Eight years ago, the man soon to become President thought it a "dumb
and nutty" idea to give people a choice between a private IRA and the
current Social Security system to fund their retirement.
Last year nearly twice as many young people believed in UFOs as thought
they would ever receive a Social Security check.
So perhaps we are making a kind of progress - more and more people are coming
to understand that their promised retirement benefits are an illusion, a
Washington conjurer's trick. The Social Security Administration's Intermediate
Assumptions show that in 1965 there were five contributing workers for each
Social Security beneficiary. Today, there are three. By the time the Baby
Boomers are retired in 2030, there will be but two. Then, Social Security
taxes must double to 30% of payroll, or benefits to the retired elderly
must be halved. Neither course is economically or politically feasible.
The predilection of the politicians is, like the Roman Emperor Nero, to
fiddle while the system burns. Tinker a little with the retirement age;
fiddle with the CPI indexing formula. Raise taxes a little; lower benefits
a little bit less. Or, perhaps, as the Kerrey Commission recommended last
January, allow us to deposit an astonishing 1.5% of our Social Security
(FICA) taxes in our own IRAs instead of sending it to Washington.
But tepid gradualism is useless in the face of an overwhelming challenge.
It is not just that the Social Security system is failing and must soon
be propped up with increasing payroll taxes that will suffocate the dreams
of the young. Nor is it that a fixed benefit, pay-as-you-go pension system
with yields of close to zero is a 1930s anachronism in an age when market
investments would produce five to ten times as much retirement income.
The crux of the matter is that a government controlled pension system that
does not link benefits to contributions is violating the economic rights
of American citizens. It is imposing an enormous intergenerational tax burden
on the young and limiting the economic opportunity of the old.
It is also immoral, for in the words of Chilean economist José Pinera,
"you are all sitting around the table figuring how to make your children
pay for your retirement." The government should not own your retirement
assets; you should. The government should not control the amount of your
retirement check; you should. Your grandchildren should not pay for your
retirement; that is your responsibility.
An information age retirement system would empower individuals to design
a personal retirement plan. Such a retirement system exists in Chile. Beginning
in 1980, the Chilean government guaranteed the lifetime benefits of all
retirees. It then gave current workers a choice: stay in the existing government
pension system with full benefits, or enter a new, private sector retirement
system in which benefits are based upon the individual's contributions to
an IRA and market yields on deposited funds. You must contribute 10% of
your wages into your private retirement fund, but you may contribute up
to 20% if you desire higher benefits upon retirement. You may choose your
retirement age and your investment manager (there are now 22 government
approved investment funds in Chile).
So what did Chilean workers choose? Economists predicted 1% would choose
the market system in the first month; 25% did. By year-end, it was 70% and
today 90% of the workforce has chosen the market system over the government
one.
Over the past 14 years, the average annual yield of an individual's retirement
account has been 10%. That compares to a 2.2% lifetime yield for a 45-year-old
(and even less for younger people) in the U.S. Social Security system. Contributions
by Chilean workers have created a huge pool of investment capital, allowing
the economy to grow 7% annually, while the U.S. is averaging less than 3%.
The Chilean savings rate is now 26%, compared to 4% in America.
Most important, the ordinary Chilean worker has a stake in the nation's
economy. His biggest asset is not, as Pinera points out, a "small house,
or used car, but the capital in his pension account. The Chilean worker
is an owner; a capitalist." Indeed, he is, for the first $1,000 he
contributed to his private pension account in 1981 is now worth $3,800,
and his subsequent annual contributions have been compounding at the same
rate.
Not bad for an idea that President Bush thought "nutty," President
Clinton won't consider because he is "not going to fool with Social
Security," and Congressmen and Senators consider the third rail of
American politics.
The politicians need to catch up with the people. There is a better way
to finance retirement pensions, and the American people should be allowed
to use it.
The National Center for Policy Analysis is a public policy research institute
founded in 1983 and internationally known for its studies on public policy
issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington,
D.C.