To Replace America's Social Security
NEED TO KNOW: Before Embracing Chilean Model
A 2008 analysis by
the U.S. Social Security Administration lays out the basic idea of
Chilean system:
In 1981, Chile implemented its mandatory individual retirement account
system allowing workers to choose between the public PAYG and the privately
managed system, except those workers eligible to retire within 5 years. Since
December 31, 1982, new entrants to the labor force must join the new
capitalization system and set up individual accounts with the AFP of their
choice. The public PAYG system is being phased out as the number of
beneficiaries declines and is expected to close by 2050.
In short, the “Chilean Model” so touted by Cain is the individual mandate.
What “Obamneycare” is to health care, Chile’s pensions system is to Social
Security, with a system of mandates, regulation and subsidies.
Under the Chilean system, workers must contribute 10% of their income, up
to a certain limit — similar to Social Security taxes in this country — to a
private pension fund administrator (the different funds are known by the
Spanish initials “AFP,” for Administradoras de Fondos de Pensiones).
As a 2001 OECD report
makes clear, the Chilean Model actually does involve a significant amount of
government regulation on AFP’s, in order to contain risks and ensure stability.
From the OECD report:
There are very tight regulations established by law regarding the assets
the AFPs can invest in. Safety and profitability are the principles behind
these rules. These regulations have taken the form of maximum limits for
holdings of particular types of financial instruments as approved by the Risk
Classification Commission. This Commission was created in 1985 and its main
function is to classify debt securities into several risk categories.
Workers then choose which funds to invest in, according to the different
classifications of risk levels. But even then, there is no true free-market
risk of total failure and being left out in the cold — at least, not for the
pensioners.
In fact, the government has maintained a social guarantee of minimum
pensions for retirees. Thus, in case of serious underperformance or losses
by a fund — or outright bankruptcy of a failing AFP — the government will
essentially perform a bailout of retirees, by paying for the difference
up to the minimum benefit. Indeed, the reforms that have taken place in the
system have been done to address the wide-ranging low payments from the system,
with expanded efforts to cover poorer workers and to increase the minimum
benefits that the government will provide.
(It should also be noted that the most cautious risk category, Fund E, is
composed mostly of fixed-rate instruments such as government bonds — arguably
making it a de facto public option.)
Moreover, there is a key wrinkle in the system, which would pose a serious
political barrier to its adoption in this country: The transition from the old
PAYGO system to the private/mandate model involved removing current workers’
salaries from the old public system, with their former contributions going
instead to their private funds. As such, the government has had to absorb the
costs of paying retirees who were entitled to any degree of benefits under the
old system — and has had to pay for it through higher taxes for the transition.
In short, the Chilean Model — if actually enacted and administered as it is
in Chile — would be a far, far cry from the abolition of the welfare state.
Instead, it would represent government partnering with private business in
order to administer the social welfare guarantees that conservatives are often
so quick to denounce. And seriously, how much chance is there of enacting it,
if big tax increases were needed in order to provide for current retirees and
older workers close to retirement?
A few other Chilean ‘models’ Herman Cain may not be so quick so embrace:
1) Health care in Chile is also covered through the
mandate-regulate-subsidize model, in which 7% of workers’ paychecks are
deducted in order to pay for health insurance — and with a public option
called FONASA (an acronym that could be translated as the “National
Health Fund”).
Indeed, the majority of
workers opt for FONASA, and the government provides subsidies and
coverage for poorer Chileans who cannot afford insurance.
2) The current President of Chile, Sebastián Piñera, is a conservative.
During the presidential campaign cycle two years ago, Piñera recorded a TV ad
that depicted him meeting with supporters from all different walks of life,
with the candidate promising to govern on behalf of all the people, and his
supporters declaring that he would be their voice. And among those supporters
were a gay male couple:
This past August, Piñera proposed a civil
unions bill, though it remains to be seen whether the bill can make
it through the country’s current Congress.
