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Little Chile May Save Your Economic Future—and America’s

Recently in this space I described the effort of Sam Beard, author of “Restoring Hope in America,” to rescue the Social Security system from bankruptcy and provide a real economic future for the American worker. Now touring the United States is another crusader with the nearly identical cause, José Piñera. The main difference between the two is that Beard, head of the Jefferson Awards program and a Discovery Institute fellow, has a plan for saving Social Security, while Piñera, former Minister of Labor in Chile and a fellow of Cato Institute, has actually achieved something very like it in his country.

Furthermore, little Chile’s experiment in using the private sector and personal choice to reform social security has been in operation for 15 years now, long enough to test the concept thoroughly. The result is what Piñera terms “a real system of social security rather than the system of social insecurity we used to have, and which the United States has today.”

Piñera was in Seattle this week, in concert with Rep. Jennifer Dunn, and is moving on to a most interesting meeting in Colorado with former Gov. Richard Lamm, the man who may succeed Ross Perot as the Reform Party’s presidential candidate. It has been assumed that the two major parties would decline to get sucked into a debate over reform of Social Security in this election cycle. Their fear is that the public couldn’t get used to such novelties fast enough to blunt the temptation of the politicians themselves to demagogue (“Stop me before I smear you again!”) But that all could change if the most prominent third party candidate decided to take up the issue.

Piñera, like Sam Beard, does not want to get drawn into U.S. partisan politics and has made himself available to all interested officeholders and parties. A foreign economist with a Harvard doctorate, he simply wants to spread the good news. Part of his news is that three other countries recently adopted the Chilean model–Argentina, Peru and Columbia–and that he has high hopes soon for New Zealand, a new free enterprise tiger on the Pacific Rim. Prosperous Singapore already has adopted the idea.

Sixteen years ago Chile was just another South American economic basket case. Piñera persuaded the Chilean people through television talks, who then persuaded the government, that they could do much better investing the 10% of their money going into the national social security system in an approved private mutual fund or insurance annuity plan. They also were pleased to know that they would have the option to stay with the established government social security plan.

“I believe that ordinary people will make good choices if they are given good information,” Piñera says, and today nine out of ten workers choose the new system. Each one has a little passbook, about the size of a passport, which shows an updated account of how much his savings presently is worth. Many people carry these around in their back pocket and add new information weekly. A worker is free to assign his money to any of the 20 or more approved mutual funds and annuity plans, with more being approved yearly; and they can change accounts up to four times yearly.

People in Chile, unlike those in the U.S., also have ample choice now as to what point in their life they can obtain social security. So long as they have invested enough to provide at least a minimal living, they can get retirement benefits anytime–at 50, say. Or, says Piñera, they can continue working as long as they want–“like your Senator Strom Thurmond”–and keep adding to their retirement nest egg, which they can use later or pass along to their heirs. In other words, they have the choice between using social security as an income stream or as a savings instrument. Further, during their working years, they can choose at any time to increase their contribution from the mandated 10% to up to 20%.

What is good for the average working citizen in Chile is, of course, great for the Chilean economy. Using the private sector to save social security has provided a huge stimulus for economic growth. The savings rate is 27%, the annual rate of growth is an exuberant 7% (compared to 2 1/2 % in the U.S. this year), with unemployment at 4.8%. The social security funds–which now represent 40 percent of the entire economy–have been increasing in value by over 12% a year. “In Chile today,” says Piñera, “when the stock market goes up, the workers cheer, because they know that much of it is their money. Everybody is now an owner.”

Compassion plays a role–people whose social security savings fail to reach a minimal threshold are subsidized. But overall the genius of the system is to connect results to efforts. What a novel concept!

I have assumed that it would be a mistake to “put social security on the table” in this election year. It is too tempting for candidates to try to frighten the elderly through misinformation. But if an average Chilean can apprehend the virtues of a reformed system, why can’t an average American? The elderly are held safe, keeping exactly the plan they have now, if that is their wish. For their children and grandchildren, a much better opportunity is offered–a way, at last, to get ahead.

The federal government’s own figures show social security going broke in 2029, in the lifetime of today’s baby boom generation. It probably will happen sooner, about 2012. Little Chile, however, shows that it doesn’t have to turn out that way.

Memo to Bob Dole and Bill Clinton: The party that enacts this new social contract with working Americans is likely to stay in office for generations.

Bruce Chapman

Cofounder and Chairman of the Board of Discovery Institute
Bruce Chapman has had a long career in American politics and public policy at the city, state, national, and international levels. Elected to the Seattle City Council and as Washington State's Secretary of State, he also served in several leadership posts in the Reagan administration, including ambassador. In 1991, he founded the public policy think tank Discovery Institute, where he currently serves as Chairman of the Board and director of the Chapman Center on Citizen Leadership.