA system, as it was proposed by the reformers in 1980.

>Despite calls that the military be forced to give up its exemption, no civilian government has been prepared to pursue that.

Those are the center left governments of the last 14 years. So, why they have not addressed and solved this $1 billion a year problem?

>Proponents of the privatized system argue that those costs will diminish in coming years, as those still receiving benefits from the old system gradually die off. But critics disagree, pointing to the large numbers of younger Chileans in the work force who either do not participate or whose contributions will fall short of the amount required for a minimum pension.

Economic growth during the Lagos years has been 4% on average, down from 7% before, and unemployment has increased to 10%, due to less growth and new rigidities in the labor market (some of themimplemented by....Solari). So, they create the problem of unemployment and precarious labor contracts...and then they adscribe it to the PRA system. How intelectually and politically dishonest!

Summary and Conclusions:

1) The only, I repeat the only, fact about the private personal retirement account system in this long, tedious, article is that the system has given 6 million Chilean workers an extraordinary 10% real (above inflation) rate of return for 24 years.

2) All the rest of the article--full of mistakes, omissions and even outright lies-- has to to with the legacy of the old gov. unfunded system, the imperfections of the labor market introduced by three center left governments, the social spending increases by those governments, basically politics and not pensions. But the title and the "smell" of the article is designed to bash private accounts (of course because them are being proposed in the USA by the Left's "bete noire", President George W. Bush, reelected democratically by 60 million americans).

3) Mr. Rohter has demostrated he is not a journalist but a propagandist, a sort of (untalented) Michael Moore. Shame to him because by publishing this hatchet-job in the NYT he may confuse some policy makers in countries interested in this solution to their pension crisis, and thus harm millions of poor elderly people. Of course, in Chile he has already becomed a (bad) joke and his influence is zero, nada, zilch.

4) The NYT has inflicted itself another blow by publishing this article, even worse by doing it in its front page. It will be increasingly recognized as a shameful article and it will add for years to the "unfunded" liability of the NYT.

5) If the NYT want to recuperate some prestige in Chile and Latin America, where my piece is already circulating broadly in the Internet and will be published in full in several newspapers, they should inmediately fire Rohter (like they fired Raines and Blair). Tell him "Hasta la vista" and "move on" to fiction, comedy, leftish politics, caipirinhas, whatever. As The Economist titled recently a book review, these are really "Hard Times" for the New York Times.