Saturday, May 7, 2011

Privatizing Social Security--Chile's System at 30

I ran across a reference to the 30th Anniversary of Chile's privatized social security system on Cato's blog this morning.  The article is worth a read, no doubt about it.  A couple of things here for those who do read on.

1.  The article mentions the 12.4% we pay into our government run system.  This is true, sort of.  Half of that is taken out of our checks each month, and half is paid by our employers (if self-employed, the whole nut is paid by the worker).  In Chile, 10% of earnings MUST be put into one of several managed funds, which have returned over 9% above inflation during the course of the past 30 years (compared to about 2% for Social Security).  To the average Joe--he's only putting 6.2% into the mix--putting 10% into the fund might seem 1) like a tax increase and 2) difficult on a cash flow basis.  But like the debates on employer sponsored healthcare, were the employer mandate for Social Security to go away--pressure would be imposed on the labor market to pay that money directly to the employee.

2.  The big knock on privatizing pensions is what happens during market crashes.  This article artfully cites a 2005 anecdote, but one can obviously imagine that the funds took huge hits during the recent financial crisis.  And if rate of return average 9% over inflation for the past thirty years, that's great--but when your fund takes a dive, it "feels" like you've lost money.  For the debate to move forward in our country, straightforward numbers have to be used so that people understand the HUGE amount of money they are losing by paying into government run social security (especially the self-employed).   In order to allay fears, the government could propose to "guarantee" some minimal level of return, so that no one actually "loses" money in the system.  But that's the ONLY case in which it would be my responsibility to fund your private pension.

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