US Could Learn From Chile's Form of Social Security

Wednesday, 12 Oct 2011 04:20 PM

By Dick Armey

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From the FreedomWorks website.

The country of Chile has proven that through individual choice and privatization of public programs that economic freedom is achieved.

The revolutionary privatization of Social Security in Chile has bulldozed big government and has allowed the economy and individual freedom to flourish. This country serves as a perfect model for America to look to.

Chile transitioned from an unsustainable public pensions program to an incredibly successful private program by ushering new workers into it. The new system is based on individual decision making.

Entering into the workforce, workers were given a private pension fund that requires them to contribute 10 to 20 percent of their income. The amount put into the fund depends on the age the employee wants to retire.

At retirement, the private fund is transferred into an annuity with an insurance company. The individual is given the choice to decide what insurance company to work with and what plan best fits the circumstances.

If the individual is not satisfied with the company or plan, they have the freedom to change companies. This also allows competition between insurance companies, which would lead to better service and greater returns over time.

Chile set up transitional rules for insurance companies to ensure safety. Due to the radical nature of the privatization, the government wanted to direct companies into safe investment agreements in order to prevent the loss of large sums of money. Risky investments increase the chances of system failure.

“If the system had failed in the first years, we would never have been able to try it again,” said Jose Pinera, Chile’s minister of labor. However, these rules provided the roots for a continual, successful retirement system. As insurance companies continue to grow more secure, they will have more freedom to broaden investment.

For those who were already paying into the public system, they were given a choice to stay public or to enter the private system. The major cost created by the transition is the money Chile loses from the people switching to the private system.

The cost was financed by the selling of state-owned enterprises that would provide for those who stayed on the public pension system. Due to the success of the privatization, around 93 percent of Chilean workers switched to the new program. The public pension program will be completely eliminated the day the last person in the system passes away.

The system has had immensely positive effects:
  • It generated surpluses without raising taxes, inflation, or interest rates
  • Old-age pensions are 40-50 percent higher than the public pension system
  • Disability and survivor pensions are 70-100 percent higher than the public pension system
  • Significant decreases in the payroll tax have contributed to an unemployment rate below 5 percent
  • Savings rates have skyrocketed and have deepened investment
  • Growth rates have more than doubled in the past 10 years
At a critical time when America’s debt is upwards of $14.7 trillion and unfunded future liabilities are more than triple that number, isn’t this is the kind of growth and freedom we deserve?



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