The Chilean Model of Social Security (10 to 20 percent of their income)

Freedom Works ^ | Oct 3, 11 | Celia Bigelow

[xzins]

The country of Chile has proven that through individual choice and privatization of public programs that economic freedom is achieved. The revolutionary privatization of Social Security in Chile has bulldozed big government and has allowed the economy and individual freedom to flourish. This country serves as a perfect model for America to look to.

Chile transitioned from an unsustainable public pensions program to an incredibly successful private program by ushering new workers into it. The new system is based on individual decision making. Entering into the work force, workers were given a private pension fund that requires them to contribute 10 to 20 percent of their income. The amount put into the fund depends on the age the employee wants to retire.

At retirement, the private fund is transferred into an annuity with an insurance company. The individual is given the choice to decide what insurance company to work with and what plan best fits the circumstances. If the individual is not satisfied with the company or plan, they have the freedom to change companies. This also allows competition between insurance companies, which would lead to better service and greater returns over time.

Chile set up transitional rules for insurance companies to ensure safety. Due to the radical nature of the privatization, the government wanted to direct companies into safe investment agreements in order to prevent the loss of large sums of money. Risky investments increase the chances of system failure. “If the system had failed in the first years, we would never have been able to try it again,” said Jose Pinera, Chile’s minister of labor. However, these rules provided the roots for a continual, successful retirement system. As insurance companies continue to grow more secure, they will have more freedom to broaden investment.

For those who were already paying into the public system, they were given a choice to stay public or to enter the private system. The major cost created by the transition is the money Chile loses from the people switching to the private system. The cost was financed by the selling of state-owned enterprises that would provide for those who stayed on the public pension system. Due to the success of the privatization, around 93 percent Chilean workers switched to the new program. The public pension program will be completely eliminated the day the last person in the system passes away.

The system has had immensely positive effects:

• It generated surpluses without raising taxes, inflation, or interest rates
• Old-age pensions are 40-50 percent higher than the public pension system
• Disability and survivor pensions are 70-100 percent higher than the public pension system
• Significant decreases in the payroll tax have contributed to an unemployment rate below 5%
• Savings rates have sky rocketed and have deepened investment
• Growth rates have more than doubled in the past 10 years

At a critical time when America’s debt is upwards of $14.7 trillion and unfunded future liabilities are more than triple that number, isn’t this is the kind of growth and freedom we deserve?

[Para-Ord.45]

BM

[xzins]

For whatever reason, I don’t recognize “BM.”

Can you help me out?

[xzins]

This is a description of the Chilean model, and that country takes 10 to 20 percent of income.

I assume we would have to do roughly the same given the current 14.? percent we take for social security. It would fall in there someplace between 10 and 20 percent that would be required deducted.

I don’t believe there is an opt-out for the average citizen.

[Para-Ord.45]

NP

BM is Book Mark.

So I can use the article over and over to beat socialists over their empty heads with in the future.

[xzins]

Thanks, PO.45

[Repeal The 17th]

Who controls the money prior to retirement?
The government?
Or the individual?

[hobbes1]

I wrote about this in college FCOL.

[SueRae]

This is what Herman Cain talked briefly about in the first debate (no one has any real time to elaborate in a debate).

I know the Chilean system had a meltdown a number of years ago but has since recovered. It’s certainly worth a look since our present system is unsustainable.

[wmfights]

The real transition cost of the system is the money the government ceases to obtain from the workers who moved to the new system, because the government is committed to pay the pensions of the people already retired and of those who will retire in the future. That transition cost can be calculated. In Chile it was around 3 percent of gross national product. How we financed it is another story.

We would have to have a tax of some sort to cover the transition. Adults 20-40 would be crazy to continue paying into the govt system. Assuming that most of the people 50 and older stay in the govt system we would have about a 30 yr period of declining liability. In the end you our children would have greater freedom and really retirement security.

This is very similar to a 401K plan in which the employee contributes and the business contributes.

[wmfights]

Who controls the money prior to retirement?

The money is being held by approved insurance companies in low risk annuities. It's in the individuals name, but they can't touch it until they retire.

[xzins]

Yes, I do think this model would work to the extent that it did NOT drive up the value of stocks creating a bubble due to a huge influx of money into the investment system.

The bottom line would be that each individual would be required by the government to pay 10-20 percent of their income into the system. In other words, we don’t rid ourselvs of the social security tax by switching to this system, we simply retarget that same amount of money into a new, personal system.

One idea I’ve heard of that might avoid the possibility of creating a bubble is to pool all the money in independent “retirement bank or banks” that then, like any other bank, makes money by lending, investing, etc. with the profits being distributed to the various accounts in the bank. They are untouchable by the government, and depending on the facility of the bank at making a profit, those with their money in it would always see some protected growth of their personal retirement accounts.

Either system, though, the money is required to be taken from a person’s income. While they might no longer be in social security, they are STILL having a SIMILAR amount deducted from their income.

A politician can’t claim their tax plan eliminates the need for social security taxes.

[BfloGuy]

Who controls the money prior to retirement?

The individual controls its investment.

[Netizen]

In other words, we don’t rid ourselvs of the social security tax by switching to this system, we simply retarget that same amount of money into a new, personal system.

Instead of being forced to pay into a general retirement fund that you may not ever draw from, you would being paying into your own account. Like a forced savings. I kinda like it.

[Netizen]

One idea I’ve heard of that might avoid the possibility of creating a bubble is to pool all the money in independent “retirement bank or banks” that then, like any other bank, makes money by lending, investing, etc. with the profits being distributed to the various accounts in the bank.

Not keen on this. What guarantee do you have if the bank makes bad investments with your money and goes under? It shouldn't be touched by anyone. jmo

[xzins]

You have to send your money to someone to invest.

A bank making bad investments with your money.

A fund manager making bad investments with your money.

A government agent making bad investments with your money.

An insurance company making bad investments with your money.

Someone’s going to get your money.

[Netizen]

Why does it have to be invested? Why can’t it just sit and draw interest?

[livius]

I think it’s more than 14%. I’m self-employed, so I pay the full amount, and IIRC, it’s about 16.8%.

Bambi is planning on reducing the payroll tax next year in order to win votes, which of course will put Social Security even more in the hole and will in fact mean that the difference will have to be made up by direct payments from the federal government. In other words, welfare, in the form of direct dependence on the federal government, which can be given and taken away at whim.

A state-sponsored pension fund is not necessarily a bad idea, but it’s got to be something that is really a pension fund and pays you back, just the way a private pension fund would. And it’s got to be beyond the manipulations of politicians. The Chilean model seems to do that.

I think that was part of the plan when our SS was started, but the problem is that SS extends to many more things now that it did originally. This includes SS disability payments that cover things like “working gives me migraines” to alcoholism...while at the same time, Congress has been dipping into the fund to bankroll its whims and the money has not been invested and grown.

[xzins]

Where do you think banks get the money to pay interest? They invest your money. Same with fund managers, insurance companies, etc.

[Netizen]

We took a huge hit when the market fell and our IRA’s went with it, and we weren’t putting in 20%. I can’t even imagine how devastated we would have been had we been doing that.