The New York Times' opening shot against Social Security privatization is out. Masquerading as a news article, the front-page editorial paints Chile's fairly successful privatization in the worst possible light.
Nearly 25 years ago, Chile embarked on a sweeping experiment that has since been emulated, in one way or another, in a score of other countries. Rather than finance pensions through a system to which workers, employers and the government all contributed, millions of people began to pay 10 percent of their salaries to private investment accounts that they controlled.If only Bush's plan was as bold. But lets see how bad this can be made to look:
But now that the first generation of workers to depend on the new system is beginning to retire, Chileans are finding that it is falling far short of what was originally advertised under the authoritarian government of Gen. Augusto Pinochet.And here, many Times readers will stop. The boogeyman was behind it, so it must be a horror for all concerned. An odd form of ad hominem attack.
For all the program's success in economic terms,Huh? Weren't we just saying the opposite? In what terms should an economic program be measured?
the government continues to direct billions of dollars to a safety net for those whose contributions were not large enough to ensure even a minimum pension approaching $140 a month.As does Social Security through SSI. We even pay it to people who've never worked, including recently naturalized elderly immigrants who have never paid any taxes.
Many others - because they earned much of their income in the underground economy, are self-employed, or work only seasonally - remain outside the system altogether.SSI again. No pension system of any kind pays out to people who never participated.
Combined, those groups constitute roughly half the Chilean labor force. Only half of workers are captured by the system.And the old system captured how many? We're not told.
Even many middle-class workers who contributed regularly are finding that their private accounts - burdened with hidden fees that may have soaked up as much as a third of their original investmentOver 25 years, one third of the original contributions -- not account balance -- are eaten up in fees. Assuming a constant deposit and interest at 10% [see below], this would amount to an annual fee of 0.4% over 25 years, with the total account value being about 4 times contributions, rather than slightly more. Hardly gouging, even for those Pinochet bastards.
- are failing to deliver as much in benefits as they would have received if they had stayed in the old system.Really? Can we find the worst possbile case? Yes, of course we can:
Dagoberto Sáez, for example, is a 66-year-old laboratory technician here who plans, because of a recent heart attack, to retire in March.Note that he entered the new system at the age of 41. There was a buyout for people who contributed under the old system, but we don't know what he did with it.
He earns just under $950 a month; his pension fund has told him that his nearly 24 years of contributions will finance a 20-year annuity paying only $315 a month.Hmmm ... Multiplying by 5 for a typical US worker, the numbers are pretty much the same in the current system. The maximum US payout is something like $1700 a month for a couple, which is pretty much at the US poverty line.
"Colleagues and friends with the same pay grade who stayed in the old system, people who work right alongside me," he said, "are retiring with pensions of almost $700 a month - good until they die.Good god, no wonder they reformed it! For a US worker making $5000 a month at retirement (typically a high-paying year), this would amount to a payment of $3700 a month, which would bankrupt our system next week, not in 2042.
I have a salary that allows me to live with dignity, and all of a sudden I am going to be plunged into poverty, all because I made the mistake of believing the promises they made to us back in 1981."Clearly he spent the buyout, or never contributed under the old system before he was 41. Assuming US life expectancy and a fixed $315 payout at age 66, a lump sum annuity would cost $48,000, which isn't a whole lot of savings over 25 years. Assuming Chile's historic 25-year program interest of 10%, less fees, this would be an average contribution of $40/month, given a zero initial value. The $315 payout seems pretty generous for this investment. Certainly he wasn't putting in the $95/month the article implies.
The problems have emerged despite what all here agree is the main strength of the privatized system: an average 10 percent annual return on investments. Those results have been achieved by the pension funds largely through the purchase of stocks and corporate and government bonds - investments that helped fuel an economic expansion giving Chile the highest growth rate in Latin America over the last 20 years.Hmmm. Again, it's not a failure, it's a wild success. But why is this lede so deeply buried in horror stories? But back to the horror:
Among the complaints most often heard here is that contributors are forced to pay exorbitant commissions to the pension funds. Exactly how much goes to such fees is a subject of debate, but a recent World Bank study calculated that a quarter to a third of all contributions paid by a person retiring in 2000 would have gone to pay such charges.Assuming that the World Bank is right, over 25 years, this is a fee of about half a percent. And certainly not the many percent the article implies. It's not at all a hard calculation actually, although you have to make assumptions about the deposit ramp. What's missing is the assocated fact that the account would grow to about 4 times contributions instead of 4 1/3rd.
Proponents of the privatized system argue that those costs will diminish in coming years, as those still receiving benefits from the old system gradually die off.D'oh! And more importantly, younger workers will have paid in over more years. Running the calculations over a 45-year time frame gives an ending balance of about 15 times contributions.
But critics disagree, pointing to the large numbers of younger Chileans in the work force who either do not participate or whose contributions will fall short of the amount required for a minimum pension.Again with the people who never pay in. Social Security doesn't pay them anything either. The welfare SSI program pays them a bit, but not a lot more than Sr. Sáez is going to get in Chile.