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Author Topic: Social Security
philnotfil
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An interesting editorial about Chile's SS system.

http://www.nytimes.com/2004/12/01/opinion/01pinera.html

quote:
The Chilean retirement system was originally based on exactly the same principle that guides the United States' system. It originated in 19th century Prussia, where Bismarck created a pay-as-you-go-system. But such a defined-benefit system is not only hostage to demographic trends, it also has a fatal flaw: it destroys the link between individual contributions and benefits, or, in other words, between personal effort and reward.

Chile's Social Security Reform Act of 1980 allowed current workers to opt out of the government-run pension system financed by a payroll tax and instead contribute to a personal retirement account. What determines those workers' retirement benefit is the amount of money accumulated in their personal account during their working years. Neither the workers nor the employers pay a payroll tax. Nor do these workers collect a government-financed benefit.

Instead, 10 percent of their pretax wage is deposited monthly into a personal account. Workers may voluntarily contribute up to an additional 10 percent a month in pretax wages. The invested amounts grow tax-free, and the workers pay tax on this money only when they withdraw it for retirement.

Upon retiring, workers may choose from three payout options: purchase a family annuity from a life insurance company, indexed to inflation; leave their funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a worker dies, the remaining funds form a part of his estate); or any combination of the previous two. In all cases, if the money exceeds the amount needed to provide a monthly benefit equal to 70 percent of the workers' most recent wages, then the workers can withdraw the surplus as a lump sum.

A worker who has reached retirement age and has contributed for at least 20 years but whose accumulated fund is not enough to provide a "minimum pension," as defined by law, receives that amount from the government once funds in the personal account have been depleted. (Those without 20 years' contributions can apply for a welfare-type payment at a lower level.)

Workers may choose any one of several competing private pension fund companies to manage their accounts. Those companies can engage in no other activities and are subject to strict supervision by a government agency. Older workers have to own mutual funds concentrated in short-term fixed-income securities, while young workers can have most of their funds in stocks. The law encourages a diversified portfolio, with no obligation to invest in government bonds or any other security.

Each worker receives a statement from the manager every three months, and can keep track of the retirement capital at any moment. Workers with enough savings in their accounts to buy a "sufficient" annuity (50 percent of their average salary, as long as it is 20 percent higher than the minimum pension) can stop contributing and begin withdrawing their money. But there is no obligation to stop working, at any age, nor is there an obligation to continue working or saving for retirement once a worker has met the "sufficient" benefit threshold.

Because the personal retirement accounts are tied to the workers, not the employers, workers can take their accounts with them when they move to other jobs, keeping the labor market flexible. The system does not penalize or subsidize immigrants, who receive what they have contributed, even if they return to their homelands. We set three basic policy rules for the transition to personal accounts: the government guaranteed retirees that their benefits would not be affected by the reform; everyone already in the work force could stay in the government system or move to the personal retirement account system (those who opted out were given a "recognition bond" calculated to reflect the money the worker had already accrued); and all new workers were required to enter the personal account system.

With this system, we ended the illusion that both the employer and the worker contribute to retirement. As economists know well, all the contributions are ultimately paid by workers, since employers take into account all labor costs in making their hiring and salary decisions. To protect the net wages of workers, we initially recategorized the employer's contribution as an additional gross wage.


Social Security is terminal. It will die. The only unknown is when. The longer we wait the more it will hurt.
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meworkingman
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This is one of the main reasons I voted for Pres. Bush. Thankfully, the president has already stated that he will spend some of his accumulated political capital to address SS.
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velcro
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This looks great. If we could start from scratch, this would be a good starting point.

How did they pay the current retiree benefits with reduced inflow from current workers? That is not an insignificant cost.

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Robertson, Ugly and Nohow
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quote:
How did they pay the current retiree benefits with reduced inflow from current workers? That is not an insignificant cost.
From Review of Chilean Private system

quote:
To Finance the transition, Chile used Five
methods: First, it issued new government bonds
to acknowledge part of the unfunded liability of
the old pay-as-you-go system. Second, it sold
state-owned enterprises. Third, a fraction of the
old payroll tax was maintained as a temporary
transition tax. That tax had a sunset date and is
now zero. Fourth, Chile cut government
expenditures. And, Fifth, pension privatization
and other market reforms have contributed to
the extraordinary growth of the Chilean econo-
my in the last 13 years, which has increased
government revenues, especially those coming
from the value-added tax.

The upfront costs were definitely a big pill to swallow, but I admire their courage for doing so.
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ATW
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In the US, we'll be borrowing 100% of the up front costs no matter which form the reform takes.

But that's not a bad thing if the plan they adopt does indeed reduce the need for future government spending on retirees. There's several trillion dollars of unfunded liability in the social security program. If their plan wipes out a large fraction of that in exchange for a couple of hundred billion, that's OK by me.

Of course, I'd rather they flat out adopt my plan... [Smile]

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philnotfil
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quote:
Originally posted by Robertson, Ugly and Nohow:
The upfront costs were definitely a big pill to swallow, but I admire their courage for doing so.

The upfront costs are going up every day. The sooner we do it the lower they will be.
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philnotfil
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Didn't want to start a new thread, but did think that this was interesting:
http://www.nytimes.com/2004/12/03/politics/03social.html

quote:
Calling the current system of Social Security benefits unsustainable, a top economic adviser to President Bush on Thursday strongly implied that any overhaul of the system would have to include major cuts in guaranteed benefits for future retirees.

"Let me state clearly that there are no free lunches here," said N. Gregory Mankiw, chairman of the Council of Economic Advisers, at a conference on tax policy here.

"The benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue," he added. "They are empty promises."


quote:
In his speech, Mr. Mankiw flatly rejected raising taxes as a means of saving the federal retirement system, which government actuaries say is on track to become insolvent by 2042 if no changes are made to the current law. Instead, he took particular aim at a specific feature of current law under which retirement benefits are linked to the rise in wages rather than the rise in consumer prices.

"Each generation of retirees receives higher real benefits than the generation before it," Mr. Mankiw said. Because wages typically climb faster than inflation, he said, an average worker retiring in 2050 would get benefits that are 40 percent higher, after inflation, than a comparable worker who retires this year.

quote:
Policy analysts say changing the way benefits are calculated could save trillions of dollars in decades to come. But it would imply significant reductions from the benefits promised under today's laws.
It sounds like they have a plan, but they are trying to get it into public discussion before the y unveil it as The Plan.
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Ivan
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If they scrap our current social security plan, they'll have to do something to make up the revenue lost from the payroll taxes. Those are a huge part of the budget.
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