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. Last Updated: 07/27/2016

Pensions May Get Pinochet Makeover

Presidential economics adviser Andrei Illarionov brought a close ally of General Augusto Pinochet to town Thursday to give a lesson in the pension reforms that helped turn around Chile's economy - and that he hopes could do the same here.

"Pension reform had a fantastic impact on Chile's economy and society," Illarionov said at a news conference as he introduced Jose Pinera, the mastermind behind the scheme to privatize Chile's pension system.

"After a period of stagnation, Chile's economy averaged 7 percent yearly GDP growth."

Pinera, who was Pinochet's labor minister, now heads the International Center for Pension Reform. He has met with leaders of numerous Latin American and East European countries and said he has been invited to the U.S. White House.

"If Russia followed this path, it could be one reform where Russia gets there before the United States," Pinera said.

Pinera said his transformation of Chile's pension system in 1981 has been dubbed "the mother of all reforms" for making the nation's workers "real capitalists" and property owners overnight.

President-elect Vladimir Putin has called for economists to come up with ways to drive economic growth up to 10 percent per year.

But the visit of Pinochet's ally for meetings with top officials stirred some fears that Putin might be aiming for the same Pinochet mix of economic freedom and dictatorship. Ever since Putin entered the race for the presidency, the media have been filled with reports that he might go for Pinochet's strongarm approach to impose order on the unruly economy and fight corruption.

A former KGB operative, Putin has reinforced that view by consistently calling for strengthening the state while following a liberal course of reform. The president of the influential Alfa financial industrial group, Pyotr Aven, said in an interview with The Guardian that a Pinochet model of "totalitarian force" would be the best way to push through fast liberal reform.

However, both Pinera and Putin's economic adviser rejected talk of transforming the government into a Pinochet-style regime.

"Nobody is raising questions about removing democracy," Illarionov said. "Those sort of moves could only come from the opposition."

Pinera said dictatorship was not a prerequisite for the reform. Seven other countries, including democracies in Latin America, have installed the pension system and Hungary and Poland are currently trying out reforms along the same lines, he said.

"Economic reforms can take place under democratic rule. What is important is leadership and the right ideas," Pinera said. "The fact that all these countries have taken on the reform shows that what made it possible was not that the president's last name began with P."

Pinera conceded that the biggest obstacle to privatizing the country's pension system was a lack of trust in the financial system and not the type of government.

"I've had many sleepless nights ever since I arrived here on how to conduct the same reform in Russia," he said. "The main complication for Russia is what happened in '98. A lot of Russian workers, to put it mildly, do not have enough trust in the financial system."

Under Pinera's reform of the Chilean system, citizens were given the choice of opening their own pension accounts managed by private pension funds, not the state. That meant they were soon receiving returns of around 11 percent above inflation, instead of getting back less in old age than they had paid in as payroll tax under the state system, Pinera said.

"With half the contribution, they were getting twice the returns," he said.

Existing private pension funds in Russia have only attracted a very small percent of the population because of the lack of trust in an economy where banks and currencies have collapsed too many times to make private management a safe bet.

But Illarionov said the need to reform the creaking pension system had already become critical.

"The significance of pension reform here would be even greater than it was for Chile," he said. "For us it is critical."

Illarionov said pensioners make up 27 percent of the population and the government spends around 8 percent of gross domestic product on pensions every year, which he said is a heavy burden on the state. He has repeatedly called for cutting state expenditure as a percentage of GDP to boost economic growth.

Even so, the elderly receive miserly pensions under the current system, which is plagued by nonpayments, arrears and corruption allegations. The Audit Chamber last year claimed the Pension Fund lost more than $1 billion from 1995 to 1998 by poorly investing the funds.

The average monthly pension of 740 rubles reaches just 69 percent of the minimum subsistence level, said Alexei Nersky, the deputy head of the Pension Fund's benefits department, in a telephone interview Thursday. He said that by November, the Fund has been ordered to increase that to 80 percent of the minimum subsistence level.

Employers pay a payroll tax of 28 percent to the Pension Fund, while employees pay 1 percent of their wages.

Duma Deputy Irina Khakamada, a co-leader of the pro-Kremlin Union of Right Forces, has said that the rapid demographic growth of the elderly compared to the working population means that a crisis could be around the corner.

She said in a recent interview that if there are no moves to privatize the Pension Fund, then in several decades the working population could be faced with having to pay their entire wages to support the elderly.

However, Illarionov said Thursday that the only way the government would be able to push through pension reform successfully was if other structural reforms were carried out at the same time.

"[There needs to be] tax reform, reform of the natural monopolies, business needs to be separated from the state, reform of housing benefits, health and education, military reform and reform of the banking system and the Central Bank. That's a long list of reforms. But its better to do it all together. Only then is success ensured," he said.

Pinera said the only way he could think of to privatize Russia's pension scheme and overcome the trust barrier would be to have funds invested in an index of shares and securities in tens of thousands of foreign companies.

"That way, in just one reform the workers of Russia would be linked to world financial markets," he said. In return, he said he would ask multinationals to bring direct investment to Russia.

Pinera said that move might not be approved by the country's financial elite. He said that if Russia was going to move forward on reform it would have to build a Chinese Wall between business and the state.