Oh, to Retire in Chile

In today's New York Times, John Tierney compares the pension he'd get in Chile to what he's supposed to receive in Social Security benefits. I don't know how much Tierney makes (someone more sophisticated in these matters probably could make an estimate based on the numbers he reports), but a pension worth most of my current salary, which he implies is typical in Chile, would go a long way toward relieving my anxieties about old age. Unfortunately, the Bush administration's modest vision of "personal accounts" is not nearly as ambitious as Chile's privatization.

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    A zillion years ago I read about young men from Greece who move to NYC, work at whatever they can find, become eligible for U.S. social security and then move back to their villages, sometimes islands off the coast, and retire in luxury.

    This was true in the Sixties but I doubt it is true today because the wealthy people have surely taken over those islands by now. Similarly, the hippies used to say, "For $5000 you can live like a king in (enter disease ridden, dangerous, fly infested but presumably marijauna friendly [Ha!] country here).

    Do I have a point? No. I just didn't like seeing a blank comment section for what is clearly a post with humorous potential. Now, Hit it!, dhex.

  • ||

    there's nothing funny about social security. i have to give a goddamn presentation on an analysis of the modes of "debate" in social security to a bunch of twenty somethings who don't know how social security works in the first place. nothing funny about that either. now i have to figure out how to boil this shit down to a 10 minute presentation, which isn't very funny either. however, i was planning on opening with something like this:

    "the debate around social security is a lot like the original dawn of the dead. the democrats are those guys hiding in their houses who don't think the zombies are real, and can just hide from them. the zombies are the AARP and the mass of retirees. the people fighting the zombies are the cato institute and the good old boys who shoot that black guy at the end of the movie are the republicans."

  • ||

    I've given these numbers before, but for the sake of making this comments section less blank...

    A person who works from age 18 to 65 and puts 12% of his earnings into accounts yielding a mere 4% real return can draw down his savings over a 30-year retirement to earn a pension equal to 108% of his net paycheck.

    Unfortunately for everyone, we instead have "Social" "Security" -- a system where that same 18-year-old has that same 12% taken from him and mailed to millionaires simply because something less than 12% was taken from them in the past. That 18-year-old can look forward to a retirement where his Social Security payout is guaranteed -- with a straight face by Social Security's defenders -- to have a -27% return.

    Whenever I read something like, "the Social Security program has been the most successful domestic government program," I feel ill. Social Security is utterly unjust. The next forty years should see it phased out entirely in favor of tax-free mandatory personal accounts and means-tested welfare paid out of general revenue.

  • ||

    the debate around social security is a lot like the original dawn of the dead....

    Great imagery! I believe the movie you have in mind is Night of the Living Dead.

    "Are they slow moving, chief?"
    "Yeah, they're dead. They're all messed up."

  • ||

    More wisdom from P.J. O'Rourke,

    "Consult American Indians for a further discussion of government promises."
    "Meanwhile, no conservative is talking about abandoning the injured, the orphaned, the abject, or the hopelessly goofy."
    "Social Security (with later help from Medicare and other programs) reduced the poverty rate among the elderly from greater than 50 percent during the Depression to eight percent now. Why is this good deed financed with a 6.2 percent regressive tax on only the first $90,000 of income? (The tax is 12.4 percent if we drop the fiction that employers pay the other half instead of calculating this expense into wages.) An addled Robin Hood of a system waves fare-thee-well to the rich while taking from those of moderate means. And why isn't this good deed means-tested? We don't drop coins in a man's hat when it's a silk topper doffed in his box at the opera."

    May, 2005 issue of the Atlantic

  • ||

    I first read about Chile's system in Toward Liberty: 25 Years of Public Policy from the Cato Institute, and I reread that essay more than any other. It's so cool, and it just baffles me how few people in America realize a system like that works, and works well. ARGH.

  • ||

    "The tax is 12.4 percent if we drop the fiction that employers pay the other half instead of calculating this expense into wages"

    I may be thick as a whale omelette, but it seems to me that wages are set by rules of supply and demand without regard to FICA withholding. i.e. if you're willing to work for $30,000/yr after payroll taxes and then somehow all payroll taxes are abolished, then your employer has no reason not to lower wages so that you end up earning the same $30,000/yr as before. What your labor is worth in the market is what you take home in your paycheck.

  • nmg||

    Mark: "if you're willing to work for $30,000/yr after payroll taxes and then somehow all payroll taxes are abolished, then your employer has no reason not to lower wages so that you end up earning the same $30,000/yr as before. "

    Actually Mark, it's the opposite. If your employer is willing to pay $30K plus all the costs incurred from taxes and regulation (including FICA), then that is what your labor is worth. You are demanding 30K PLUS costs. If those costs go away, your take home will go up that is what you are worth to your employer.

    Your emlpoyer is NOT going to pay you $30K takehome PLUS costs if you're not worth it.


  • ||

    I don't know anything about whale omelettes, but I think you're imagining that supply and demand somehow doesn't work in the labor market. The fact is, employers factor in wage taxes, health insurance premiums, and other benefits whenever they consider increasing headcount. If a proposed addition doesn't provide a business value of, say, 130% of the expected salary, the business simply won't add the new employee. The 6.2% employer contribution therefore acts to lower the labor demand, thus salaries. Eliminating it won't magically cause your employer to increase or decrease your salary, but it will result in greater demand for labor, applying pressure to keep up in terms of salary and benefits.

  • ||


    Of course no forced savings plan would pass the libertarian purity test. There does seem to be a genuine difference in liberty, however: Tierney's Chilean friend at least chooses where his money goes. I have no idea what monstrosity the Bush administration will come up with, but the Chilean system seems to me at least a baby step in the right direction.

  • ||

    I've found myself becoming something of a libertarian purist, which can be painful at times. On the one hand, I don't feel that I can support "private" accounts; on the other hand, the arguments of the opposition (you know, mainstream Democrats)are so terrible that I feel inclined to rebut them when I hear them. But it oftentimes feels stupid to say, "You're right, but you're right for entirely wrong reasons."

  • R C Dean||

    Trust me, Mark, when employers figure the cost of adding a new position, they include payroll taxes and other benefits.

    They couldn't give a rat's ass about your take-home (different people with the same "wages" take home different amounts anyway). All they care about is what you cost them. And that definitely includes payroll taxes.

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    a forced savings system doesn't really seem to be much more libertarian than a tax-based system

    It certainly isn't perfect. But right now the federal government spends a fifth of its budget on its ridiculous pension plan. It seems to me that forcing you to save for your own retirement, in accounts that really are yours, is more than 90% of the way toward a pure libertarian solution.

    And if you propose to eliminate all mandatory retirement contributions, the whine will rise that people are not responsible enough to save for themselves and they'll just inflate the welfare rolls later.

    In other words, I don't think it's politically possible to eliminate Social Security without replacing it with something mandatory. But I do think that if enough people knew just how horribly unjust and inefficient Social Security is in everything it tries to do, that it could be eliminated entirely.

  • Virginia Postrel||

    I imagine John Tierney can also expect a nice pension from the NYT--which, unless things have changed a lot in the past few years, isn't something Reason employees can look forward to. He probably gets 401(k) matching too. Of course, all of this amounts to "compensating differentials" for the pain of working for a large, bureaucratic organization.

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    The problem with the private accounts is that they will be government managed. Anybody with a 401K plan knows that a private account that you manage yourself is a lot better investment than Social Security. With the government managing your account though, you could get into a situation where the government is making your investment decisions based upon political reasons. The social security system is bad just because it is inefficient. The larger problem with social security is that the government has pilfered the money in the trust fund. If the government had 5 trillion dollars in a piggy bank to pay future retirees, there wouldn?t be a national debate to reform it now. The evil in limited private accounts is that they will be used to extend the life of a failed program. It might be better in the end to let the train wreck happen sooner, than to prop up a failed system. For that reason, I won?t support anything other than making social security optional.

  • MP||

    Private accounts will more likely be government regulated rather than government managed.

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    I saw this article at the Democrat-loving Media Matters, which claims that things aren't so great in Chile. I'd appreciate opinions, since I'm eternally trying to figure this subject out.


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    Click the links in the article (mostly cbo analysis) :

  • ||

    Has anyone done a careful comparison of the statageries of the Worldwide War on Terror and those of Social Security reform?

    One comparison is that the more vigorously Bush pursues a goal, the more elusive it becomes.

  • ||

    nmg, jon, rcdean:

    My understanding is that when a tax on transactions is dropped, the benefit goes partly to each side of the transaction. Suppose the employer pays $36K, $30K to you and $6 to the government. He's willing to pay $36K; you're willing to accept $30K. So if the tax is dropped, the resulting salary will be somewhere between $30K and $36K.

    Where, exactly, depends on elasticity of supply and demand, if I remember correctly. But start by figuring half the benefit to the employer and half to the employee, and go from there.


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