Herman Cain says his plan to reform Social Security worked for Chile, but can it work in the USA?

Southrn California Public Radio ^ | 10/08/2011 | Matthew DeBord

[SeekAndFind]

Herman Cain is now polling alongside perpetual Republican kinda sorta frontrunner Mitt Romney. Today, KPCC's AirTalk did a segment on the sudden arrival of the Cain Train. Time to get up to speed on everything the pizza king stands for, and fast! Yesterday, it was the 9-9-9 plan to reform the tax system. Today, it's Cain's scheme to fix Social Security.

In the CNN/Tea Party Debate, Cain said his plan could copy the "Chilean Model" (see the above video). So what does that mean?

It means privatizing Social Security, as Chile did in the early 1980s. José Piñera, the Chilean government official who oversaw the conversion of his country's social security system from its classic model to one based on private investment accounts, explained how and why he did it, back in 1997 (his account now lives on the Cato Institute site).

He loves the idea, and thinks its benefits far outweigh its potential disadvantages:

That does not mean that we do not have any problems in Chile, but I believe that a society based on individual freedoms -- economic, social and political -- is a much more prosperous and lively society.

Could something like this be done in the U.S.? People have said it's utopian and that nobody in the establishment would support privatization, but I believe the situation is changing.

Recently, I was invited by Sen. Phil Gramm, R-Texas, to testify before the Senate Subcommittee on Securities. Basically, everyone agreed that a system like this is much more consistent with American values than a system created by a Prussian chancellor in the 19th century.

How about that dig! Social Security is as old as Prussia, and where the heck is that? Private investment empowerment is so much more now.

Well, OK. But Piñera argues that he needed to fix Chilean social security because it was bankrupt, or headed there in a hurry. Our Social Security system isn't bankrupt, anymore than it's a Ponzi Scheme, as Texas Gov. Rick Perry has claimed.

However, some GOP candidates and even Republican politicians not running for the White House insist that Social Security is a Ponzi scheme and that it's unfair to compel workers to pay into the system if they're never going to see benefits.

Herman Cain isn't so much calling it a Ponzi scheme as demanding that it be done away with completely.

So Cain wants to emulate Chile, a nation that the U.S. has clearly emulated on matter of domestic policy many times before, and see Social Security phased out. Workers could invest what they would have paid into Social Security in the stock and bond markets, instead. Presumably, the funds that are created would be low-cost and low-risk.

The case for doing this says that the government would shed an allegedly too-costly entitlement program while providing workers with a chance to earn a much higher return than they would if they relied on Social Security, whose benefits are set by the government and only indexed to inflation. The point isn't to make money. It's to make sure that the money will provide an adequate cushion against poverty.

BUT, and it's a big but, you have to prepared for market volatility, of the kind we've seen lately, if you get on the Cain Train. Funds go up and funds go down. There's no guarantee that you won't lose a lot right before you're ready to retire. Also, people are often crummy at managing their retirement investments. 

Meanwhile, Social Security chugs along, safely providing a modest benefit to millions of Americans, year after year. We may have to raise the retirement age, to make sure that there are enough people paying into the system to keep its trust fund well-capitalized. But then again, people are living a lot longer than they did when that 19th-century Prussian chancellor dreamed up social insurance.

It's not that hard to understand Cain's plans to reform taxes and Social Security, in the end. The 9-9-9 plan shifts a fiscal burden to less-rich Americans. The Chilean Model shifts risk from the government, which can easily absorb it, to the private citizen, who can't.

CLICK ABOVE LINK FOR THE VIDEO

[null and void]

We are a fundamentally different people than Chileans how exactly?

[Brilliant]

I think Herman should keep his ideas about social security to himself. You can’t win that battle. All you can do is let the Dems thrash about and then ultimately they can explain to the American people why their ponzi scheme has failed.

[ken21]

remember the good ol’ days when the democrat party and bob dope r-kansas spent the social security surplus?

[RC2]

At least Cain is willing to talk about it. No new idea will work if the people don’t want it. We all know that something has to change, but so far, nobody has any idea that will pass the peoples muster.

[justsaynomore]

From INVESTORS.COM

Chile’s system, enacted in 1981, took government out of the pension business altogether and replaced it with a system of personal retirement accounts.

It’s one of most successful fiscal reforms in history.

It outperforms Social Security on returns, yielding about 9.23% compounded annual returns over 30 years under private management.
mp3Subscribe to the IBD Editorials Podcast

That means Chilean retirees take home pension checks four times what they would have gotten if they had remained in their old Social Security system.

Workers chose the types of investments, the level of risk, the size of their contributions — 10% to 20% — and the day they intended to retire.

Unlike Social Security, accounts are by law property. A worker who dies early can will his account to heirs.

Incredibly enough, the program could work here, too, with sufficient political will.
http://www.investors.com/newsandanalysis/article/586464/201109291533/Cains-Chilean-Model.aspx?ven=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EditorialRss+%28Editorial+RSS%29

[SeekAndFind]

Not saying I disagree with Investors.com, but someone has to play Devil’s advocate the better to sharpen our arguments.

See here:

http://economistsview.typepad.com/economistsview/2006/01/chile_confronts.html

EXCERPT:

Michelle Bachelet is a pediatrician and a Socialist, while Sebastián Piñera is a billionaire businessman and a conservative. They may agree on little as the opposing candidates in Chile’s election for president, but they concur on one important point: the country’s much vaunted and much copied privatized pension system needs immediate repair. ... [D]issatisfaction with the system has emerged as one of the hot-button issues in the election...

“Most people perceive the costs of pensions and the pensions themselves as unfair,” said Patricio Navia, a political science professor at New York University and at Diego Portales University here. “Many of those who started work when the system was first adopted are realizing that they have not been able to contribute enough to get a significant pension,” ... they resent “overhead costs that are so high” and that have led to record profits for the pension funds that manage contributions automatically deducted from workers’ paychecks. ...

“There are two big issues, coverage and costs,” Andrés Velasco, Ms. Bachelet’s economic adviser, said ... “Too many people are outside the system,” he said, adding that too many of those in the system have found that “saving via the pension funds is quite expensive.” ...

[S]skeptics point to another developing problem: many young people, who should be enrolling in the system early to accrue maximum benefit, are staying out or paying in very little. Some cannot afford to contribute beyond the obligatory minimum payment, which is 10 percent of wages, while others are either self-employed or have been hired by companies as low-paid independent contract workers and therefore do not have to contribute at all. ...

[E]ven advocates of an untrammeled free market, like Mr. Piñera, the conservative candidate, are jumping in with criticisms, to the surprise of some here. Mr. Piñera is the brother of José Piñera, the former labor minister who imposed the personal account system during the dictatorship of Gen. Augusto Pinochet. [and co-chairman of the Project on Social Security Choice at the conservative Cato Institute] ... “Chile’s social security system requires deep reforms in all sectors, because half of Chileans have no pension coverage, and of those who do, 40 percent are going to find it hard to reach the minimum level,” Mr. Piñera said ... “This has to be confronted now...” ...

CLICK ABOVE LINK FOR THE REST

[justsaynomore]

A major point about this too that seems to be missed a lot...

It is an OPTIONAL alternative to SS. No one would be forced to participate.

[Brilliant]

There is no point in talking about it if you can’t do anything about it anyway. You’re just going to stir up opposition to your candidacy in doing so, and give ammo to you opponents.

The problem with privatization is that it would have worked in the 90’s when we had a social security surplus, but it would require benefit cuts to do it today. In the 90’s, there was a ss surplus, so you could give that to young workers and let them put it in private accounts without cutting benefits for people who were already receiving benefits. Now, ss is running a deficit, so if you want to privatize any portion of the contributions, you are going to have to either increase taxes, cut benefits, or print money. None of those things can easily be defended from a political standpoint. The best thing to do is let the Dems find out the hard way that they can’t sustain it, and then they can explain to the people why they are proposing harsh changes.

[Ganndy]

The Chilean Model shifts risk from the government, which can easily absorb it, to the private citizen, who can't.

There is something wrong with this statement...
Our government cannot easily absorb anything; except maybe kickbacks, Chicago style politics and cronyism... Ideologically speaking

[not2worry]

The 9-9-9 plan shifts a fiscal burden to less-rich Americans

-———————————————>

What is the definition of “less-rich”?

I know “disability” and “unemployment” recipients with the most recent iphone, souped up cars with high tech stereos, designer handbags, nikes, bling jewlery and concert tickets!

There will not be a tax on food and medical.

There are no waivers on the “less rich” to pay the gasoline tax, local and state sales tax. Why all of a sudden should the “not so rich” not pay their fair share to run the federal government?

This is the springboard for the Fair Tax!

[ScaniaBoy]

Believe it or not but “socialist” Sweden also reformed its social security system, converting a pay-as-you-go system to a partially privatized system. The reform was based on ideas by Peter Ferrara and Martin Feldstein.

http://www.heritage.org/research/reports/2000/06/pension-reform-in-sweden-lessons-for-american-policymakers

There are better descriptions of the new system than this, but unfortunately in Swedish.

[ex-snook]

Probably we are the same. Some have their taxes increased and some don’t. What we don’t know about 999 is, who pays more and who pays less?

[ScaniaBoy]

See also:

http://www.thenewatlantis.com/docLib/20080522_US_Should_Study_Swedish.pdf

[Jeff Head]

Here's the bottom line of this article:

The Chilean Model shifts risk from the government, which can easily absorb it, to the private citizen, who can't.

Another big government...governemnt can do all...attitude. Well, it can't. We are seeing the fruits of this train of thought in the US now, where the entire nation teeters on the brink of bankruptcy.

The fact is, in a free society, the citizens are SUPPOSED to take the risk and have the opportunity to achieve. Other citizens, if the free society is modeled on fundamental moral values like ours is, and MUST BE if it is to remain free, then step in with churches, families, and charities to help the people who are in hard times.

But, they do it with the idea of getting them off the hand out and back into productive society wherever they can...not perpetuating their hand out into economic slavery like the Federal Government and self serving politicians do.

AMERICA AT THE CROSSROADS OF HISTORY

[LomanBill]

Fithcal Conthervatism - Herman Cain edition:

 

====================

 

TP: Mr. Cain, you recently came under fire for your comments about the kind of people you would appoint to your cabinet. Would you be opposed to appointing an openly gay but qualified person to be in your cabinet?

CAIN: Nope, not at all. I wouldn’t have  a problem with that at all. I just want people who are qualified, I want them to believe in the Constitution of the United States of America. So yep, I don’t have  a problem with appointing an openly gay person. Because they’re not going to try to put sharia law in our laws.

http://www.google.com/#hl=en&sugexp=gsihc&cp=20&gs_id=25&xhr=t&q=Open+homosexual+Cain

=====================

 

HERMAN: What happens now?

Scott Toomey: Well, now, uh, Ken Mehlman, R. Clarke Cooper, Meghan McCain, Mary Cheney and I wait until nightfall, and then leap out of the Fithcally Conthervative log cabin, taking The Party(tm) by surprise -- not only by surprise, but totally unarmed!

HERMAN: Who leaps out?

Scott Toomey: Uh, Ken Mehlman,  R. Clarke Cooper, Meghan McCain, Mary Cheney and I. Uh, leap out of the log cabin, uh and uh....

HERMAN: Oh....

Scott Toomey: Oh.... Um, l-look, if we built this large wooden Rhinocerous -- [twong]

ALL:  Run away!  Run away!  Run away!  Run away!
      [splat]

[dawn53]

It is an OPTIONAL alternative to SS. No one would be forced to participate

This is what I'm unclear on. The 9-9-9 plan replaces income tax and FICA withholding, but does the 9-9-9 plan collect monies that will be distrubed to SS recipients? Or is the 10-20 percent contribution (the Chilean example) what replaces SS?

If you have to contribute to both in order to have retirement savings, then it's not going to be affordable for many people. I realize under the 9-9-9 plan I'd pay extra taxes, and I'd be willing to do that if it stabilized SS and replaced the income and FICA tax. But I can't figure out if you'd have to pay higher taxes and contribute to the "Chilean model" in order to get a retirement plan.

[M. Dodge Thomas]

There are a lot of things to like about the Chilean system, but one thing a lot of it’s supporters in the US gloss over is that the reforms had to be “reformed” again in 2008 (by a Conservative government), with pensions for the lower earning 30% of workers again financed largely out of general tax revenues.

Bottom line is that if the Chilean system is your model, two of the lessons drawn form their experience are:

1) Some sort of re-distributive mechanism is required to provide pension support for for lower-income and part-time participants.

2) You need to include the self-employed in the system on a mandatory basis.

These features of the current Chilean system would not be popular with many US conservatives.

[SeekAndFind]

RE: Believe it or not but “socialist” Sweden also reformed its social security system, converting a pay-as-you-go system to a partially privatized system.

Australia has done it also for several decades and seems to be working well. They call it their SUPERANNUATION PLAN.

See here:

http://www.heritage.org/research/reports/1997/12/australias-privatized-retirement-system

[RockyMtnMan]

If only two of the 9’s reach 100% compliance it equals 18% which happens to be the average percentage of revenue as compared to GDP. Everything else is gravy. While 100% compliance is unlikely the level of compliance would be much higher for income and corporate taxes. Businesses are likely to bring all their foreign profits back to the US.

The money returning would lead to an expansion of jobs and followed by a significant uptick in consumer spending, which fuels the other 9.

The plan also makes the pie much bigger which brings in more revenue and expands the overall GDP.