Upon moving to Chile I was quickly integrated into a different social security model, one that demanded my active participation and albeit daunting at first, quickly made sense not only for someone like myself occupying the middle-class but for all sectors, rich, middle and poor.
We’ve all more than likely heard the cries against the proposed privatization of social security in the U.S. What will happen if the market crashes, is the private sector really capable of handling an issue as sensitive as the well-being of each and every citizen upon retirement? Well, I would say flat-out, no. But the model, at least here in Chile, is not a completely private-sector initiative. Rather, it is an excellent example of a public/private partnership that I believe, smartly implemented, can be achieved in the U.S.
In 1981 the Chilean government embarked on the new system. Instead of the old 26% payroll tax, workers here in Chile are now required to place 10% of their wages into special savings accounts. These accounts range in risk and there are a number of providers to choose from. From a regulatory side, the providers are required to guarantee a minimum return relative to other providers. This therefore results in little variation between providers. There are also rigid restrictions on the commissions charged by the providers. Now, the one issue that has been tough to regulate as a result of the above mentioned regulation is the aggressive marketing that providers engage in to attract clients. Due to little variation between providers they must do their utmost to market their fund thus driving up administrative costs. But what model is perfect, right!
The beauty of this system though does not lie in the returns, but rather the agreement with the government and the resulting psychological effects on the populace as a whole. The Chilean government addresses the biggest fear of a privatized system by maintaining a safety net in the form of a minimum pension guarantee. If a retiree’s private benefits don’t meet a minimum threshold for any reason, the government will make up those benefits bringing them back up to that threshold. These are funded from general tax revenue and not a payroll tax.
Second, and most important, is this system explicitly implies that each and every Chilean citizen, regardless of their socio-economic status, has enough brains to manage their retirement. This is a concept that flies in the face of big government, namely that there are always segments of the population that will need government hand-holding because they are not capable of integrating themselves into the greater society. I have seen first-hand how empowering this system is, specifically within some poorer populations. People get it, the funds and their returns are communicated clearly and do not bog the customer down with complicated financial equations or market-talk. People understand what each fund has returned over the previous year and the risk level associated with it.
I do not believe for one bit similar populations in the U.S. would not be able to grasp and manage this either. This in my opinion is a political issue and one that serves party interests. Empowering people should be the goal here, not more hand-holding in exchange for votes.