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TIERNEY ON CHILE’S PENSION SYSTEM
(Three
columns by John Tierney, Op Ed columnist of The New York Times)
I. THE PROOF IS IN THE PENSION
(April
26, 2005).
SANTIAGO,
Chile. I made a pilgrimage to Santiago seeking to resolve the
Social Security debate with a simple question: What would Pablo
Serra do?
I
wanted to compare our pensions to see the results of an
accidental experiment that began in 1961, when he and I were
friends in second grade at a school in Chile. He remained in
Chile and became the test subject; I returned to America as the
control group.
By
the time we finished college, both of our countries' pension
systems were going broke. Chile responded by pioneering a system
of private accounts in 1981. America rescued its traditional
system in the early 1980's by cutting benefits and raising
taxes, with the promise that the extra money would go into a
trust to finance the baby boomers' retirement.
As
it happened, our countries have required our employers to set
aside roughly the same portion of our income, a little over 12
percent, which pays for disability insurance as well as the
pension program. It also covers, in Pablo's case, the fees
charged by the mutual-fund company managing his money.
I
visited Pablo, who grew up to become an economist, at his office
at the University of Chile and showed him my most recent letter
from the Social Security Administration listing my history of
earnings and projected pension. Pablo called up his account on
his computer and studied the projected retirement options for
him, which assume that he'll keep working until age 65 and that
the fund will get an annual return of 5 percent (which is lower
than its historical average).
After
comparing our relative payments to our pension systems (since
salaries are higher in America, I had contributed more), we
extrapolated what would have happened if I'd put my money into
Pablo's mutual fund instead of the Social Security trust fund.
We came up with three projections for my old age, each one
offering a pension that, like Social Security's, would be
indexed to compensate for inflation:
(1)
Retire in 10 years, at age 62, with an annual pension of
$55,000. That would be more than triple the $18,000 I can expect
from Social Security at that age.
(2)
Retire at age 65 with an annual pension of $70,000. That would
be almost triple the $25,000 pension promised by Social Security
starting a year later, at age 66.
(3)Retire
at age 65 with an annual pension of $53,000 and a one-time cash
payment of $223,000.
You
may suspect that Pablo has prospered only because he's a
sophisticated investor, but he simply put his money into one of
the most popular mutual funds. He has more money in it than most
Chileans because his salary is above average, but lower-paid
workers who contributed to that fund for the same period of time
would be in relatively good shape, too, because their projected
pension would amount to more than 90 percent of their salaries.
By
contrast, Social Security replaces less than 60 percent of your
salary - and that's only if you were a low-income worker.
Typical recipients get back less than half of their salaries.
The
biggest problem in Chile is that many workers don't contribute
regularly to their pensions because they're unemployed or
working off the books. That's a common situation in the
developing world, no matter what the pension system is. But if
you contribute for at least 20 years, Chile guarantees you a
minimum pension that, relative to the median salary, is actually
more generous than the median Social Security check.
Still,
you may argue, Chileans may someday long for a system like
Social Security if the stock market crashes and takes their
pensions down with it. The relative risks of the Chilean and
American systems are a question for another column. But I can
tell you that Pablo is an economist who appreciates the risks of
stocks and has no doubt about where he wants to keep putting his
money.
"I'm
very happy with my account," he said to me after comparing
our pensions. He was kind enough not to gloat. When I enviously
suggested that he could expect not only a much heftier pension
than mine, but also enough cash to buy himself a vacation home
at the shore or in the country, he reassured me that it would
pay for only a modest place.
I'm
not sure how much consolation that is, but I'm trying to look at
the bright side. Maybe my Social Security check will cover the
airfare to visit him.
2. PLACE YOUR BETS (May 7, 2005)
After
a recent column comparing Social Security with the Chilean
system of private accounts, I was deluged with letters from
readers eager to explain why I am a superficial nitwit. In this
case, they're at least half right.
The
column was superficial because I simply looked at how much more
money I'd have if I had invested my Social Security
contributions in the private account of a Chilean friend and
economist, Pablo Serra. The numbers were impressive - my
projected pension would be triple what I'm promised by Social
Security - but they're not as important as another
consideration: which type of pension is riskier?
Pablo
has done well because Chilean mutual funds have yielded high
returns in the past two decades - probably higher than I would
have gotten from an American mutual fund, although here I'd
still be way ahead of Social Security. Historically, stocks have
yielded returns two to three times what Social Security pays.
Still,
stocks could yield much lower returns in the future, as critics
of private accounts have pointed out in advertisements comparing
the market to a slot machine and extolling the
"guarantee" of Social Security.
But
there's also another kind of risk to consider, one that Chilean
workers kept mentioning to me. The best part of their private
accounts, they said, was that they'd put "la plata donde
mis ojos la vean" - the money where my eyes can see it.
They knew they might lose some of it in the stock market, but
they preferred that to watching it all disappear into
politicians' hands.
My
Social Security, far from being a guarantee, comes with a
political risk that will become clear around 2017, when I'll be
64. That's when the Social Security Administration expects to
start paying out more than it collects in taxes.
In
theory, there is a trust fund to cover this shortfall. When
Congress sharply raised Social Security taxes in the 1980's, the
idea was to generate surpluses during the baby boomers' working
years that would finance our retirement. Instead, Congress spent
our money, leaving the Social Security trust fund with a file
cabinet full of i.o.u.'s in the form of Treasury bills.
It's
not a problem now, because for the next few years the baby
boomers' taxes will provide an annual surplus for Social
Security of about $100 billion, allowing Congress to dole out
the extra money for its favorite causes, like farm subsidies and
weapon systems and West Virginia buildings named after Robert
Byrd. But in four years the surpluses start declining, and they
turn into deficits around 2017, when Congress must begin
repaying those i.o.u.'s.
By
the time I'm in my 70's, the Social Security shortfall will
force Congress to find new taxes or make spending cuts that are
more than half the size of the Pentagon's budget. If I make it
to age 88, there will no more i.o.u.'s left in the trust fund,
so everyone's benefits would have to be cut by 27 percent.
Faced
with the grim math, President Bush offered a progressive
compromise last week to Democrats: protect the poor while
moderating the growth of benefits for higher-income workers.
Democrats refused to bite, denouncing his "cuts"
without offering a plan of their own, and members of both
parties wondered why any politician would jeopardize his party's
chances in 2006 by tackling an unpleasant future problem.
You
can call the Democrats irresponsible obstructionists, but
they're just following the first rule of politics: get
re-elected. It's the same rule followed by the politicians from
both parties who have spent the baby boomers' retirement money.
Why set aside money for 2017 if it could be used to woo voters
and campaign contributors for the next election?
I
can't protect my pension against political risk, but Pablo can
help protect his against the risks of the stock market. As he
approaches retirement, he can gradually shift his money out of
stocks and into bonds, like the ones that financed the private
road between Santiago and the port city of Valparaiso, which
will be paid off by tolls. The Chilean pension system has
billboards along the road proclaiming, "Your savings are
financing this highway, and this highway is financing your
retirement."
Those
billboards have been on my mind. My pension depends on 535
politicians who will be asked to vote for steep tax increases or
budget cuts that they fear could cost them their jobs. Pablo's
pension depends on people driving between Chile's two largest
cities.
III. THE OLD AND THE RESTED (June 14, 2005)
Men
in their 70's raced on bikes for 40 kilometers in this month's
National Senior Games in Pittsburgh. A 68-year-old woman threw
the discus 85 feet, and a 69-year-old man hurled the javelin
nearly half the length of a football field.
Is
it possible that people this age are still physically capable of
putting in a full day's work at the office?
I
realize I'm being impolitic. In the Social Security debate, the
notion of raising the retirement age is the elephant in the
room, as Robin Toner and David Rosenbaum reported in The Times
on Sunday. Both liberal and conservative economists favor the
change, but politicians are terrified to even mention it to
voters.
Americans
now feel entitled to spend nearly a third of their adult lives
in retirement. Their jobs are less physically demanding than
their parents' were, but they're retiring younger and typically
start collecting Social Security by age 62. Most could keep
working - fewer than 10 percent of people 65 to 75 are in poor
health - but, like Bartleby the Scrivener, they prefer not to.
The
problem isn't that Americans have gotten intrinsically lazier.
They're just responding to a wonderfully intentioned system that
in practice promotes greed and sloth. Social Security is widely
thought of as a kumbaya program that unites Americans in caring
for the elderly, but it actually creates ugly political battles
among generations.
With
the help of groups like AARP, the elderly have learned to fight
for the right to retire earlier and get bigger benefits than the
previous generation - all financed by making succeeding
generations pay higher taxes than they ever did themselves.
The
result is a system that burdens the young and creates perverse
incentives for people to retire when they're still middle-aged.
Once you've worked 35 years, more work often yields only a tiny
increase in your benefits (sometimes none at all), but you still
have to keep paying the onerous Social Security tax, which has
more than doubled over the last half century.
If
the elderly were willing to work longer, there would be lower
taxes on everyone and fewer struggling young families. There
would be more national wealth and tax revenue available to help
the needy, including people no longer able to work as well as
the many elderly below the poverty line because they get so
little Social Security.
Getting
that kind of system seems politically hopeless at the moment
here, but it already exists in Chile. Its pension system has a
stronger safety net for the older poor than America's (relative
to each country's wages) and more incentives for people to work,
because Chileans' contributions go directly into their own
private accounts instead of a common pool like Social Security.
Once
Chileans accumulate enough money in the account to finance a
pension that pays at least half their salary (which is better
than what the typical American gets from Social Security), they
can start collecting the pension and still go on working. In
fact, they have an extra incentive to go on working because they
keep more of their paychecks: elderly Chileans, unlike
Americans, are freed of the obligation to continue making
pension contributions.
The
result has been a big change in working habits. Before the
private-account system began in 1981, Chile had a traditional
pension system going broke with the same problems as America and
Europe: rising taxes on the young to pay for older workers who
were retiring earlier and earlier. But under the new system,
there's been a 30 percent increase in the labor force
participation by workers in their 60's, according to two
economists, Estelle James and Alejandra Cox Edwards.
Best
of all, Chileans who control their own private-account pensions
don't have to count on politicians or groups like AARP to decide
when they can retire. It's a personal choice, not a public
battle, and the Chileans I interviewed had a saner attitude
about retirement than the American baby boomers dreaming of
retiring to decades of golf.
A
57-year-old schoolteacher, Maria Clara Meyer, told me she was
thinking of spending her 60's running her own tutoring program
or setting up an ecotourism business in Chile. "I'm a
little tired of my teaching job," she said, "but I'm
not stupid, so I shall keep doing something. It's not healthy
for you to stop working if you're still able." And not
healthy for your country, either.
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