Privatized Social Security: The Chilean Model

00168The stock market reached a record high last week, closing over 17,000 for the first time. Good news, of course. As President John F. Kennedy famously said, “A rising tide lifts all boats.” But it sure helps if you own a boat.

In this case, the “boat” would be the dynamic American stock market.

But investors in the stock market disproportionately come from the top 1 percent, and they hold about 35 percent of all stocks and mutual funds. The next-richest 9 percent control about 45 percent. The remaining 90 percent have less than 20 percent. While nearly half of Americans have either direct or indirect investments in the stock market, half of Americans do not. And even for those who do, their home equity is still, by far, their largest investment.

President Obama wants to focus his remaining years in office on fighting “income inequality.” To do so, he has proposed things like “promise zones” where federal grants and tax incentives is supposed to spark development. He has promoted silly income-transferring schemes like “cash for clunkers” and “cash for caulkers,” and HAMP to help homeowners fight off foreclosure.

But there is something we could do immediately to help to increase the net worth of the bottom 99 percent — allow private accounts for Social Security.

Chile recently celebrated its 33rd year of private retirement accounts. Its then-secretary of labor and Chilean pension system, Jose Pinera, went on television day after day to explain to cabdrivers, housewives and construction workers the benefits of allowing private savings accounts.

Pinera successfully persuaded 93 percent of Chilean workers to invest their “social security” contributions in one of several types of managed portfolios. Those who feared the “risk” of the stock market could continue as they did before. While U.S. workers pay 12.4 percent of their wages into Social Security, Chileans put 10 percent (or up to 20 percent) of their earnings into a private fund, earning compound interest. On retirement, workers can choose a life annuity or make programmed withdrawals. Heirs inherit what’s left.

The result? Chilean workers averaged a near double-digit annual return on their money — 9.23 percent above inflation — over the first 30 years. In the U.S., Social Security nets a theoretical 1 to 2 percent return — less for newer workers. Not only do they allow private accounts for “social security” in Chile, but also in Australia and the United Kingdom.

Columnist John Tierney, writing in The New York Times in 2005, calculated what his retirement benefits would be if he’d paid into the Chilean system instead of Social Security.

He found he’d have three options: “(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.”

Social Security is an especially bad deal for blacks.

CATO Institute’s Michael Tanner writes: “The longer you live, the more money you get from Social Security. But African Americans have shorter life spans than whites. As a result, a black man or woman earning exactly the same lifetime wages, and paying exactly the same lifetime Social Security taxes as his or her white counterpart, will likely receive a far lower rate of return. A study by the nonpartisan RAND Corporation found that the rate of return for African-Americans was approximately one percent lower than that for whites. The result was a net lifetime transfer of wealth from blacks to whites averaging nearly $10,000 per person.”

Worse, the Supreme Court ruled long ago that one does not have a proprietary interest in his Social Security contributions. In other words, when the recipient dies, the “contribution” goes “poof.” With private accounts, the money can be bequeathed to a family member or to a charity.

So why not private Social Security accounts?

The late vice presidential candidate, Rep. Geraldine Ferraro, D-N.Y., opposed private accounts for Social Security. She said if one lacked the “knowledge and the wherewithal to manage your own private funds … you’re gonna be out of luck.” Out of luck?

Legendary investor Warren Buffett quotes his mentor, Benjamin Graham, who said: “In the short run the stock market is a voting machine, but in the long run it is a weighing machine.” For the long term, prices reflect actual value, and investors who prudently and patiently “invest” in the stock market will have a much greater net worth and therefore realize the resources to enhance their comfort in their retirement years.

Democrats think Americans too stupid, too irresponsible and too impatient to manage their own Social Security contributions. Chileans can. Australians do. Many European and Latin American citizens do. But Americans, at least the bottom 99 percent, well, they’re just too stupid to join the party.

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  • Ivan Ewan

    Didn’t Ted Cruz make some noises about emulating such a system?

    • sundance69

      Yes he did and so have many other people. SS is the worst deal going. Pres. Bush was also for private accounts but the Dems beat him down with a stick for mentioning it. Another Govn’t control mechanism.

  • CapitalistPig

    Social Security does NOT shield you from risk as many of its proponents tout. In my life they have raised contribution levels (to maintain-not increase benefits) moved out the retirement age, started taxing benefits & have reformulated the COLA so as to ensure your benefit never keeps up with inflation.
    All these actions have resulted in benefit cuts over the years & now Sen Elizabeth “Crockagewea” Warren is proposing “adjustments” for future workers. What do you suppose she means by that? And why future workers? Hey, Fauxcohontas, why not just do it now? Why pick on those youngsters & m0r0n college kids who think you’re the smartest woman in the world? Is it because they’re too stoopid to follow the real news & so you feel safe stiffing them–knowing they won’t figure it out until you’re dead & gone how bad you skruwed them?
    All you’re doing by supporting the current system is substituting political risk for market risk. Don';t think for one second politicians like Warren, Obama & Shrillary Clinton are neutral advisers with no dog in your hunt–SS is a political slush fund that they have access to to spend–they DO NOT want you to control your money.

  • kentek

    But, you missed one important point. Chile’s retirement plan creates wealth: if/when you die the balance of your account goes to your heirs. What happens with SS: the State gets it!
    How can a little country like Chile be so smart. And, there are 40 other countries that have followed their lead.
    We are toast!

    • AreaMan66

      How can a little country like Chile be so smart.

      Oh the left is smart but remember smart ≠ good.

      The left values equality over prosperity and SS keeps the people in line and dependent on the government. Also, it’s perpetual bankruptcy is an effective terror tool when trying to raise taxes.

      • sofiarconlon

        just before I looked at the receipt ov $8130 , I
        didn’t believe that my sister woz like actualy bringing in money part-time from
        there pretty old laptop. . there aunts neighbour has been doing this 4 only
        about 22 months and at present repayed the mortgage on their appartment and
        bought themselves a Chrysler . see here C­a­s­h­f­i­g­.­C­O­M­

    • Uncle Jay

      Social Security is a tax. People who pay into do not necessarily have the luxury of getting returns on it per a ruling in the early 1960’s (I forgot the name of the case) when the SS Administration refused to grant money to an applicant. The SCOTUS ruled in favor the SSA stating SS is indeed a tax, and the SSA has the authority to dictate who can reap the benefits at retirement age.
      There was another case regarding SS in the 1970’s or the 1980’s where the city employees of Corpus Christie, Texas found a loophole in the SS law and was allowed to fund their own retirement. Congress closed this loophole quickly.
      My father told me that before FDR came around, people would put money in a bank to save for their old age. Why? Because before FDR, the interest rates between banks on savings accounts were not regulated. Therefore, competition between banks regarding interest in savings would vary. In addition, there was no tax on interest on bank accounts until FDR came around.
      The point is, SS is about control. Whoever controls your money, will control you as well.

      • cyberdove

        It’s interesting that SS is a tax and you are taxed on the money you use to pay the tax and then you are taxed again on the money you receive from SS at retirement. So in effect, you are taxed three times on the money you earned through your own labor.

  • AreaMan66

    Mr. Elder,

    Thanks to generations of leftist control over the K-12 and University system….most people are economic illiterates and to make decisions ONLY with their emotions.

    It’s an uphill battle.

    • victoryman

      Wonderful post. You are right on target. “Economic illiterates.”

      • veritaseequitas

        Yes, but people can learn to manage their money can’t they? There are plenty of financial advisors around to help them too.

  • Philo Vaihinger

    This bullshit is why I will never vote Republican, again.

    What I need to stay alive trumps everything.

    If you really thought you needed my vote to save the country you would stop trying to kill me.

    Fuck you.

  • alericKong

    Equities are highly over valued.

    I would rather see Social Secuirty removed. If you want a payout, it should be done through mineral rights payments through the states, but I wouldn’t even do that because it would be screwed up too.

    Stop spending. Stop immigration. Let owners hire people same day and pay them out of the cash register if they want. DC should have no involvement in that whatsoever.

  • veritaseequitas

    GWB suggested this and got his butt handed to him over it. The reason the cretins in Washington don’t want privatized Social Security, is it takes away what they consider their own personal lollipop. They have to up their game to continue to steal from Americans if Social Security is privatized.
    Of course, as long as the Establishment Republicans and the Democrats are in office, this is “hope and change” Americans will never see.

  • hrwolfe

    It is an interesting foot note to this but in recent years I’ve been reading more that Pinochet the supposed evil dictator of Chile implemented a lot of reforms of which something like 95% are still in force and he peacefully relinquished power and stepped down after an election, did Hugo or Fidel do anything similar? I wonder just how evil Pinochet was and how much was leftist hype.