This is an answer to a column written by John Tierney of the New York Times.
John,
There are a some things you didn't reference in your article on Chile's Soc Sec system. You and Pablo were looking at a specific point in time when comparing your SS amounts. Had the Chilean economy been downsized by a tech bubble, ie like the US, his pension would have been significantly less.
Second, you included the mutual fund management fees in Pablo's 12% deductions for his retirement plan. I don't believe that is correct. The Chilean plan requires a mandatory 10%, per the CATO institute. These costs would run, in US dollars, 1 or 2% of the return. A recent figure on the Chilean pension fund return has been 10%. Subtracting the management costs of 1-2%, the return is 8-9%. The current US SS funds are returning 6%. Further, Warren Buffett has predicted Stock Market returns, over the next 20 years, at 6-7%. This was in his 2003 letter to his Berkshire investors at their annual meeting.
The US SS fund, while not equaling the Chilean returns (at a point in time) are guaranteed by the US government. While Chilean fund will guarantee a minimum pension amount only.
Fourth, the current Chilean government is spending $6 Billion dollars annually to ensure the minimum pension for its already retired workers. This represents 25% of it's GDP. Our SS program cost represent 6% of our GDP.
Fifth, President Bush is promoting "private accounts" and workers choosing their investments. Not really what is in the details. His plan is based on the Chilean plan so the workers investment choice is ONLY mutual funds. There are 5 companies in Chile authorized to manage the pension plan. The workers choice amounts to selecting one of these companies. The company then makes the investment choice.
Private accounts, in the US SS plan, would add several trillion dollars to the US debt, in order to kick the program off. The country cannot afford it, and it does nothing to change the predicted shortfall of funds in 2042..
Thanks for reading,
Ron
Wednesday, March 28, 2007
Privatization of Social Security? Bad idea!
Why? It will harm the SS system in two ways:
1.)It will immediately reduce the surplus (available through 2012) that exists today;
2.)This will cause the government's general tax fund to pay out more than it takes in much sooner, thus raising taxes, eventually. This will add to the already growing deficit of 500 Billion dollars and more, annually.
Even more important are other issues:
1.)Lack of investment knowledge by most people.
As an example, before Enron, 80% of the workers had 90% of their 401ks invested in their own company stock. Never a good idea. This shows lack of investment wisdom; 2.)Even if everyone understood the investment arena, the average working person will not take the time or have the level of interest, to manage their savings to maximize future income, asset growth, and maintain some security.
The government, probably through a contractual arrangement, will have a large brokerage firm manage these personal accounts. Since these firms are major contributors to political campaigns, jockeying for these lucrative investment accounts would present a tempting area for further scandals and mis-appropriation of important retirement funds.
Since no less an expert than Warren Buffet predicts only an average 7% return on stocks over the next 20 years, it seems that any privatization proposal will not greatly increase the return for SS funds over what they already earn in interest on the IOUs from the US Treasury. Particularly when you subtract the individual fees charged (1%-2% on average, based on average fees for 401k plans today) to manage these accounts from the predicted rate of return of 7%. Yes, Mr. Buffet could be wrong, but his expertise speaks in support this prediction.
The only true beneficiary of this privatization proposal will be the Brokerage Houses who manage the accounts. Conservative versus Liberal politics aside, the purpose of Social Security is to benefit the individual not investment firms.
Why? It will harm the SS system in two ways:
1.)It will immediately reduce the surplus (available through 2012) that exists today;
2.)This will cause the government's general tax fund to pay out more than it takes in much sooner, thus raising taxes, eventually. This will add to the already growing deficit of 500 Billion dollars and more, annually.
Even more important are other issues:
1.)Lack of investment knowledge by most people.
As an example, before Enron, 80% of the workers had 90% of their 401ks invested in their own company stock. Never a good idea. This shows lack of investment wisdom; 2.)Even if everyone understood the investment arena, the average working person will not take the time or have the level of interest, to manage their savings to maximize future income, asset growth, and maintain some security.
The government, probably through a contractual arrangement, will have a large brokerage firm manage these personal accounts. Since these firms are major contributors to political campaigns, jockeying for these lucrative investment accounts would present a tempting area for further scandals and mis-appropriation of important retirement funds.
Since no less an expert than Warren Buffet predicts only an average 7% return on stocks over the next 20 years, it seems that any privatization proposal will not greatly increase the return for SS funds over what they already earn in interest on the IOUs from the US Treasury. Particularly when you subtract the individual fees charged (1%-2% on average, based on average fees for 401k plans today) to manage these accounts from the predicted rate of return of 7%. Yes, Mr. Buffet could be wrong, but his expertise speaks in support this prediction.
The only true beneficiary of this privatization proposal will be the Brokerage Houses who manage the accounts. Conservative versus Liberal politics aside, the purpose of Social Security is to benefit the individual not investment firms.
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