Tags: Chilean | Private | Retirement | System | Works

Chilean Private Retirement System Works

Sunday, 05 December 2004 12:00 AM

How does Chile's program work? Basically it privatizes an individual worker's retirement benefits, and allows individual workers to manage their own remuneration, taking the process out of the government's hands completely.

Currently, the U.S. Social Security system "denies workers retirement options," says the National Center for Policy Analysis (NCPA), a non-partisan think tank. "The current system does not help families to accumulate wealth, because it forces all retiring workers to settle for nothing more than a fixed monthly payment and denies them the chance to build assets over the long term."

The Chilean system used to be based on the same 19th century model adopted by the United States, but in 1980 Chilean lawmakers reformed the system by adding a privatization option.

Now, writes a former Chilean secretary of labor and social security, the South American country has "ended the illusion that both the employer and the worker contribute to retirement" by creating a system which "allowed current workers to opt out of the government-run pension system financed by a payroll tax and instead contribute to a personal retirement account."

José Pinera, now president of the International Center for Pension Reform and co-chairman of the Cato Institute Project on Social Security Choice, says he has lauded the system he helped create for 24 years.

"What determines those workers' retirement benefit is the amount of money accumulated in their personal account during their working years. Neither the workers nor the employers pay a payroll tax. Nor do these workers collect a government-financed benefit," Pinera wrote in a recent editorial for The New York Times.

That's along the lines of recent U.S. proposals, including changes recommended by the Bush administration.

A commission appointed in 2001 by President Bush, for example, developed a plan that would "protect benefits for today's retirees; enhance Social Security's fiscal sustainability for the long term; and give younger workers the opportunity to invest part of their payroll taxes in personal retirement accounts they would own, control, and be able to pass on to their children," according to one analysis of the commission's findings by the Cato Institute, a libertarian think tank that has long advocated privatizing Social Security.

"We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account -- a nest egg you can call your own, and government can never take away," Bush said of his proposals.

In the Chilean model, Pinera says, workers contribute 10 percent of their pretax wage to a pension fund managed by companies which are prohibited by law from engaging in any other form of business (these firms are strictly monitored by a government agency). If they chose, workers can opt to kick in another 10 percent of pretax wages.

"Upon retiring," he writes, "workers may choose from three payout options: purchase a family annuity from a life insurance company, indexed to inflation; leave their funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a worker dies, the remaining funds form a part of his estate); or any combination of the previous two."

In each case, "if the money exceeds the amount needed to provide a monthly benefit equal to 70 percent of the workers' most recent wages, then the workers can withdraw the surplus as a lump sum," he wrote.

Any workers who have contributed for at least 20 years but whose monthly benefit does not meet a "minimum pension" as defined by law, he or she will receive that amount from the government once the pension fund is depleted. "Those without 20 years' contributions can apply for a welfare-type payment at a lower level," Pinera wrote.

Quite simply, if the current system isn't phased out or, at a minimum, given a major facelift, it's just a matter of time before it goes belly-up.

"Studies and official reports confirm that Social Security is approaching a major financial crisis, and even if its revenue and expenditures were in long-term balance, the program is providing poorer and poorer retirement income security for the money Americans contribute," confirms an assessment by the Heritage Foundation, a conservative public policy think tank in Washington, D.C. "Younger workers are especially aware that Social Security will not be able to provide the benefits they have been promised when they retire."

Heritage says there are two basic problems with Social Security. One, the older workers will get much more for their taxes than younger workers; and two, Social Security taxes now are so high its tough for younger, lower-wage workers to save any money on their own, outside the system.

In the end, says Heritage, "the gap between what Social Security has promised to pay and what it expects to collect is staggering—and growing."

"In less than 15 years, Social Security will begin running a deficit, spending more on benefits than it will take in through taxes," says Edward Krane, president of the Cato Institute. He says in the years ahead, Social Security's unfunded mandates will amount to tens of trillions of dollars.

Nearly all analysts who advocate major change for Social Security say it needs to come now, not later. That's a warning Bush seems to have heard.

Bloomberg News reported Friday the president will use an upcoming mid-December economic summit to push his Social Security plans, which include a number of Chilean aspects.

"The president's made very clear what his policies are for moving forward, and we'll be discussing all those policies and ideas and the challenges that our economy faces," White House spokesman Scott McClellan said in announcing the Dec.15-16 White House conference.

Administration officials say the system, in 18 years' time, will begin paying out more than it takes in. And, says Cato, the 12.4 percent Social Security payroll tax would have to increase almost 50 percent by 2030 to sustain the system.

Pinera understands the political machinations surrounding the "third rail of politics," but he says the transition in Chile has been widely accepted by the people there—so much so that now, 95 percent of qualified workers participate in private pension fund plans.

"For Chileans, their retirement accounts represent real property rights. Indeed, the accounts, not risky government promises, are the primary sources of security for retirement," he wrote.

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How does Chile's program work? Basically it privatizes an individual worker's retirement benefits, and allows individual workers to manage their own remuneration, taking the process out of the government's hands completely. Currently, the U.S. Social Security system...
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Sunday, 05 December 2004 12:00 AM
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