The Proof's in the Pension

I made a pilgrimage to Santiago seeking to resolve the Social Security debate with a simple question: What would Pablo Serra do?

I wanted to compare our pensions to see the results of an accidental experiment that began in 1961, when he and I were friends in second grade at a school in Chile. He remained in Chile and became the test subject; I returned to America as the control group.

By the time we finished college, both of our countries' pension systems were going broke. Chile responded by pioneering a system of private accounts in 1981. America rescued its traditional system in the early 1980's by cutting benefits and raising taxes, with the promise that the extra money would go into a trust to finance the baby boomers' retirement.

As it happened, our countries have required our employers to set aside roughly the same portion of our income, a little over 12 percent, which pays for disability insurance as well as the pension program. It also covers, in Pablo's case, the fees charged by the mutual-fund company managing his money.

I visited Pablo, who grew up to become an economist, at his office at the University of Chile and showed him my most recent letter from the Social Security Administration listing my history of earnings and projected pension. Pablo called up his account on his computer and studied the projected retirement options for him, which assume that he'll keep working until age 65 and that the fund will get an annual return of 5 percent (which is lower than its historical average).

After comparing our relative payments to our pension systems (since salaries are higher in America, I had contributed more), we extrapolated what would have happened if I'd put my money into Pablo's mutual fund instead of the Social Security trust fund. We came up with three projections for my old age, each one offering a pension that, like Social Security's, would be indexed to compensate for inflation:

(1) Retire in 10 years, at age 62, with an annual pension of $55,000. That would be more than triple the $18,000 I can expect from Social Security at that age.

(2) Retire at age 65 with an annual pension of $70,000. That would be almost triple the $25,000 pension promised by Social Security starting a year later, at age 66.

(3)Retire at age 65 with an annual pension of $53,000 and a one-time cash payment of $223,000.

You may suspect that Pablo has prospered only because he's a sophisticated investor, but he simply put his money into one of the most popular mutual funds. He has more money in it than most Chileans because his salary is above average, but lower-paid workers who contributed to that fund for the same period of time would be in relatively good shape, too, because their projected pension would amount to more than 90 percent of their salaries.

By contrast, Social Security replaces less than 60 percent of your salary - and that's only if you were a low-income worker. Typical recipients get back less than half of their salaries.

The biggest problem in Chile is that many workers don't contribute regularly to their pensions because they're unemployed or working off the books. That's a common situation in the developing world, no matter what the pension system is. But if you contribute for at least 20 years, Chile guarantees you a minimum pension that, relative to the median salary, is actually more generous than the median Social Security check.

Still, you may argue, Chileans may someday long for a system like Social Security if the stock market crashes and takes their pensions down with it. The relative risks of the Chilean and American systems are a question for another column. But I can tell you that Pablo is an economist who appreciates the risks of stocks and has no doubt about where he wants to keep putting his money.

"I'm very happy with my account," he said to me after comparing our pensions. He was kind enough not to gloat. When I enviously suggested that he could expect not only a much heftier pension than mine, but also enough cash to buy himself a vacation home at the shore or in the country, he reassured me that it would pay for only a modest place.

I'm not sure how much consolation that is, but I'm trying to look at the bright side. Maybe my Social Security check will cover the airfare to visit him.

What we really need is complete pension reform: privatize most of SS, and on top of that fix all private pensions into a vast analog of the marvelous TIAA-CREF system that Andrew Carnegie gave American academe---day-one, or at least year-one vesting of all contributions, and full portability.

2 posted on 04/26/2005 7:42:33 AM PDT by The_Reader_David (And when they behead your own people in the wars which are to come, then you will understand. . .)

Well, it would have been nice if he pointed out that Pablo's money is also real. It exists. Whereas the author's Social Security is just an IOU.

I made a pilgrimage to Santiago seeking to resolve the Social Security debate with a simple question: What would Pablo Serra do?

Boy, did Tom Friedman teach this guy to write. Thats right out of his writing style: citing far away people places and asking open ended questions.

"Whereas the author's Social Security is just an IOU."

Rodney-You are on the money.

My wife and I looked at the social security payments and calculated in inflation and cost of living and we were shocked. It is not much and now we look at it as a "Where the hell fund" Long story short- we are in a 20 year plan that will leave us far better off than SS will ever help us and we will have REAL MONEY.

If they would let me opt out I would in a heartbeat. If they said You get to keep 1/2 of the 12% but get no bennies I would still take the chance and opt out.

Relax. Nothing is going to happen with Social Security. The Democrats are opposed to it and the mainstream media is brainwashing the public. Social Security funds have been raided repeatedly by both parties for over twenty years. There is no solution as long as our southern borders are open. Hospitals, emergency care providers, and programs like medi-Cal are going broke from the number of illegal aliens. Unless the U.S. locks down our borders, we will all be living in gated communities or third-world slums in twenty years anyway.

Our only solution is to lock down our borders. The 'promise of America' I grew up with as a child is just another Big Lie. Feel free to flame away. I wear asbestos long johns.

Unless the U.S. locks down our borders, we will all be living in gated communities or third-world slums in twenty years anyway.

No flames from me - I agree with the first half of the statement above and most of your post, as well. I am not quite as pessimistic as the second portion of the quote (gated communities/third world slum). Of course, that is just my central Oklahoma perspective. I can certainly admit that if I lived in the PRK I might be more pessimistic.

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