Chile: A Better Social Security System?

By William F. Buckley Jr.

(Boston Sunday Globe, November 30, 1980)

Everybody knows that our Social Security system is in grave jeopardy and that, as things are going, insufficient funds are being collected from a decreasing number of younger Americans to support an increasing number of older Americans.

A radical transformation of social security has been initiated in Chile, and regardless of what any American thinks about Pinochet, Allende, Letelier, or the Beagle Islands, we should give it a close look.

It is the creature, primarily, of a young and brilliant Harvard Ph. D. in economics and political theory, a student of Nobel Prize-winner Kenneth Arrow. His name is Jose Piñera, and he is the minister of labor and social security.

1) Henceforward, all social security payments will be made by the employee, ending the fiction that they are being paid in part by the employer –a fiction penetrable after a course in kindergarten economics. The employee will be required to turn over 17 percent (tax-free) of his wage to the social security fund. This represents 10 percent for old-age benefits: 3 percent for life insurance; 4 percent for health care.

2) Any qualified money management corporation, properly capitalized, can bid for the right to manage your share of the accumulating benefits.

3) Every year, the average returns on investments will be published. Any company whose performance dips more than 7 percent below the average performance has to dip into its own capital and contribute the differential to the fund. If its capital is insufficient to make up the difference, it must contribute what capital it has, the government will make up the difference, and the fund will be distributed among other administrators.

4) When a Chilean woman is 60, or a Chilean man 65, the fund matures. He may then do one of two things: buy an annuity with it; or make annual withdrawals, tax free. He will, in a words, be getting back exactly what he put into the fund, plus what the fund has earned over the years; tax free. If the fund dips below a minimum level, the differential is put up by the government.

5) Beginning on May 1, and for a period of five years, everyone paying in to the old system has the option of a) staying with the old system; or b) transferring to the new system. If the chooses the latter, he is given a bond representing the value of all the payments made by him or on his behalf to date, and these are transferred into his account.

6) Employers, who under the present arrangements are required to contribute 28.7 percent per month into social security, will be relieved of their obligation entirely. However, they will be required to increased salaries by 18 percent. The net situation: a decreasing in labor cost of 9 percent to the employer; approximately the same take-home pay for the employee; and a social security system that furnishes capital, uses the investment energies of competing parties, and gives the individual freedom of choice.

Not bad for a political dictatorship.



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