Correspondence: Angel Melguizo, BBVA Research Department, Castellana 81-7, Madrid 28046, Spain. E-mail: angel.melguizo@grupobbva.com

¹has been Chief Economist of the Global Trends Unit at BBVA Economic Research Department since August 2006. He joined BBVA in January 2004, as Chief Economist for Chile. Before 2004, he was a senior research scholar and a member of the Executive Steering Committee of the Center for Globalization and Sustainable Development of The Earth Institute at Columbia University, and a visiting scholar to Universidad Adolfo Ibañez in Santiago, Chile, since June 2002. Starting in February 2000, he was the project director of the Andean Competitiveness Project at the Center for International Development at Harvard University. Vial also has had significant experience in policy making, first as the chief macroeconomic advisor to the Finance Minister in Chile from 1992 to 1994, and then as National Budget Director from 1997 to the beginning of 2000. Earlier in his career, he was a member and Executive Director of CIEPLAN, a leading research institute in Chile that played a key role in the construction of the economic and social vision and teams shaping economic policies after the resumption of democracy in 1990. Vial received his PhD in economics from the University of Pennsylvania in 1988, with a dissertation on the global copper market.

²is Principal Economist of the Global Trends Unit at BBVA Economic Research Department, specialising in public and labour economics, and pension research. From 2007 to 2008, he worked as Senior Advisor at the Spanish Economic Bureau of the Prime Minister, on social security and taxation policies. From 2000 to 2007, he was Senior Economist at BBVA Pensions Unit and BBVA Economic Research Department. Melguizo holds a BA in Economics from Complutense University of Madrid (1998, First National Prize), and a PhD in Public Economics from Complutense University of Madrid (2006, Spanish Institute for Fiscal Studies Award), with a dissertation on the economic effects of social security taxes.

Received 30 September 2008; Revised 30 September 2008.

Abstract

This paper presents a brief history of pension reform in Chile, the reasons behind the introduction of individual privately managed accounts in 1981, and the adjustments introduced in 2006–2007. The main conclusions are that the system is sound, but the reinforcement of the social protection to low-income–low-contribution workers was a necessary step, given the problems of the formal labour market. This adjustment was also feasible because the transition costs of the 1981 reform are entering the decreasing phase. We emphasise the importance of economic growth for the effective performance of the pension system, reversing one of the traditional arguments for pension reform. Finally, we explore elements that must be taken into account when designing this type of pension reform.