Sunday, November 16, 2014

The Social Security Myth

Its obvious that Social Security is broken and a drain on our productivity and efficiency as a society. What to do about it? I argue that immediately eliminating it completely would be a fine method of handling the situation if carried to term, but the fallout would be so extreme that political intervention would stop a recovery from occurring.

The next best option, then, is to phase it out at the fastest rate possible while not being extreme enough to incite political intervention. To this end, I look at a special case study provided by Chile, in which that exact thing has happened.


Entering into the work force, workers were given a private pension fund that requires them to contribute 10 to 20 percent of their income. The amount put into the fund depends on the age the employee wants to retire. At retirement, the private fund is transferred into an annuity with an insurance company. The individual is given the choice to decide what insurance company to work with and what plan best fits the circumstances. If the individual is not satisfied with the company or plan, they have the freedom to change companies. This also allows competition between insurance companies, which would lead to better service and greater returns over time.

For those who were already paying into the public system, they were given a choice to stay public or to enter the private system. The major cost created by the transition is the money Chile loses from the people switching to the private system. The cost was financed by the selling of state-owned enterprises that would provide for those who stayed on the public pension system. Due to the success of the privatization, around 93 percent Chilean workers switched to the new program. The public pension program will be completely eliminated the day the last person in the system passes away.

The effects of the program model include generating surpluses without raising taxes, inflation, or interest rates; Old-age pensions are 40-50 percent higher than the public pension system; Disability and survivor pensions are 70-100 percent higher than the public pension system; There has been a significant decrease in the payroll taxes have contributing to an unemployment rate below 5%; Savings rates have sky rocketed and have deepened investment; Growth rates have more than doubled in the past 10 years.

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