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If Chile could successfully privatize its Social Security system in 1980, it should be easier for the United States to do so now, Jose Pinera, the architect of Chile's highly touted and much copied privatized pension program, said Thursday in the Twin Cities.
Sen. Rod Grams, R-Minn., whose own plan to privatize the U.S. Social Security system is based on Chile's in many respects, said that Chile's success proves "this isn't just pie in the sky."
As a member of Chile's cabinet under the regime of former dictator Augusto Pinochet, Pinera converted a corrupt, struggling pay-as-you-go pension system into millions of private accounts that he said have earned Chileans average annual returns of 11 percent above inflation.
By law, Chilean workers pay 10 percent of their wages into the accounts, which are managed by private firms and invested in stocks and bonds.
Grams' bill, the most ambitious of several congressional proposals to privatize the U.S. system, would give workers the option of diverting 10 percentage points of the 12.4 percent of wages that now go into the publicly administered guaranteed-benefit Social Security system into personal retirement accounts similar to Chileans'. Grams would guarantee benefits for those at or near retirement. He estimates that it will cost $13.5 trillion to finance the transition to a privatized system, which he said would be complete by 2050.
Pinera has spearheaded an international movement to privatize government-run pension systems. He claims 10 converts: seven in Latin America and Poland, Hungary and Kazakhstan.
"This is a universal idea that has to be applied locally," Pinera said. Critics have said Chile is so different that its experience cannot be applied to the United States. Pinera said everything about the differences would make the transition easier because the United States starts with more mature capital markets than Chile did, a larger group of citizens already accustomed to investing, highly sophisticated technology to administer the program and huge projected surpluses to help pay for the transition.
Critics have said Chilean accounts initially benefited from hyperinflated interest rates on government bonds and a hot stock market more recently. Pinera said that after 20 years, critics can't keep saying that Chile is going through a brief, exceptional period.
Pinera, who was educated at Harvard and joined the Chilean cabinet when he was just 30, now works out of his own institute in Santiago and out of the Cato Institute, a Washington-based think tank that has been a leader in advocating Social Security privatization. He came to Minnesota at Grams' invitation and for an event at the Airport Hilton, cosponsored by the Washington-based Citizens for a Sound Economy.
They participated in a public meeting and broadcast of the KSTP-AM radio show hosted by Jason Lewis.
On the show, Pinera said that the Chilean privatization, like Grams' proposal, is optional. But Chileans' experience has been so good that 94 percent of workers now choose to participate. The other six percent still get benefits from a government formula. That's because "we have turned every Chilean worker into a capitalist," he said.
But Peter Diamond, an MIT economist who has studied the Chilean case, has said that is also because just before offering the privatization option, the Chilean regime had slashed the benefit formula, making it unattractive to stay with the old system. Pinera said he was able to reassure Chileans that "I won't take away Grandma's check." But Diamond said he was able to make that promise because his predecessor had already reduced Grandma's check.
Grams said that under the current system, "the government tells you how much you have to put into Social Security, how to invest it, and when you can retire. Under my plan, all those decisions will be up to you."
Grams also gave his assessment of Vice President Al Gore's recent proposal to use government matching funds to encourage people to save for their own retirement outside of Social Security. Grams said, "Gore says, you give me one dollar and we'll give you three dollars. But who is 'we'? The money comes from the same workers. He's trying to bribe you with your own money."