If empirical observation shows a better solution to old-age pensions and public debt, shouldn’t we take a serious look at it? It’s worked wonders in Chile:
Pinera’s proposal began with scrapping the payroll tax on the country’s social security system and inviting all workers to take the money they were contributing and move it into a private pension.
Workers would be free to choose the fund, how much to put in, and at what age they would retire, with a minimal safety net built into the design. Past contributions would be refunded to workers by government bond. And anyone who didn’t like the idea was free to remain with the system as it was. It was a huge success: 95% of Chile’s workers chose the private system.
Pinera told the public to expect a compounded 4% rate of return under the private plan. But as of 2010, the average annual rate of return was 9.23%, far higher than promised.
By contrast, the U.S. social security system, which today accounts for a quarter of the U.S. government budget, is slated to give retiring workers in the next decade a 1% to 2% rate of return. And those entering the system today will see a negative return.
Chile’s implicit pension debt fell to just 6% of GNP — compared with 100% in the U.S., 300% in France and 450% in Italy, leaving Chile with no net debt.
Better still, the accumulated savings in the pension funds fueled Chile’s spectacular economic ascent, taking real incomes from about $4,000 per capita in the early 1980s to $15,000 today, and GDP to the 6% range most years for nearly 20 years. With that record, is it any surprise that Chile this year earned itself a membership card into the club of rich nations, the OECD?
We know our current system is heading for collapse, so, other than fear fed by the demagoguery of the Left, what’s to stop us from looking at a model similar to Chile’s? Shouldn’t workers be able to keep their own money in their own retirement accounts, instead of relying on handouts from a government-run Ponzi scheme?
LINKS: Further observations at No Runny Eggs