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Chile's pension system, hailed as a model for the world, requires workers who receive regular paychecks to bankroll their own pensions with a 10%... View Enlarged Image
May Day — socialists' paean to class warfare — evokes memories of Soviet tanks in Red Square and leftist radicals rioting. But Chile celebrates the actual empowerment of workers.
May 1 marks the 30 years since Chile became the first nation to privatize its social security system. By turning workers into investors, the move solved an entitlement crisis much like the one America faces today.
"I like symbols, so I chose May Day as the birth date of Chile's 'ownership society' that allowed every worker to become a small capitalist," wrote Jose Pinera, former secretary of labor and social security and the architect of this pension revolution. He is now a senior fellow at the Cato Institute in Washington, D.C.
What he designed has succeeded beyond all expectations. Yet Congress remains reluctant to adopt anything like it, despite efforts by Presidents Bill Clinton and George W. Bush to partially privatize an American system.
Instead of paying a 12.4% Social Security tax as we do here, Chilean workers must pay in 10% of their wages (they can send up to 20%) to one of several conservatively managed and regulated pension funds. From the accumulated savings, they get a life annuity or make programmed withdrawals (inheriting any funds left over).
Over the last three decades these accounts have averaged annual returns of 9.23% above inflation. By contrast, U.S. Social Security pays a 1% to 2% (theoretical) return, and even less for new workers.
Long-Term Boom
History shows that pension funds prudently invested in a diversified portfolio appreciate significantly over long periods of consistent saving. In 1981, the Dow industrials stood at 900; today, despite three market crashes, it's nearly 13,000.
In 2005, New York Times reporter John Tierney worked out his own Social Security contributions on the Chilean model and found that his privatized pension would have been $53,000 a year plus a one-time payout of $223,000. The same contributions paid into Social Security would have paid him $18,000.
The system is doable here, but does require citizen education and political resolve.
First, implicit debts must be made explicit, which most politicians abhor.
Chile decided to compensate workers for money already paid into the system, through "recognition bonds." It financed this via bonds, partial diversions of existing pension taxes, sales of state assets and spending cuts.
Its road was made even easier as economic growth from a system that encourages work, saving and responsibility filled government coffers with new streams of tax revenue.
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