Social Security Reform

Chile's Private Social Security System Turns 30 - Monica Showalter

May 1 marks the 30 years since Chile became the first nation to privatize its social security system. By turning workers into investors, the move solved an entitlement crisis much like the one America faces today.

"I like symbols, so I chose May Day as the birth date of Chile's 'ownership society' that allowed every worker to become a small capitalist," wrote Jose Pinera, former secretary of labor and social security and the architect of this pension revolution. He is now a senior fellow at the Cato Institute in Washington, D.C.

What he designed has succeeded beyond all expectations. Yet Congress remains reluctant to adopt anything like it, despite efforts by Presidents Bill Clinton and George W. Bush to partially privatize an American system.

Instead of paying a 12.4% Social Security tax as we do here, Chilean workers must pay in 10% of their wages (they can send up to 20%) to one of several conservatively managed and regulated pension funds. From the accumulated savings, they get a life annuity or make programmed withdrawals (inheriting any funds left over).

Over the last three decades these accounts have averaged annual returns of 9.23% above inflation. By contrast, U.S. Social Security pays a 1% to 2% (theoretical) return, and even less for new workers.

Retirement Plans

Even U.S. can't afford generous defined benefit systems - Michael Barone

Pensions are not the only defined-benefit system in our society. Social Security is a defined-benefit system: You pay money in and you get retirement benefits when you reach a certain age. Medicare is a defined-benefit system as well, though when you become eligible you may be surprised to find it doesn't cover everything: that's why elderly people buy Medigap insurance policies.

Many on the political left decry the disappearance of defined-benefit pension plans from the private sector and strive mightily to maintain them for public-sector employees. They argue that people with defined-contribution plans often don't save enough for a comfortable retirement or make bad investment choices.

They argue that defined-benefit plans and defined-benefit public policies provide you with absolute 100 percent security and eliminate all risk. Unfortunately it's becoming clear they don't.

The people who put defined-benefit plans and policies in place assumed there would always be someone able to pay for them.

There would always be enough new workers to pay for retirees' Social Security and Medicare. Benefits were raised on the assumption that the baby boom generation would produce a baby boom of its own. Oops. Birth rates near replacement levels, which we have now, are not enough. The ratio of workers to retirees is in inexorable decline.

General Motors would always be a big enough company to pay for the pensions and health benefits promised to hundreds of thousands of retirees. Turned out it wasn't.

10 States Where Pensions Are Running Out of Money - Douglas A. McIntyre and Charles B. Stockdale

24/7 Wall St. reviewed the pension funds of all 50 states collected by Pew as of 2009, the latest period when data is available for all of them. We looked for how much the most underfunded pensions were compared to the level that actuaries suggested in 2009. We also looked at the recommended amounts of annual contributions that each state made. 24/7 compiled a list of The Ten States Where Pensions Are Running Out of Money based on state pensions that are underfunded and which have a shortfall of the 2009 recommended level.