Last night, as a guest of Andy Favor, I attended the Claremont Institute‘s “reception and discussion with the former Secretary of Social Security and Labor of Chile, Dr. Jose Pinera.” In addition to meeting with President Bush he has also advised Vladimir Putin of Russian and President Sarkozy of France on this topic. This event, attended by nearly 70 invited guests, was held at the St. Regis Monarch Beach Resort in Dana Point.
Before introducing Dr. Pinera, Claremont review of books Publisher Brian Kennedy opened the discussion by citing three problems facing our nation today. Freedom, (which relates to the future of our nation), illegal immigration and abandonment of our Constitutional Government. Note: As this was not the theme of the event he did not elaborate on same.
Dr. Pinera, who studied at Harvard, shared with us the origins of the social security safety net idea that was first introduced by German Chancellor Otto von Bismarck in 1880. At that time the retirement age was set at 65. He commented that this was at a time when the average Prussian only lived to age 45.
His solution for our failing social security system is to permit “every common worker–all payroll tax– be placed into individual retirement accounts instead of a “black hole.”
Jose said the only question facing America on retirement funding is whether or not we will follow Europe. He cited a 40 percent payroll tax in France which currently has 10 percent of it’s work force unemployed. He than shifted gears to share the history of his success in Chile where he personally spent two years on major TV educating people on his concept of personal savings accounts. He pointed out that compound interest grows exponentially. Setting aside 10 percent of wages for 40-45 years can create a huge portfolio. Note: Earlier he reminded us that FICA taxes are now at 17 percent of wages. He added that in Chile not all of the money goes into one basket. You could put money into Bonds and safely get four percent return. The long term objective is to become self reliant “when you reach 65 you don’t depend on government to provide your retirement.” Your next step would be to “transfer your money into an Annuity for life.”
Dr. Pinera proudly said that the nation of Chile approved his social security concept on November 4, 1980, the same date that Ronald Reagan was elected president.
As they introduced this concept in Chile workers had “free choice” in terms of remaining in the government system or opting out. “Ninety-five percent chose to have their money where their eyes could see it—a Universal 401 K system.” In the 25 years of their retirement system “not a penny has been lost.” He called their personal portfolio system “a (conservative) revolutionary approach.” All the money in the portfolio account goes to the worker less approximately four percent service fee. Typically they have been earning ten percent per year for the past 27 years. He has extended his system to 12 other South American nations and has partially expanded into Europe with Poland being his first success in 1995. He shortly will add Romania as number 30 to this ever growing list.
He told us that in 20 years the US could be in “real trouble” if we fail to act in revising our system. While we have a $80 billion per year surplus today, in 15-20 years it will have a deficit. He said “it is more difficult to change the closer you get to the abyss.” Do we put our head in the sand while nations around the globe recognize this concept rather than our self destruct Social Security approach. When Governor George W. Bush invited him to Texas a few years ago Gov Bush did acknowledge that “social security is going bankrupt.” Jose added “we will have enormous deficits in the next five to six years. If we don’t alter course we could end up following France and Germany into a socialistic system. The stakes are higher for us.”He than cited the “basic rules of the transition. How you move from one (system) to another” starting with those already getting benefits that your government will not touch. Those benefits will continue to be paid. The second group, those workers, be it 30, 35 or 40, will receive a Recognition Bond from the Treasury which the government must redeem at age 65. These workers will also have around 35 years of individual contributions. As such nobody loses. For the young men just entering the system the old will fade away but they will be participating in the personal portfolio’s. The trick for selling this concept is to be “careful about the details of the reform.”
With respect to social security he pointed out that we are “not creating a new liability. It’s already there. A huge hidden debt. ” He added that we must “tell the people the truth in an honest way. This is one of the three biggest problems facing America today.” He remarked that “government cannot create a fund without spending.” In Chile the “government can’t touch the workers money. He jokingly said “they can’t use it to build a tunnel from Chile to China.”
Dr. Pineras said the number one issue in this change is the safety of the funds. In Chile the first five years (their investments) were very diversified.
He warned us that in the U.S. social security can be changed overnight by the Congress. In 10, 20 or 30 years the situation could turn bad for those who contributed to the system. It’s all about “promises to pay” while there are not enough workers to meet the payouts of those currently collecting. He added that while “government should have a safety net for the poor” he added that “we should not be dependent on social security.”
He took several questions from the audience and closed by telling us that when he started the reform in Chile the DOW was at 900. Today it is around 14,000. Workers in Chile should not have any concern of finances for their old age. He pointed out that “this is a system that works. It is not a graduate thesis.”
COMMENTARY. Are we in America so focused on other issues that we ignore this ticking time bomb?
Any my question for those of you who wish to jump in.
Are you depending on Social Security for 100 percent of your retirement?
Do you have corporate or other pension funds to meet future living expenses?
Would you support personal savings accounts as exist in Chile and other countries today?
For those in their 20’s to 40’s. While you continue to pay FICA taxes every payday do you worry that the government will not provide social security benefits when you retire?
What the doom and gloom sellers don’t tell you.
The FICA taxes are invested in the United States of America, not a “black hole”. The top tier of safety in the investment world.
Another item not explained or just ignored is “It’s all about “promises to pay” while there are not enough workers to meet the payouts of those currently collecting”
If there are not enough workers in the future to contribute the dollars to fund the retirement payments to retirees, Then it does not matter where your retirement funds were stored or you held them for you.
A big reason the “DOW” goes up is the surplus of retirement funds going into the various funds. Once the surplus stops and a draw down starts. There will be big problems for those who put all their eggs into intangibles.
Thank you for the excellent summary Larry!
I hope your post will generate a discussion because this issue really should be the number one issue of the presidential election season.
On September 24th MSNBC had the following headline:
“Bush administration urges Social Security cuts
Report: Fix requires combination of benefit changes and tax increases”
When I saw that headline I immediately thought of Boxer in “Animal Farm” who was planning on retirement but when the time came, he was told to just work harder. And then he died.
Given the above MSNBC headline, yes we should all be concerned about the government run SS System. People need to know that there is no promise for the government honor Social Security and we owe it to our children to embrace reform now. “In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that workers have no right to receive Social Security benefits. Congress and the president may change, reduce or even eliminate benefits at any time. Retirees must depend on the good will of 535 politicians to determine whether and how much they will receive in retirement.”*
There is a better option than higher taxes and reduced benefits. I hope voters will demand all candidates for office in this election season to state clearly where they stand on the issue of private accounts. The election season is the best time for voters to force the politicians to address critical issues so that we can pave the way for the reforms that we desperately need.
Andy Favor
73rd Assembly District Candidate
http://www.AndyFavor.com
* January 20, 2005
The Point Is Ownership
by Michael Tanner
e-mail response:
NIce job, Larry. Thanks, Bill
Who is this Cook person…we love
them alot. Common Sense always
impresses us!! At any rate, has
anyone ever heard of “bracket creep”? They usually use it in
regard to the IRS and Tax Brackets.
The truth of the matter is, that
Social Security has already been
fixed. They haven’t told anyone
yet..but they just move the goal
posts and say: “What me worry?”
The days of Retirement at 65 are
way over! To get the full enchilada..from SS….you need
to live to 66 years eight months
or you can take the short money
when you are 62. As the full boat
money ascends up to 72 years of
age….the short money will finally
be made available at say…68…
years of age. These numbers are
going to move in these directions
within the next couple of years
when the so-called “Baby Boomers”
start collecting. If the Dems
get in….off come the $97K cap
and that number is ridiculous…
and it will move to $150 minimum.
In the meantime, SS will chug along
just fine and everyone will wring
their hands on Tim Russert…saying
how the US Senate and Ted Kennedy
saved Social Security. Belch!!!
Ron and Anna,
Your post illustrates why people should be outraged. Government employees who have their retirement money put into investments such as real estate and equities will not have the “goal post” moved. Yes, there is a problem with the retire at age 50 plans, but that is a different subject.
email input from Dr. Pinera:
Larry,
Great coverage of the Pinera event.
Jose sent me this comment.
Best regards,
Andy
Congratulate Mr. Gilbert for such a great article. He captured all the essential points. Just one minor correction: the fee charged by the manager companies nowadyas is not four percent, but only half of one percent (50 basis points) of assets under management!