A Pension Lesson From Chile
WHETHER or not the Balanced Budget Amendment eventually passes, Congress should heed the words of its majority leader. Bob Dole (R) of Kansas said in a speech that if Congress is serious about meeting the requirements of the proposed amendment, ``I ... believe that we can't keep Social Security off the table forever.'' His declaration is an important first step in publicly recognizing one of America's gravest fiscal problems. It is a problem that might well be addressed by following Chile's lead in privatizing pensions.
The Social Security train is gathering too much speed for its rickety rails. And Congress is acting like the reckless conductor unwilling to change tracks. Long-term financial problems will cause not only Social Security but also the United States economy to derail. However, if we act soon, we can change to a more solid track that ensures a secure retirement for Americans without undue hardship to anyone.
Social Security's financial problems stem from major changes in demographics. In 1935, when the system began, a little more than 5 percent of the population was older than 65. Now, people over 65 represent 13 percent of the population and by 2025 they will be 20 percent.
In the present system, the taxes of today's employees pay for the benefits of today's retirees. There are about five workers for every retiree; by 2030, there will be fewer than three. Last year's report to Congress by the Social Security Administration estimated that by 2013, Social Security will collect less in payroll taxes than it will pay out in benefits. The crunch may come even sooner. When it does, the SSA plans to draw down on the Social Security Trust Fund. But the trust fund consists of Treasury notes which the government can afford to honor only if it issues new debt, increases taxes, and/or cuts benefits.
Just as American engineers have looked to Japan and Europe in developing high-speed trains, US leaders can find ways to reform Social Security by looking abroad.
In 1981, Chile's government privatized its social security system. Chileans must put 10 percent of their wages into individual retirement accounts. They may choose from among 19 different private firms to manage their assets. Unlike the US Social Security system, in Chile, retirement assets are invested in the national economy - in new companies, capital equipment, job training, research and development. The new jobs and technologies result in a stronger economy.
From 1989 to 1993, the real economic growth in Chile averaged approximately 8.7 percent annually, as compared with a meager 1.69 percent in the United States. In the 14 years since the system's inception, the Chilean pension funds have averaged annual returns of over 13 percent. Savings rates in Chile exceed 20 percent versus a meager 3.6 percent in the US.
The gradual privatization of Social Security is just the change in course America needs. Phasing in a required tax-deferred IRA would eliminate the financial uncertainty of changing demographics. No longer would we commandeer our children's and grandchildren's earnings to support today's retirees. Everyone would be a saver and an investor in the economy.
The government could ensure the stability of the IRAs by establishing an independent government agency to oversee the pension system. The government could also contribute to the IRAs of the unemployed and very low wage earners.
Perhaps Senator Dole's courageous statement is the beginning of a more open and honest dialogue on Social Security. Privatizing America's pensions, with adequate safeguards and oversight, could put real security back into Social Security. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.