In the current Social Security debate, the left often attempts to label those in favor of private accounts as loony. Typically, supporters of the Social Security status quo use scare tactics in efforts to convince the American people that private accounts would be “risky” by “gambling your Social Security on Wall Street.” President Obama pledges that he will “continue to fight to make sure we do not jeopardize the future of Social Security with risky schemes that leave our seniors vulnerable.”
In America, how risky would private Social Security accounts be? For this answer, we can look at the country of Chile for some insight. Chile once had a Social Security system similar to what the United States has now. Prior to 1981, Chile’s Social Security system faced a crisis— its Social Security deficit rose to about 25 percent of the country’s economic output. Chile’s efforts to “fix” Social Security by rising the retirement age and cutting benefits proven unsuccessful. Finally, in 1981, Chile emphasized individual liberty by allowing workers the choice to invest in personal Social Security accounts.
In Chile, 93 percent of workers have voluntarily chosen personal accounts rather than government controlled accounts. On the other hand, Congress has trapped all American citizens in the compulsory government run Social Security with no other retirement savings options. Those Chileans who opt for a personal account contribute 10 percent of their wages to one of 20 pension funds of their choice. Unlike the United States, Chileans are able to pass the remaining balance in their pension funds to loved ones upon their death.
As a result, Chile’s private Social Security accounts have been widely successful. The savings rate in Chile has increased to 26 percent of GNP from a mere 10 percent. Overall, the private pensions have collected more than $34 billion with an average real rate of return of 11.3 percent annually. Experts attribute these private Social Security accounts to the doubling of Chile’s real growth in the past ten years. According to Chile’s former Minister to Labor Jose Pinera, “Chilean workers benefit directly, not only through higher wages, not only through more employment, but through additional capital in their individual pension accounts.”
So why is the left so afraid to give Americans Social Security choice? As Former Majority Leader Dick Armey once overheard late Senator Edward Kennedy say in a conference committee regarding personal medical savings accounts, “We can’t give people that choice; they’ll take it!” While Chile’s Social Security system is not perfect, implementing a similar plan in America would be a step in the right direction. We must allow every American at least the option to stay in the current bankrupt government run system or convert their payroll taxes into a private account that they own and control. If Chile is any indication of the demand for private accounts, the majority of Americans will also prefer to control their retirement funds in an individual account that produces higher rates of return.Published in