House of Paine

the shape of things to come ?

 here's how the chicago boys rigged up pinochets chile


     little george's wet dream :

    a US   like chile 


 
By JOSÉ PIÑERA

 December 1, 2004

  
 
  Santiago, Chile —. 

The Chilean retirement system 
was originally based 
on exactly the same principle 
that guides the United States' system.

 It originated in 19th century Prussia, 
where Bismarck created
 a pay-as-you-go-system.

 But such a defined-benefit system
 is not only hostage to demographic trends,
 it also has a fatal flaw:
 it destroys the link between 
individual contributions and benefits,
 or, in other words,
 between personal effort and reward.

Chile's Social Security Reform Act of 1980 
allowed current workers 
to opt out of the government-run pension system
 financed by a payroll tax
 and instead contribute to 
a personal retirement account. 
What determines those workers' retirement benefit 
is the amount of money accumulated 
in their personal account
 during their working years.

 Neither the workers 
nor the employers pay a payroll tax
 Nor do these workers collect
 a government-financed benefit. 

Instead, 
10 percent of their pretax wage 
is deposited monthly 
into a personal account. 
Workers may voluntarily 
contribute up to an additional 10 percent a month
 in pretax wages. 
The invested amounts grow tax-free
, and the workers pay tax
 on this money
 only when they withdraw it for retirement. 

Upon retiring, 
workers may choose from three payout options:
 purchase a family annuity 
from a life insurance company, 
indexed to inflation; 

leave their funds 
in the personal account 
and make monthly withdrawals,
 subject to limits based on life expectancy 
(if a worker dies, 
the remaining funds form a part of his estate)
; or any combination of the previous two. 

In all cases,
if the money exceeds 
the amount needed to provide a monthly benefit
 equal to 70 percent of the workers' most recent wages,
 then the workers 
can withdraw the surplus as a lump sum.

A worker who has reached retirement age 
and has contributed for at least 20 years 
but whose accumulated fund 
is not enough to provide a "minimum pension," 
as defined by law, 

receives that amount 
from the government 
once funds in the personal account 
have been depleted. 

(Those without 20 years' contributions
 can apply for a welfare-type payment 
at a lower level.) 

Workers may choose 
any one of several 
competing private pension fund companies 
to manage their accounts.
 Those companies can engage 
in no other activities 
and are subject to strict supervision
 by a government agency. 

Older workers have to 
own mutual funds concentrated
 in short-term fixed-income securities, 
while young workers 
can have most of their funds
 in stocks. 

The law encourages a diversified portfolio,
 with no obligation to invest
 in government bonds 
or any other security. 

Each worker receives a statement
 from the manager every three months,
 and can keep track 
of the retirement capital
 at any moment.
 Workers with enough savings 
in their accounts 
to buy a "sufficient" annuity 
(50 percent of their average salary,
 as long as it is 20 percent higher 
than the minimum pension) 
can stop contributing 
and begin withdrawing their money.
 But there is no obligation
 to stop working,
 at any age,
 nor is there an obligation 
to continue working 
or saving for retirement 
once a worker has met 
the "sufficient" benefit threshold.

Because the personal retirement accounts 
are tied to the workers,
 not the employers, 
workers can take their accounts
 with them 
when they move to other jobs, 
keeping the labor market flexible.

 The system does not penalize
 or subsidize immigrants, 
who receive what they have contributed,
 even if they return
 to their homelands.

 We set three basic policy rules 
for the transition to personal accounts: 

the government guaranteed retirees 
that their benefits would not be affected
 by the reform; 

everyone already 
in the work force 
could stay in the government system 
or move to the personal retirement account system 
(those who opted out 
were given a "recognition bond" 
calculated to reflect
 the money the worker had already accrued)

; and all new workers
 were required 
to enter the personal account system. 


With this system,
 we ended the illusion 
that both the employer 
and the worker contribute to retirement.

 As economists know well,
 all the contributions 
are ultimately paid by workers,
 since employers take into account
 all labor costs 
in making their hiring and salary decisions.

 To protect the net wages of workers,
 we initially recategorized 
the employer's contribution
 as an additional gross wage. 

There was no "economic" transition cost,
 because there is no harm 
to the gross domestic product 
from this reform 
(on the contrary, there is a huge benefit).
 A completely different issue 
is how to confront the "cash flow" transition cost 
to the government 
of recognizing, and ultimately eliminating,
 the unfinanced Social Security liability.

 The implicit debt 
of the Chilean system in 1980 
was about 80 percent of the G.D.P.

We used five "sources" to generate that cash flow:

 a) one-time long-term government bonds 
at market rates of interest 
so the cost was shared 
with future generations;

 b) a temporary residual payroll tax; 

c) privatization of state-owned companies, 
which increased efficiency, 
prevented corruption and spread ownership; 

d) a budget surplus 
deliberately created before the reform 
(for many years afterward,
 we were able to use the need 
to "finance the transition" 
as a powerful argument to contain 
increases in government spending); 

e) increased tax revenues 
that resulted from the higher economic growth
 fueled by the personal retirement account system. 

Since the system started on May 1, 1981, 
the average real return 
on the personal accounts
 has been 10 percent a year.

 The pension funds have now
 accumulated resources equivalent to
 70 percent of gross domestic product,
 a pool of savings 
that has helped finance
 economic growth 
and spurred the development 
of liquid long-term
 domestic capital market. 

By increasing savings 
and improving the functioning 
of both the capital and labor markets,
 the reform contributed 
to the doubling of the growth rate
 of the economy from 1985 to 1997 
(from the historic 3 percent to 7.2 percent a year) 
until the slowdown 
caused by the government's erroneous response
 to the Asian crisis.

Personal accounts have become 
the "third rail" of Chilean politics 
and the system has been accepted,
 and even marginally improved,
 by the three center-left governments 
of the last 14 years.

 But it must be said 
that some labor market problems 
have increased unemployment
 and short-term labor contracts,
 reducing participation 
in the system 
and making the future safety net 
more expensive to maintain. 

When the system was inaugurated,
 one-fourth of the eligible work force
 signed up in the first month.
 Today 95 percent 
of covered workers participate.
 For Chileans, 
their retirement accounts
 represent real property rights.
 Indeed, the accounts, 
not risky government promises,
 are the primary sources 
of security for retirement, 
and the typical Chilean worker's
 main asset 
is not his used car 
or even his small house
 (probably still mortgaged)
 but the capital 
in his retirement account. 

Since they have a personal stake 
in the economy,
 workers cheer
 the stock market's surges 
rather than resenting them, 
and know that bad economic policies 
will harm retirement benefits.

 When workers feel
 that they themselves 
own a part of their country's wealth,
 they became participants 
and supporters of a free market 
and a free society.


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