Social Security. Iceberg ahead! Dr. Jose Pinera, Co-chair Social Security Choice

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?


About Larry Gilbert