Thursday, September 29, 2011

Chile's Social Security Lesson For The U.S.

The Ponzi scheme we have here in the USA called Social Security is in trouble and needs a complete renovation. Chile's system is alive and well and gives its citizens a vested interest in keeping government spending and inflation down.

I don't believe that there is any chance that a change such as this can be made with the Democrats and RINO's in control. Congress has used prior taxpayer deposits as slush funds for their pet projects and they want to continue using future monies in the same way. What we need is to elect Conservative Republicans who believe in the private economy as the savior of our economic prosperity.

Just think of the jobs that could be created by our capitalist economy with the infusion of trillions of dollars, rather than letting the money disappear into the government cesspool.

America's Social Security system will go bust in 2010. As political leaders scramble to save it, they've overlooked an obvious free-market solution that works. They need only look at Chile.

Pay-as-you-go social security systems destroy the link between contributions and benefits, between effort and reward. Everyone tries to minimize what he puts into the system while trying to maximize through political pressure what he can get out of it. That's why pay-as-you-go plans are going bankrupt all over the world.

Chile faced that problem in the late '70s. As secretary of labor and social security, I could have postponed the crisis by playing at the edges, increasing payroll taxes a little and slashing benefits a little. But instead of making some cosmetic adjustments, I decided to undertake a structural reform that would solve the problem once and for all.

José Piñera is Chile's former secretary of labor and social security and is co-chairman of the Cato Institute's Project on Social Security Privatization.

More by José Piñera
We decided to save the idea of a retirement plan by basing it on a completely different concept -- one that links benefits and contributions.

Chile allowed every worker to choose whether to stay in the state-run, pay-as-you-go social security system or to put the whole payroll tax into an individual retirement account. For the first time in history we have allowed the common worker to benefit from one of the most powerful forces on earth: compound interest.

Some 93% of Chilean workers chose the new system. They trust the private sector and prefer market risk to political risk. If you invest money in the market, it could go up or down. Over a 40-year period, though, a diversified portfolio will have very low risk and provide a positive rate of real return. But when the government runs the pension system, it can slash benefits at any time.

The Chilean system is run completely by private companies. We now have 15 mutual funds competing for workers' savings.

The whole working population of Chile has a vested interest in sound economic policies and a pro-market, pro-private-enterprise environment.

We guaranteed benefits for the elderly -- we told those people who had already retired that they had nothing to fear from this reform. We also told people entering the labor force for the first time that they had to go to the new system.

Today, all workers in Chile are capitalists, because their money is invested in the stock market. And they also understand that if government tomorrow were to create the conditions for inflation, they would be damaged because some of the money is also invested in bonds -- around 60%. So the whole working population of Chile has a vested interest in sound economic policies and a pro-market, pro-private-enterprise environment.

There have been enormous external benefits: the savings rate of Chile was 10% of gross national product traditionally. It has gone up to 27% of GNP. The payroll tax in Chile is zero. Of course we have an estate tax and an income tax, but not a payroll tax. With full employment and a 27% savings rate, the rate of growth of the Chilean economy has doubled.

Read full CATO article here.

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