The debate over Social Security reform is over for now. A totally predictable train wreck is coming, but we made the decision to just hope something will work out. Responsible decision-making was left for another day.
But as any ostrich can tell you, sticking your head in the sand doesn't solve the problem. According to the Annual Report of the Social Security and Medicare trustees, while we dither, the unfunded liabilities in these programs continue to grow to unimaginable levels. Social Security benefits we've promised but cant pay for rose more than $200 billion last year alone. If nothing happens by 2030, the midpoint of the boomer generations retirement years, Social Security and Medicare will consume not only their dedicated revenue but also one in every two income tax dollars.
Even if payroll or income taxes could be raised to meet these obligations, it would sap our economy. Drastic cuts in benefits are inevitable. Our Social Security system will eventually become a major source of insecurity and financial anguish for the aged.
The future for seniors-to-be is much brighter in Chile. More than 20 years ago, workers there were given the choice of putting their 10 percent payroll tax into Personal Retirement Accounts. These are privately managed, personally owned funds. Americans turn our Social Security payments over to politicians who promptly spend it.
Ninety-five percent of Chilean workers opted for a PRA system. Why wouldn't they? According to summaries provided by Jose Pinera, the architect of PRA's, retirement, disability and survivors benefits (included) are already 50 percent to 100 percent higher than under the old system. Most current retirees didn't own PRA's their entire career. Still, the average Chileans income from a PRA is 78 percent of his pre-retirement income, a level that is strictly fantasy material for most U.S. Social Security beneficiaries.
The AARP scored points by claiming that American workers are incapable of sophisticated financial management and that their funds would soon be depleted. Yet in Chile, all PRA funds must be invested with a specialized pension fund company that does no other type of investing. Workers may choose between five different mutual funds with contrasting bond/equity ratios. Older workers are required to own more secure investments while younger workers may embrace somewhat more risk if they choose. But no one is allowed to make lousy financial decisions. The money is always there when retirement arrives.
Here, the dates and terms of retirement for those dependent on Social Security are dictated by politicians. Chilean workers have flexibility and freedom to retire whenever they wish, so long as their funds have accumulated enough money to sustain a reasonable standard of living. Those wishing to retire earlier or with more income can simply have a higher percentage of withdrawals from salary. Workers can continue to work while withdrawing money or can wait to withdraw until they need it.
For Chileans, their PRA is private property and becomes part of their estate at death. Americans payroll taxes go to the Social Security Trust Fund, property of the government. Worse, all the money has been drained from the Trust Fund, leaving only promissory notes. Its as if you planned for your child's college education by putting an IOU in a cigar box every year. Your child's ability to afford college would be as shaky as the Social Security benefits of todays youth
Chiles PRA system has other advantages. It has reduced poverty by increasing the size and certainty of retirement, survivors and disability benefits. The availability of capital has substantially improved Chiles economic productivity and employment. Retirement issues are no longer political.
But most importantly, Chileans have escaped the perverse pay-as-you-go system, in which current workers are required to pay the pensions for a mushrooming population of retirees. Chilean workers know that future financial crisis and intergenerational tensions wont be necessary to sustain them in old age. They have real financial security.
Why should Americans settle for less?