Retirement Reform Not Radical Ranting

Posted on April 16, 2003 | Type: In the News | Author: Robert Robb
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In the United States, personal retirement accounts as part of Social Security are generally regarded, and often attacked, as a radical, untested concept.

Last Saturday, the Goldwater Institute gave its Goldwater Award for advancing the cause of liberty to Jose Pinera, a living refutation of that perception.

When Pinera was Chile's minister of labor in 1980, he successfully introduced personal retirement accounts to that country's version of Social Security.

He was motivated, in part, by the same finance problem virtually all government retirement programs face: unfunded and growing liabilities. But, perhaps more importantly, he saw the high payroll taxes required to finance such systems as a barrier to the efforts by people of modest income to acquire wealth.

The system that Pinera instituted in Chile allowed current workers to stay in the governmental defined-benefit program if they wanted. But they also were given the option of putting 10 percent of their wages in a personal retirement account instead.

Those choosing to do so were also given government bonds for past payroll contributions, so they started out with a bit of a nest egg.

The personal retirement accounts remained part of a governmental program, but the participants owned the money and could direct the investments through a variety of private-sector managers competing for the business.

New workers were required to establish personal retirement accounts. Remaining defined-benefit obligations were financed by a residual payroll tax and governmental debt.

Chile has now had personal retirement accounts for more than two decades. Ninety-five percent of workers have established them. While the government guarantees a minimum pension, an average rate of return of more than 10 percent has greatly exceeded it.

In this country, opponents cite the volatility of the stock market as part of the alleged riskiness of personal retirement accounts. But equities are not the only investment option. According to Pinera, around 70 percent of funds in Chile are actually invested in bonds paying a fixed interest rate.

As Pinera wryly observed in his acceptance speech to the Goldwater Institute, why do politicians think that ordinary people can make wise choices among candidates for office, but not among investment options?

Pinera, who has a doctorate in economics from Harvard, has become an evangelist for personal retirement accounts. For more than a decade, Chile stood alone. That is no longer the case.

Peru was first to join the club, in 1993. It also allowed workers to put 10 percent of their wages in personal retirement accounts and provided government bonds for past contributions. Unlike Chile, new workers still have the option of joining the old defined-benefit governmental program.

The concept is spreading rapidly in Latin America. In 1997, Mexico made personal retirement accounts mandatory for private-sector workers. Colombia, Argentina, Uruguay, Bolivia and El Salvador have adopted the reform to various degrees.

Recently liberated Eastern Europe is also proving ripe for reform. Hungary, Poland and Kazakstan have adopted personal retirement account systems.

The most severe government finance problems for defined-benefit programs are in Western Europe. And even there, the door is opening a little. Britain allows workers to invest 4.6 percent of their wages in personal retirement accounts rather than the government defined-benefit pension. Sweden recently joined in at 2.5 percent.

All told, according to Pinera, there are 70 million people around the globe with personal retirement accounts as part of a government-operated pension system. This is now a proven alternative, not an untried, untested, radical idea.

Frankly, the danger isn't that the United States will go too far with personal retirement accounts as part of Social Security reform, but that it will not go far enough.

Social Security taxes are now 12.4 percent of payroll. President Bush's Social Security reform commission identified three options, with personal retirement account opportunities ranging from just 2 percent to 4 percent of payroll. That's enough to finesse the government finance problem, but sharply limits the ability of workers to acquire wealth.

As Pinera pointed out in his address, real retirement security doesn't come from depending on politicians to keep their promises. It comes from being able to use the fruits of your own labor to provide for yourself.

Reach Robb at robert.robb@arizonarepublic.com or (602) 444-8472. His column appears Sundays, Wednesdays and Fridays.

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