Tuesday, May 17, 2005
The social security solution?
- The program was voluntary for existing workers, who could choose to stay in the old program or move into the new program of private accounts. All new workers were put into the new program.
- Existing workers choosing to opt out of the old program were given a "recognition bond" that represented their accrued contributions to date. The bond was no more or less credit worthy than existing promises by the government to pay benefits upon retirement.
- A minimum pension is guaranteed, whether you stay in the old or new system. Upon retirement, if funds in your private account are insufficient to purchase an annuity representing the minimum pension, the government makes up the difference. This mechanism provides a safety net for those who, for whatever reason, have not been able to make contributions to their accounts.
- Program participants choose from among several private management firms who offer investment options. The firms are supervised by the government, and are engaged in no other business. Early in the program, investment options were quite limited to increase the chances of the program's success.
- Over time, more options have been added, and now include international securities and equities, both of which were not permitted at inception.
- The system was sold to the people over a period of years, primarily by showing them an account book that would belong to them. They didn't care about funding gaps. They wanted to see what they would get, and Mr. Piñera showed them.
An essential point in the argument in favor of a move to private accounts is that the move has no economic transition costs to the economy. In actuality, it brought substantial economic benefit to Chile as it very quickly lead to the accumulation of a substantial pool of investment capital. It also changed the perspective of the Chilean people. In Piñera's words,
Since they have a personal stake in the economy, workers cheer the stock market's surges rather than resenting them, and know that bad economic policies will harm retirement benefits. When workers feel that they themselves own a part of their country's wealth, they became participants and supporters of a free market and a free society.
The funding gap would still exist, of course, but, as Piñera pointed out, the US capital markets are far more equipped to handle this problem than the Chilean capital markets were.
Asked whether he thought a change to private accounts would be feasible in the US, Piñera scoffed and said of course. 50% of US citizens are already investors, compared with 0% in Chile at the inception of the program. The biggest obstacle in his view is the growing entitlement culture in the US which seems to see government as the solution to all problems, at the cost of personal accountability.
After hearing the presentation, I could only marvel at how well Mr. Piñera was able to use his alloted hour, and just how terrible the Bush administration has been at communicating the benefits of a new retirement system based on private accounts.
For readers interested in more, Mr. Piñera has two white papers available at Cato. They are Liberating Workers: The World Pension Revolution, and Empowering Workers: The Privatization of Social Security in Chile.
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