Now, second pillar-based reforms generate a massive transfer of savings from the public to the private sector for two reasons. First, as the public system is closed, outstanding pensions have to be financed out of the current budget without any contribution from active workers. Second, the public sector has to acknowledge its debt with active workers who contributed in the past to the pension system through the issue of marketable financial instruments, known in the Chilean case as recognition bonds. Even if the financial market can be used to spread the burden over time, the issuance of these recognition bonds has an instantaneous impact on total public sector debt and in its current service. The implication is that fiscal surpluses, or at least the capacity to finance additional fiscal deficits, must be present for the transition to be feasible.
Active workers can opt between remaining in the old system or migrating to the new one.
Because the old system, and its debt, remain in place, all workers still contribute to the old system after the reform, thus lessening the fiscal burden of the transition. The difference between the two types of reform regarding the fate of the publicly financed pension system is more a matter of remaining functions than it is a matter of extinction. In the Chilean case, the first pillar is closed for active workers, and remains in place only for assistencial old age pensions, and to subsidize workers who cannot obtain the minimum pension out of their savings in the second pillar. In the Uruguay case, the scope of functions of the first pillar remains basically intact, and even if workers opt for the new capitalization second pillar a part of their contributions will end up nevertheless in the first pillar. It is easy to see why, in times of fiscal restraint, first pillar-based reforms are becoming quite popular among Latin American governments, even if the jury is still out on the question of whether or not they solve the long term financial crisis of the pension system.