Social Security has enjoyed rock-solid political support for almost
all of its 60-year history. Now it's beginning to look as movable
as a continent.
Long before they know the words "plate tectonics," children playing
with a jigsaw map of the world observe that Africa and South
America fit together. It's easy for children to say that, because
they don't have to provide an explanation of how it could have
happened.
But before there was a plausible mechanism to explain how
continents could move, scientists were leery of making the claim
that is so obvious to children.
Of course, plausible is a subjective term. Not everyone would chose
to apply it to the theory that the continents are so light they are
floating apart like bubbles on the surface of an earth churning
with currents of boiling rock and metal.
To people entering the work force, the vulnerability of Social
Security is as obvious as the fit of the puzzle pieces. One survey
showed young adults had more confidence in extraterrestrials than
they did in the future of Social Security.
But politicians have been leery of admitting the obvious. They
suspect it will be harmful to their careers to say Social Security
is doomed, especially if they have nothing plausible to put in its
place.
But there is a plausible alternative on offer: a completely private
old-age security system to replace Social Security.
And for those who find that idea as likely as floating continents,
Jose Piņera has provided something even better than an explanation.
As Minister of Labor and Social Security in Chile from 1978 to
1980, he has provided a demonstration.
Piņera is now a co-chairman of the Cato Institute's project on
privatizing Social Security, and he came to San Francisco Wednesday
to talk about the Chilean experience at a Cato seminar.
Chile actually established its pay-as-you-go retirement system in
1925, 10 years before the United States adopted it as a treatment
for Depression symptoms. And Chile recognized the unfortunate side
effects of socialized retirement sooner, too. In 1980 it converted
its government-run pension system to one where workers invest and
own their retirement savings individually.
With 15 years' experience behind it, the conversion has been a
success. Nearly 90 percent of Chilean workers opted for the new
system, though it was not mandatory, and as they retire they are
enjoying pensions 50 to 100 percent higher than they would have had
under the old system, funded by their own assets rather than taxes
on other people.
Chile's growth rate has doubled from 3.5 percent a year for decades
before the switch to 7 percent since, Piņera said. The nation's
savings rate has nearly tripled. The total assets in all the
companies that invest retirement funds equal about 40 percent of
Chile's gross national product now, and when the system reaches a
steady state, around 2008, total assets will approximately equal
GNP.
This is an enormous pool of capital now available for long-term
investment in infrastructure projects, like toll roads and bridges.
Thus more saving for retirement translates into more jobs. The way
the U.S. does it, the more money we take for Social Security
payments funded by taxes, the fewer jobs we have.
Workers in the Chilean plan must put 10 percent of their earnings
in a regulated, but private, pension savings account. At their
option, they may contribute up to another 10 percent. To find out
how much to save for the future they prefer, they can play
"what-if" on the computers in their pension company's office
"Some people want to go fishing at 55," Piņera said, while others
want to work longer.
"A socialized system cannot account for these divergent
preferences, and it exacts a huge price in human happiness."
The change has brought significant cultural changes, Piņera said.
Strikes have almost vanished as workers realize they own big chunks
of the companies they work for.
"We are not masochists," one labor leader told Piņera. "We like
strikes against someone else."
The transition went smoothly because it addressed the separate
concerns of three age groups. For those already retired, nothing
changed. People currently in the labor force could choose whether
to stay in or escape, and if they chose the new plan they received
a "recognition bond" worth the real value of their contributions
plus interest, to be paid at retirement. Most opted to switch. And
new workers automatically joined the new system.
The idea is, as intended, so simple "that every taxi driver can
teach it to you between the airport and the center of the city,"
Piņera said. He's even been able to teach it to some other South
American leaders.
Chile was the first, but it's no longer alone. Peru converted in
1993, Argentina and Colombia in 1994. He's had discussions with
Bolivia, Mexico and El Salvador, Piņera said.
On other continents he's had slightly less success, though Europe's
sclerotic welfare state desperately needs mending.
"We are Europeans, we have 2,000 years of civilization" is one
response he gets, as if no good idea could possibly come from
anywhere else.
Americans may not worry about the source of a good idea, but
neither are they worrying enough about the consequences of the bad
one we adopted 60 years ago. Social Security's cash flow will turn
negative around 2012, meaning taxes will have to be raised to begin
paying back the money the government has borrowed from the
so-called "trust fund." By 2029 or sooner, even that fiction will
be exhausted.
As any child can see, the solution is obvious.