Reduced government pension debt, 9.23% rate of return, increase in GDP, ending the payroll tax.
Can’t be done?
The Chilean Model
Thirty years on, Pinera’s plan, adapted from the ideas of Milton Friedman, is, along with free trade, one of the two pillars of Chile’s success story, surpassing all predictions.
Pinera’s proposal began with scrapping the payroll tax on the country’s social security system and inviting all workers to take the money they were contributing and move it into a private pension.
Workers would be free to choose the fund, how much to put in, and at what age they would retire, with a minimal safety net built into the design. Past contributions would be refunded to workers by government bond. And anyone who didn’t like the idea was free to remain with the system as it was. It was a huge success: 95% of Chile’s workers chose the private system.
Pinera told the public to expect a compounded 4% rate of return under the private plan. But as of 2010, the average annual rate of return was 9.23%, far higher than promised.
By contrast, the U.S. social security system, which today accounts for a quarter of the U.S. government budget, is slated to give retiring workers in the next decade a 1% to 2% rate of return. And those entering the system today will see a negative return.
Chile’s implicit pension debt fell to just 6% of GNP — compared with 100% in the U.S., 300% in France and 450% in Italy, leaving Chile with no net debt.
No Runny Eggs:
That, folks, is the real payoff; a government and a people able to weather economic storms that is sinking the rest of the world. Even when one takes out the dysfunctional Disability Insurance, the cost of providing the benefits of the Old-Age and Survivors Insurance (including a transfer of funds to cover railroad retirees) outstripped the taxes paid by $2.14 billion on $577 billion of benefit payouts, and $6.06 billion on $580 billion in total program cost, in FY2010. That’s $6.06 billion that, because of the nature of the “Trust Funds”, the Treasury had to borrow, which gives the lie to the accounting trick that counts “interest earned” by said “Trust Funds” as income into Social Security.
With the level of publicly-held debt rapidly approaching 100% of GDP, and current trends showing that increasing at an exponential rate, how long can it be before everybody stops buying US Treasuries? The first time that happens, the value of those “Trust Funds” will be $0.00, and we’ll be up a swollen Shit Creek without a paddle.
Go read it all.