The Chilean Social Security System: GOP dreams versus reality


    A few days ago I had the opportunity to hear a Republican speak about Social Security reform.  This individual is an officer in the First District Republican Party and past president of the 99th District Tea Party.  Because I was not conversant on the subject, I had no response to his comments.  I am now better prepared and want to share with other BlueVirginians what I learned.

    As we all know, the rightwing is all about privatization.  These folks want to turn over to private hands everything except Defense.  In one of the latest privatization outrages, we now learn that Willard Romney is a big proponent of selling off our national parks and national forests.…

    But, I digress.  Follow below the fold to get back on track.

    Our Social Security system needs reform.  That’s “reform,” not replacement.  The speaker I listened described a rightwing dream:  Replacing our current Social Security system with the Chilean system, which, according to rightwing propaganda, is as close to paradise as possible.  They claim that, under the Chilean system, retirement savings are up, pensions are fat, the government has money to invest, and Chilean pensioners all live on the Big Rock Candy Mountain.

    Not surprisingly, they lie.

    While the Chilean system looks good on paper, and while its conservative proponents praise it, the fact is the Chilean system is broke, it is a disaster for Chilean workers, and we don’t need it.

    In 1976, following a military coup that put General August Pinochet’s dictatorship into power, Chile went from a system similar to ours to a privatized system in which workers make investments from their salaries into one of several mutual funds (ignore the fact that these funds were managed by Pinochet’s cronies – nothing like that could happen here).  The promise was that these investments would grow over the worker’s career, allowing him/her to retire with a fat investment portfolio.  

    It doesn’t work.

    1.  To transition to the new system the Chilean government had to pay for the pensions of retirees in the old system.  To do that, they had to cut government spending on other programs and raise taxes – and they will be paying transition expenses until 2050.

    2.  Exorbitant pension fund management fees are destroying at least 25 percent of individual savings.  Although the average rate of return from 1982 to 1986 was 15.9%, the real return after commissions was only 0.3%.  Returns between 1991 and 1995 averaged 12.9%, but management fees lowered the return to 2.1%.   For a new worker enrolling in 1996, the 3.5% gross yield actually amounted to a 6.8% loss after management fees.

    3.  Non-participation threatens the overall viability of the system.  Because participation is voluntary, many workers choose not to participate and part-time or temporary workers – a growing segment of the Chilean workforce – do not participate at all.

    4.  Individual accounts replace little of low-income workers’ and women’s wages.  Because low income workers have little income to save, and because women tend to move in and out of the workforce, these two categories of people find themselves with little or no retirement savings under the Chilean plan.

    In 2008, the World Bank recommended fixes to the Chilean system, including – are you ready for this? – a defined benefit minimum pension, similar to that in the U.S. and to the plan that Pinochet ditched.

    I recommend folks read the following items so you’ll be better prepared than I was when the bull manure starts to flow:……

    As for privatization, here’s a helpful website – lots of info but not well-organized.



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