Privatizing social security works in Chile
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Nearly 30 years ago, on the very day Ronald Reagan was sworn in as U.S. president, Chile became the first nation to privatize its social security system. Three decades hence, it has surpassed all expectations.Just like health saving accounts, letting people control their own money works for them and saves money for government. The reason it is not done in the US is that Democrats are control freaks who do not trust the people to manage their own affairs.
Decades ago, Chile's then-military dictatorship shuddered at a proposal from then-Labor Minister Jose Pinera to privatize Chile's liability-laden pension system. The military men argued that the public was too ignorant to manage its own affairs and only government's firm hand could be trusted to provide.
Pinera explained that the pension liabilities the government then couldn't pay were not only perfectly payable, but could be converted into actual assets, which would become investment capital to develop the country.
All they needed to do was privatize the system.
The generals eyed Pinera balefully. But their worried junta chief, Generalissimo Augusto Pinochet, told the economist to go ahead.
Thirty years on, Pinera's plan, adapted from the ideas of Milton Friedman, is, along with free trade, one of the two pillars of Chile's success story, surpassing all predictions.
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.