Thursday, January 27, 2005

Chile's Privatized Social Security

The NY Times today has a good article on how the Chilean experiment with priviatizing their Social Security system is working now that the first people under the new system are retiring.

The short version is that the people who switched from the older government-funded system because of the promises of a higher retirement are actually getting about half of what the people who did not switch are getting. The government guaranteed a minimum benefit, so that the people who are getting so much less than planned are still being paid about as much from government funds as was the case under the older system. In other words, retirees have been hurt and the government has not reduced its costs.

But its not an entirely bad story. Businesses in Chile have found that the cost of funds for them is a lot lower than previously, and three of the six remaining pension funds (there were originally 22 funds - note the concentration of the system?) are making record profits. The latter is not too surprising since they are apparently charging fees of between 25% and 33% of contributions to the system.

Essentially Chile privatized much of its social security system and has been using the funds provided by workers to increase industrialism and economic development. Stalin did much the same in the USSR. He cut the income of the Kulaks and workers so that the funds could be used to industrialize the Soviet Union during the first two 5-Year Plans. Workers starved, but the nation industrialized. Privatizing Social Security appears to be a Capitalistic method of soaking the workers to industrialize a nation like the Communists did previously.

Somehow it does not seem to me that the nation with the most advanced securities markets in the world (the US) really needs to soak the retirees for more funds for industrial development. Our only problem with funds for industrial development is the "crowding out" caused by excessive borrowing to support the excessive federal deficit. It hasn't been a major problem yet because our economy is growing so slowly, but more rapid growth will require higher interest rates. That will increase the cost of the total federal debt as well as reducing economic growth. The problem is not lack of funds, though. It is a failure of the federal government to manage its spending and revenue.

The purpose of a national retirement system should be to provide an adequate retirement to every worker who loses income because of retirement, and to provide that retirement fairly and efficiently at the lowest possible cost. The Social Security system is doing that as well or better than in any other industrial nation and if the economy performs decently the system will continue to do so without significant change. Even the most pessimistic projections for the system will require merely minor tweaks to keep it functioning well.

Instead in the Holy name of Privatization and Removing Government from Everyone's Lives we are being offered a more expensive system that has never succeeded in any other nation and will not do the job it needs to do as well as the current system does.

Compare privatization of Social Security to the health care crisis that is current in the US. American conservatives have stated for over half a century that our health care system will function better for everyone if it is left to private enterprise and private insurance funded through employers. Ignoring the half century of growing failure of the current system they block every effort to develop a rational, more fair and less expensive healthcare financing system. What does their privatization ideology give us?

The results in health care are clear. We have health care rationing through HMO's, criminal misuse of health care funds by one hospital chain, one in six Americans has no insurance (and one in four children) and our infant mortality rate is more than double that of Cuba or Singapore. All of this is given us at a cost that is double per capita of the next nearest nation in the world.

Privatization of the Social Security system will bring all the failures of our still much too privatized healthcare system and provide no real benefits in exchange. Chile's experience has shown that.

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