Social Security and Chile

[Steve]

You may have read or heard that Chile is being held up as a model for Social Security reform in the United States. I've been skeptical of this, mainly because of the legacy of Marxism and, after that, the military dictactorship of Pinochet.

I was surprised to find out, then, that Chile is a stable, growing country (http://www.cia.gov/cia/publications/factbook/geos/ci.html) with an economy resembling that of the U.S. albeit on a small scale, of course. How did it get that way?

Partly through sound economic policies initiated by (surprise!) Pinochet. The other part? Well, read this simplified yet concise (http://www.cato.org/dailys/12-17-97.html) article on the benefits of Chile's social security program. I have to admit I hadn't given much thought to the salutary and moderating effect on an economy when all of the workers in it have a vested interest in sound, controlled growth.


I know the article is 7 years old; it's still applicable.

[SixofNine]

Jose Pinera is the father of Chile's private account system and makes a good case for it.

Chile has been an economic success story in Latin America, confounding publications such as the Economist by limiting political freedom under Pinochet's dictatorship while allowing capitalism to flourish. Or perhaps the Economist is right in that economic freedom made political freedom inevitable. Chile has basically had a capitalist economy since Socialist (but elected) president Salvador Allende died in a coup (assassinated or suicide) in 1973 (on a September 11th, by the way).

Economic growth has helped the new retirement system. The annual rate of return in its first 22 years was 10% above inflation, something an explosively growing economy can do for a while, but unsustainable in the long run.

However, the good news is that even if the rate of return were to fall to 4.9% above inflation, a figure the Social Security Administration uses as the expected return of a mixed portfolio of stocks and bonds, and wages were to grow at 2% above inflation, the average Chilean worker who contributes until retirement at age 65 would get 60% of his final wage plus a survivor's pension for his spouse. Under Social Security, a middle-income U.S. worker currently gets about 42% of his pre-retirement earnings.

Chile does have some safety measures in place that could cost some money during hard economic times. The biggie is a minimum pension guarantee, financed out of general tax revenues, for any worker who contributes to a personal account for 20 years.

This floor gets raised every year to keep track with wage growth. This keeps the pension floor at about 25% of the average wage, about double the poverty line, for retirees who earned little or use up the money in their private accounts.

The purpose of a guarantee is to keep the elderly from falling into poverty. Every country with personal accounts has adopted a pension floor for this reason, but this measure is currently missing from President Bush's proposal.

In the United States, a minimum pension equal to 25 percent of the average wage would equal about $750 a month, while our current average Social Security benefit is $1,000 monthly.

It's definitely a good idea to take a long, hard look at Chile's system. They have had 23-24 years to dicker with it. One difference is that it's the core of Chile's pension system, while in countries like Sweden and Australia (and the U.S. under Bush's plan), it would be a supplement to the core pay-as-you-go system. Also, in those three countries the new system is mandatory while in the U.S private accounts would be optional. Still, it would be crazy not to study these systems and their successes.

Brian