Monday, November 14, 2005

Social Security and Chilean Example


Below is a respones I wrote to John Tierney of the New York Times, April 26, 2005. He was arguing for SS privatization.

"There are a some things you didn't reference in your article on Chile's Soc Sec system. You and Pablo were looking at a specific point in time when comparing your SS amounts. Had the Chilean economy been downsized by a tech bubble, ie like the US, his pension would have been significantly less.

Second, you included the mutual fund management fees in Pablo's 12% deductions for his retirement plan. I don't believe that is correct. The Chilean plan requires a mandatory 10%, per the CATO institute. These costs would run, in US dollars, 1 or 2% of the return. A recent figure on the Chilean pension fund return has been 10%. Subtracting the management costs of 1-2%, the return is 8-9%. The current US SS funds are returning 6%. Further, Warren Buffett has predicted Stock Market returns, over the next 20 years, at 6-7%. This was in his 2003 letter to his Berkshire investors at their annual meeting.

The US SS fund, while not equaling the Chilean returns (at a point in time) are guaranteed by the US government. While Chilean fund will guarantee a minimum pension amount only.

Fourth, the current Chilean government is spending $6 Billion dollars annually to ensure the minimum pension for its already retired workers. This represents 25% of it's GDP. Our SS program cost represent 6% of our GDP.

Fifth, President Bush is promoting "private accounts" and workers choosing their investments. Not really what is in the details. His plan is based on the Chilean plan so the workers investment choice is ONLY mutual funds. There are 5 companies in Chile authorized to manage the pension plan. The workers choice amounts to selecting one of these companies. The company then makes the investment choice.

Private accounts, in the US SS plan, would add several trillion dollars to the US debt, in order to kick the program off. The country cannot afford it, and it does nothing to change the predicted shortfall of funds in 2042..

Thanks for reading,

Ron Ambler