José Piñera live chat in the

[Tuesday, September 9, 2003]

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More Americans under 30 believe in UFOs than in Social Security being there when they'll need it. Social Security faces a crisis of more retirees and fewer workers to support them in the years ahead. One proposed reform solution is the personal retirement account, which is currently in place in a number of countries. Dr. José Piñera is a free market economist and, as Chile's secretary of labor and social security, the architect of Chile's successful reformed social security system. He was online to discuss the worldwide movement to reform public pension systems in a way that allows workers more choice and control over their retirement future.
José Piñera, Ph.D., as founder and president of the International Center for Pension Reform (, promotes the privatization of state-run social security systems all over the world. He currently chairs "Proyecto Chile 2010," a think tank that promotes free-market economic policies. In the United States he co-chairs the Cato Institute's Project on Social Security Choice, is a Senior Distinguished Fellow and a member of the Advisory Board of their Trade Policy Center. Dr. Piñera has published numerous articles and is the author of six books. He holds an M.A. and a Ph.D. in economics from Harvard University.

Moderator: Welcome to Viewpoint with our guest, Dr. José Piñera. Dr. Piñera, thank you for joining us. The Pension Reform law of 1980 gave Chilean workers the choice of opting out fully from the government-run pension system and instead putting the former payroll tax in a privately managed personal retirement account. How would you characterize the results of this reform?

Dr. José Piñera: Thank you, it's nice to be here. The reform has been successful beyond all my dreams. First, workers have obtained a ten percent real rate of return on their money over twenty two years even though I explained the reform with only a four percent real rate of return. Second, no money has been lost, what so ever, by bad investments or fraud or anything like that. So, the regulatory scheme has worked very well. Third, ninety five percent of employed workers have chosen the private retirement account system because we gave them the choice to stay in the current government system or opt out to the one of private accounts. And, finally, this new system of saving and investment has increased savings and helped double the rate of growth of the Chilean economy to seven percent a year.

Moderator: What about the problem of risk? For example can an Enron-type case happen with your system.

Dr. José Piñera: The key to manage this problem is to have a highly diversified portfolio of bonds, mortgages, certificates of deposit, shares, etc. Precisely the opposite of investing a third or a half of your pension money in one stock like Enron or any other. Workers in Chile have the choice among five funds with different proportions of bonds and shares. So, a young person is more heavily invested in shares and, as life goes on, he begins to change to funds more invested in bonds. He could go as far as to move to a fully short-term bond fund when, for example, he reaches age fifty five. So, he can sleep very well in the last ten years of his working life because whatever happens to the stock market doesn't affect them at all.

Moderator: What happens if there isn't enough money in a personal account to provide for retirement?

Dr. José Piñera: Even though everyone has a private account, the government guarantees a minimum safety net financed with general tax revenues.

Moderator: What if the stock market crashes the day before a worker retires?

Dr. José Piñera: If he is in a fully bond fund, he will congratulate himself on his prudence because no reasonable person will be in the stock market the day before he will retire. Let's trust people who have to survive on their daily lives making a lot of choices. Especially if we educate them, something that I did permanently on radio and TV in my country, and that now you have this wonderful internet tool that we are using today.

Washington, D.C.: What is your assessment of the future of Social Security in the U.S. if the status quo prevails?

Dr. José Piñera: Regrettably, and as both Presidents Clinton and Bush have said, the system will not be able to pay the promised benefits because of the well-known demographic trends that entail lower fertility rates and longer life expectancies.
In a way, it is like the Titanic heading toward the iceberg of an aging population. The good news is that there is time to transfer the passengers to another ship, the ship of private accounts.

Raebareli, Uttar Pradesh, India: Will the govenments of the future have no role to play in providing social security to its citizens? Will privatization be the only tool left to provide social security to the masses and not classes?

Dr. José Piñera: In the Chilean system, the government has two very clear and indispensable roles. First, provide a strict supervision and regulation to ensure a transparent, honest, no fraud system. Second, to provide a safety net to the very poor who are unable to accumulate enough money in their accounts. What the private sector does is what it does well -- to manage accounts and to invest them to benefit workers with the extraordinary power of compound interest.

Trenton, N.J.: Sir, from your biography, it sounds as if you were not only the architect but also the chief proponent behind the great change in Chile's social security/retirement system. There are huge differences between our countries and we can no doubt learn some valuable lessons from your experiences. What is the single biggest obstacle the U.S. people face in making real reform? Is it the government or is it just fear of the unknown? Thank you for your insights.

Dr. José Piñera: In your question, you suggested precisely the two biggest obstacles. First, vested interests that don't want to devolve power to the people. Remember that Social Security is the largest single government program in the U.S. spending twenty three percent of the federal budget. With a system of private accounts, you are giving that power back to the people and away from the political class. Second, of course, people fear what they do not know. That is why in Chile as Secretary of Social Security I used half of my time to design the best reform and the other half to communicate on a daily basis the main ideas to the people, always in a simple and understandable language.

Moderator: Don't personal retirement accounts benefit the rich most?

Dr. José Piñera: On the contrary, the rich always have benefitted from compound interst because they have had money to save at the end of the month. The key insight of my reform is to allow the common worker to benefit from this extraordinary power by allowing him or her to accumulate financial wealth in a private account using what was formerly a payroll tax. Second, poorer people regrettably live shorter lives than rich people. Of course, I cannot change that. But, since the funds in private accounts can be inherited, that means that when a poor person dies, for example an African American whose life expectancy is around sixty-five, the widow and the family will receive that money. That is a huge benefit to the poor.

Tucson, Ariz.: How do we pay for the promised benefits of all the people on Social Security and all the near retirees if we have no Social Security money coming from the workers?

Dr. José Piñera: That is a very legitimate question, and it is called "the transition financing problem." I cannot give you here a full answer, but there are several studies that you can check on our website, that provide financing alternatives. But, let me clarify one point. The problem arises because the current system has an unfunded liability that is around $10 trillion dollars. So, the transition to private accounts does not create the problem. On the contrary, it makes it transparent and begins to reduce that unfunded liability. And, finally, we did it in Chile twenty-two years ago without raising taxes and without producing unsustainable deficits. A country with the best capital markets in the world, like the U.S., can find several ways to solve this financing transition cost.

Moderator: What about those who know little about investing money -- will they lose out in the long run?

Dr. José Piñera: People don't have to know about money management or picking bonds or stocks on a daily basis. They have to do only two choices. One, pick a reliable manager in the same way that they pick a bank to hold a checking account. Second, pick one of, say, five funds with different bonds and shares allocations depending probably on the age of the worker at the time. The rest is done by professional managers under the guidelines of the law that require very diversified and safe portfolios. I trust the people. Those are the same people that have elected Presidents, Senators, Representatives, Governors, Sheriffs, Mayors, etc. etc., during two hundred and fifty years, and kept alive the great experiment that the Founding Fathers began. If they have been trusted with this great responsibility, and done it better than any other country in the world, how could you doubt that they will also be able to make simple financial choices?

Moderator: In view of the significant decline of stocks in the recent past, isn't the market a risky place to put your retirement "eggs?"

Dr. José Piñera: Remember, that the relevant period to assess the performance of private accounts is the full working life of the person, that is, forty or forty-five years. The capital markets in the U.S. have always given a positive and substantial real rate of return over that period. Let me share with you what I once said to the Budget Committee of the House of Representatives. If America had begun private accounts at the same moment that we did in Chile, that is, in 1980, the Dow Jones index was at around 900. So, it is true that now it is below 10,000, and it was higher, but clearly 10,000 is much much higher than 900.

Oklahoma City, Okla.: Dr. Piñera, I hope you're successful in helping bring about some change to a badly broken Social Security system. My question is, with presidential elections in 14 months, which political party in your opinion has espoused a more thoughtful, workable plan for restructuring?

Dr. José Piñera: I respect too much your country and your democratic system to dare to make any partisan opinion since I am not a U.S. citizen. Even though, let me tell you, that my eldest son was born in Boston and carries a Social Security card. What I can tell you is that I have met distinguished politicians from both parties and I have found reasonable people like former Senator Bob Kerrey of Nebraska who became an enthusiast of this idea, and President George W.Bush who invited me to have dinner with him at his Governor's Mansion in Austin in 1997, asked all the relevant questions similar to the ones we are discussing now, understood perfectly the answers, liked the idea, introduced it into the platform when he was running for President and I believe could be the President who will leave this historic legacy of private accounts to all Americans.

Akron, Ohio: I appreciate that you have apparently helped make some major changes in Chile's pension system. I don't have the specifics on Chile's population, their current government structure or the state of the economy but it seems that there are very few parallels between Chile and the U.S. in terms of size, economic system complexity etc. And if this alone isn't a deterrent, we have sharply divided political parties and all the involved interest groups. How would/could your reforms take hold in such an inhospitable environment?

Dr. José Piñera: I agree that every country is different in many respects. But, your Founding Fathers, and excuse me for calling on them again but I have such a great admiration for them, understood that were universal ideas like individual freedom, religious tollerance, limited government, private property, and, of course, the pursuit of happiness. Well, I believe the basic principles of the Chilean system can be appreciated by any person in the world because they all would like to become owners of property and have a higher degree of control over their own money and their own lives. Of course, the details, the transition, the mechanism, can and should be different among countries. But the key idea of private retirement accounts is being appreciated in countries as different as Great Britain, China, Poland, Mexico, Sweden, and, of course, the cradle of liberty, the U.S.A.

San Jose, Costa Rica: Dr. Piñera: I very much enjoyed reading El Cascabel al Gato, and recently completed my senior thesis at Princeton on the political context of the 1980 Chilean reform.
Several authors have argued that Chile's 1980 reform was possible due to a very unique set of political circumstances. Due to political insulation, and the presence of a military regime, your team was able to successfully implement a privatization (or more specifically, capitalization) with very little political opposition.
Are these circumstances (political upheaval, authoritarian regimes, etc.) a necessary facet for a complete reform of pay as you go systems such as the United States?

Dr. José Piñera: Thanks, and everyone can read a summary of that book called "The Bull By The Horns" in English, in my world website, It is true, as I explained there, that my country was facing exceptional and transitory circumstances at the moment that we did the reform. But, as I can attest from experience, what made the difference was not the type of government but the power of an idea communicated with rigor, honesty, and passion. The ultimate proof is that fifteen other countries, each one different from the other, have followed the basic Chilean scheme. There are now seventy million workers in the world with private retirement accounts. If we take into account their families, that means that approximately three hundred million people have been turned into owners and retaken control over their retirement lives.

Moderator: Are personal retirement accounts secure?

Dr. José Piñera: They can be as secure as you want. For exaple, if you are a completley risk averse person, you can instruct your manager to put all of your funds in an indexed, AAA, bond fund. Of course, you will get a lower rate of return, but you will feel very well. A younger person may have different attitudes toward risks and will probably prefer to put more in shares. It is all about choice, freedom, and not a one-size-fits-all program like today's Social Security, that, to me, seems so unAmerican. Not surprisingly, since it was not an American idea, but it was created by Chancellor Otto von Bismack, a 19th century Prussian politician who wanted to have a docile population to lead into wars as he himself recognized in his memoirs.

Moderator: What other countries have gone to personal retirement accounts and what have been the results for the workers in those countries? What countries are considering it now?

Dr. José Piñera: Eight other Latin American countries, including the biggest one and your neighbor to the south, Mexico, where the system is working quite well with the only exception that they should allow more diversification including international investments in their portfolios. Three former Communist countries, including the most successful one, Poland. Two western European countries, the United Kingdom under Margaret Thatcher and recently, Sweden, who is allowing people to have small accounts. And in Asia, Australia and Hong Kong. So, the idea is spreading like a freedom virus.
Almost every country is considering it. But, those closer are the United States, Slovakia, Russia, China, and several other former communist countries. The most resistance to change are those in Old Europe, especially France, who may be the last country in the world to replace the system created by, paradoxically, a German leader who defeated them.

Macon, Ga.: It is interesting to me how many people believe what they read on their Social Security statements. I have met so many people who believe that there is a trust fund with their name on it and that it will be waiting for them when they retire. What, in your opinion is the best way to educate the masses?

Dr. José Piñera: The good thing about America is that you have such a strong civil society. There are emerging groups that are espousing this idea and educating the people. For example, one of the most effective of them is called appropriately "For Our Grandchildren," and they have invited me to give a conference this Friday in Charleston, South Carolina, where I will be introduced by Governor Mark Sanford, and next Monday in Manchester, New Hampshire, where I will be introduced by Senator John Sununu. The Cato Institute has been a leader in this issue for years, and has this great website,, books, and all kinds of publications to people interested in the details of this proposal. There is also the group called "Social Security Choice" that is doing town hall meetings around the country. And many others that I cannot mention now but whose work I appreciate enormously. Now, what is missing is a "Mr. or Ms. Social Security" in the government or Congress, that is, a person willing to dedicate one hundred precent of his or her time, energy, and passion, to educate the people on this issue. I hope that person will emerge soon and that could be the trigger for having this reform done in America.

Dr. José Piñera: Thanks for a wonderful experience and thanks all of you for those sensible questions that prove the point that Americans can be trusted to debate and decide issues in a reasonable way. My last message is one of encouragement. I know that this can be done in a way to benefit all and everyone because I have done it and I have seen it work successfully for more than two decades. The more I travel around the world, the more I study and reflect on the problem, the more I am convinced that this is the way out for one of the greatest problems of America and the world. And, one whose solution provides the added benefit of creating a world of worker-owners, with dignity and freedom of choice. Ultimately, a better world for everyone. God Bless America.

Moderator: Our thanks to Dr. Jose Pinera, For Our Grandchildren and all who participated.



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