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Fix Social Security, Ease the Credit Crisis
Real Clear Markets ^ | 4/29/2009 | Fred Smith & Ivan Osario

Posted on 04/29/2009 11:52:38 AM PDT by SeekAndFind

Remember the looming Social Security crisis? If you don’t, you’re not alone. The credit crisis and economic downturn have monopolized public attention to such an extent that the Social Security crisis that was at the center of the policy debate during President George W. Bush’s second term now seems forgotten.

This is unfortunate, for not only has Social Security not been fixed, but reform, if done right by tapping into the power of the market, can help provide new capital, which American businesses now desperately need.

To see how this could be done, it’s worth looking at the experience of Chile. Government officials in many other countries have looked at Chile’s reform during the 1980s as a model. The United States should take a look, too.

Nothing threatens a public pension system as much as a diminishing ratio of workers to retirees. In Chile, by the time reform began, this problem was severe. As Hernán Büchi, an economic adviser to the Chilean government at the time, notes, in 1979 there were only two-and-a-half workers to support each pensioner. “This ratio, combined with other deficiencies in the system, inevitably meant that the vast majority of workers were retiring on very low pensions,” he writes in his memoir, La transformación económica de Chile (The Economic Transformation of Chile). Clearly, the old system needed to be replaced with one that was sustainable.

The Chilean pension reform required three preparatory steps. The first involved, in Büchi’s words, “introducing some rationality into the system,” which meant doing away with major administrative inefficiencies that had plagued the system.

The second phase of reform involved “gradually reducing the tax on work that was implicit in pension contributions.” This “tax” arose out of the fact that public pension benefits bore no relation to payments made into the system, since they were largely paid via general revenues. Benefits were an unsupportable liability that threatened the finances of the entire government. Another goal of this phase was to bring these financing mechanisms under control. To do so, Büchi notes, “the tax collection systems had to be improved and government spending cut.”

The third, and most crucial, phase constituted “a top-to-bottom structural overhaul of the pension system.” The first step in this phase was to separate different kinds of benefits—old age, disability, workman’s compensation, and others—to be administered separately according to the needs of each kind of benefit.

Having reformed the framework of the pension program, Chile then moved to tap into the power and dynamism of the market. “The new pension system, with freedom as its guiding principle, is founded on the individual responsibility of each worker, reflected in his own savings capacity and his own individual account, and in the private administration of the funds by properly regulated companies,” writes Büchi.

Individual ownership of retirement benefits has helped families accumulate wealth over generations. Now parents, even of limited means, can bequeath more assets to offspring than they ever before.

Contrary to critics, the Chilean pension system does not leave low income individuals or those unlucky enough to have made poor investments adrift. The system, Büchi notes, retains a state-supported “social safety net,” that guarantees “a minimum pension at least” to workers who have not accumulated sufficient savings and who meet certain contribution requirements.

The lessons from Chile’s reforms are relevant to Americans, now that President Obama seems willing to tackle Social Security reform.

Moreover, the Chilean reform has special value given the current need to unleash capital. Büchi points out that Chile’s reform “helped create a substantial private capital market.” Money previously cycled through government agencies became available for private investment, providing entrepreneurs with needed capital and pensioners with better returns.

As the Obama administration and Congress struggle to address America’s credit crisis, they should take the Chilean experience into consideration. As the billions thrown at the nation’s economic troubles have turned into trillions, the last thing we should do is to go further into debt. Instead, we should unleash the wealth and savings creating capacities of the world’s most formidable economic engine: the American workforce


Fred L. Smith, Jr. is Founder and President of the Competitive Enterprise Institute (CEI). Ivan Osorio is Editorial Director at CEI and contributor to

TOPICS: Business/Economy; Editorial; Government; News/Current Events
KEYWORDS: creditcrisis; genx; socialsecurity

1 posted on 04/29/2009 11:52:38 AM PDT by SeekAndFind
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To: SeekAndFind

Fine, but exactly how is this going to happen? It is going to be up to we, the people, because Congress is inept. Answer:

2 posted on 04/29/2009 11:54:18 AM PDT by DennisR (Look around - God gives countless, indisputable clues that He does, indeed, exist.)
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To: qam1; ItsOurTimeNow; PresbyRev; Fraulein; StoneColdGOP; Clemenza; m18436572; InShanghai; xrp; ...
Xer Ping

Ping list for the discussion of the politics and social (and sometimes nostalgic) aspects that directly effects Generation Reagan / Generation-X (Those born from 1965-1981) including all the spending previous generations are doing that Gen-X and Y will end up paying for.

Freep mail me to be added or dropped. See my home page for details and previous articles.

3 posted on 04/29/2009 11:57:38 AM PDT by qam1 (There's been a huge party. All plates and the bottles are empty, all that's left is the bill to pay)
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To: DennisR

You are suggesting privatizing social way. Let Wall Street gamble with their own money. They already killed my 401K

4 posted on 04/29/2009 12:32:02 PM PDT by nyconse (When you buy something, make an investment in your country. Buy Amrican or bye bye America)
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To: SeekAndFind
Actually nothing changes with the relaxation of credit until a few things shake out.

One, being it unbeknown to the general public and Congress itself is the real number$ of foreclosed homes not listed on the market for sale, yet on the banks' balance sheets in hopes of 'recovery'. Ghost foreclosures. Those are generally the high end upside down properties $450K and up.

Two, elimination of the CRA, ACORN, and associated spending.

Three, no determination yet as to whether or not Fannie & Freddie are still engaged in toxic paper creation. None of us anywhere have heard anything with regards to flushing no-doc loans to illegals by the mortgage origination entities.

Four, no regulation for OTC CDS's and the like.

Five, is that the goobermint and 0Zero just enacted the largest deficit spending package in the entire cumulative debt history of the US. That means, higher taxes for everyone in the very near future and less ability for the consumer / investor to repay a loan, credit card, and / or mortgage.

Six, Geithner, Ben Ben and Friends seems to enjoy monetizing the US debt which will create inflation and devalue good assets within the banks and the banks' lending powers.

Seven, commercial real estate bubble - default - pops are starting to increase.

Eight, continued rise in the national unemployment rates (U3 & mostly unreported U6).

5 posted on 04/29/2009 12:45:10 PM PDT by RSmithOpt (Liberalism: Highway to Hell)
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To: SeekAndFind

6 posted on 04/29/2009 12:59:33 PM PDT by FromLori (FromLori)
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To: nyconse

Did you 401k not have a provision for earning “interest only”? Or did it have to go into stocks? If so, it was a “bad” 401k.

If - and I mean “if” - “Social Security” is to continue to exist, that money should be placed in a passbook savings account or something like that, not in the stock market. But it would be your money, not the governments.

7 posted on 04/29/2009 1:38:19 PM PDT by DennisR (Look around - God gives countless, indisputable clues that He does, indeed, exist.)
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To: nyconse
>You are suggesting privatizing social way.

Would you be more comfortable simply ending SS then?
Because either way, it cannot continue in it's current construct, period.

I am aware of no inherent Constitutional right to a SS payment.
And I am close to retirement age soon. My private investments will - and have - returned about 5000% more than a lifetime of SS payments will ever, and thats assuming that SS continues without any diminishment of benefits

8 posted on 04/29/2009 1:52:46 PM PDT by bill1952 (Power is an illusion created between those with power - and those without)
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To: SeekAndFind

My two surgeons are from Chile. Could it be they don’t know their native land has a better retirement system than their beloved United States?

9 posted on 04/29/2009 6:47:57 PM PDT by lakey (To ALL Congressperps - YOU'RE FIRED!)
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To: bill1952

I will not allow Wall Street access to one more dime of my money. My 401K is decimated I have pretty much lost everything I worked for. I owned Wachovia as well as other stocks which are in the toilet. The Wachovia CEO (scoundrel) walked away with millions. We will have to find another more gambling with my money, no more leveraging 40 to 1 by these thug bankers using my money while they write themselves credit default swaps so if they lose my money, they still get paid-never. This is not the first time for me, I lost considerable money when tech went more. These Wall Street firms and indeed other companies are liars and can not be trusted to provide accurate information on the well being of their companies are doing.

10 posted on 05/01/2009 4:58:37 AM PDT by nyconse (When you buy something, make an investment in your country. Buy Amrican or bye bye America)
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To: SeekAndFind
There is no excess money in the Social Security system. The Fed Gov takes it for the general fund and replaces it with an IOU which is payable by you and me. Perhaps as soon as next year, there will be no excess revenue. All revenue will be consumed by payments to current welfare Social Security recipients
11 posted on 05/01/2009 5:15:36 AM PDT by Jack of all Trades (Bait and Switch - that's change ain't it?)
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To: nyconse
That's fine, but you missed my point.

SS is about useless unless you want it to keep from starving to death.
That retirement will not even lift you out of poverty, so the option to privatize is the only other workable option left.
If you are waiting for the government to make things better in your old age, then I suggest that you do not hold your breath.

IMO, SS should be ended - the current members can have various options to keep their program as promised or redeem their investment via buyout.
Of course, that cannot happen because that would end government control over a large population segment and diminish Socialist purviews, and after all, to put it bluntly, slaves are made in such ways.

see tagline.

12 posted on 05/01/2009 5:32:38 AM PDT by bill1952 (Power is an illusion created between those with power - and those without)
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