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Social Security Reform Thursday: Week Twenty-Eight -- Reform In Chile.


Thursdays are good days for reform, because they fall between Wednesdays and Fridays.

That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.

This week's topic:

Chilean Social Security Privatization.

The University of Pennsylvania's "Knowledge @ Wharton" web feature profiles Chile's successes with Social Security personal accounts:

Chile enacted its national defined contribution pension system in 1981 after the prior government-run systems collapsed. The core element of the plan is that workers are required to set aside 10% of their earnings into private savings accounts. Eleven other Latin American countries have copied elements of the Chilean approach, in which bankrupt state-run pension plans are replaced by defined contribution-funded individual accounts. "This reform model has been exported all around the Americas and it's been held up by many as a fine example of a well-functioning national personal accounts system," says Mitchell. Overall, the Chilean system has provided savers a 10% real rate of return since its inception. "That has made the system very popular, but it's not clear whether this can persist in the future, or whether others can replicate it," she adds.

Indeed, it's been successful, it's been replicated successfully, but reformers should never try to promise 10% in annual returns. Fortunately, no serious reform advocate is making such a heady promise. Most of us just believe even low estimates of 3 or 4 or 5 percent would work better for workers than the current system.

Chile's success with personal accounts is an important bit of evidence that we in the U.S. can and should reform our Social Security system according to free market principles. Pay-as-you-go (pyramid scheme) funding is just untenable in our demographic pattern.

Meanwhile, the Democrats have teamed up with the LaRouchers in opposing reform. Some critics of Social Security modernization also try casting Chile's overwhelmingly successful reform as a failure. The LaRoucher take on the situation is just so mind-bogglingly dishonest. It's trash. But the Democrats now walk hand-in-hand with LaRouche on this issue.

As Chile's Social Security reform architect notes:

The pension funds have now accumulated resources equal to 70 percent of Chile's Gross Domestic Product (the equivalent in the U.S. would be about $8 trillion). That huge pool of savings has helped finance Chile's economic growth. By improving both our capital and labor markets, this reform helped double the growth rate of Chile's economy.

When the system was inaugurated, one fourth of the eligible work force signed up in the first month. Today, 95 percent of covered workers participate. For Chileans, their retirement accounts represent real property rights. Their accounts, not risky government promises, are their guarantee of future security. The typical Chilean's main asset is not his house or car but the capital in his retirement account.

But what about the transition costs? And what about all the people who chose to stay in the old system? How did Chile deal with those issues?


Our numbers would look quite different, as Chile's pre-reform pension system ate up more of its GDP than ours does today. And again, let's remember that transition costs are really just an acknowledgement of obligations that already exist. And ultimately, the transition costs are a drop in the bucket relative to the cost of doing nothing.

On Sunday, Social Security turns 70, which means the 1930s-era program should have already retired. It's time to reform. It's time to modernize. It's time to hire a newer, more productive Social Security program that works for us.

The clock is ticking.


Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).
-Week Twenty-Four (KidSave Accounts).
-Week Twenty-Five (Latinos and Social Security).
-Week Twenty-Six (AmeriSave).
-Week Twenty-Seven (Cost Of Doing Nothing).

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

Posted by Will Franklin · 11 August 2005 01:10 PM


It should be outlawed!...You are the next generation. It is a shame what the past generations are leaving to this generation! Hopefully these elected politicians responsible for not reforming Soc.Sec. will not be elected again! This is your retirement that you are required to invest in! Pay more and get less!... That is what our government insures us for our retirements! ... At least until we can reform!

Posted by: Zsa Zsa at August 11, 2005 04:04 PM

Hello... Reform already!

Posted by: Cindy T. at August 11, 2005 07:05 PM

WILLisms.com you are so right once again!... I wish they would do something soon!

Posted by: zsa zsa at August 11, 2005 07:58 PM