And Now, a Word From Chile ...

Editorial
The New York Times
December 31, 2006

Everyone who followed the debate about privatizing Social Security back in 2005 has vivid memories of the Chilean model. Sometimes it seemed impossible to get through any discussion of fixing Social Security without hearing a free-market paean to the way Chile had given its workers control over their own retirement investments, followed by a demand that the United States get on the same boat.

Therefore, it seems worthwhile to note that the Chileans are now bailing water.

The Chilean government recently announced that in 2007 it plans to pursue far-reaching reforms aimed at creating a larger government role in Chileans’ old-age security. The reforms are urgently needed. It has been nearly a generation since the regime of Gen. Augusto Pinochet began to supplant Chile’s government-supported retirement system with a plan for Chilean workers to save 10 percent of their salaries in private accounts. Today, roughly half of Chile’s labor force has either not participated or has not accumulated enough to generate what the government considers a minimum payout of about $140 a month.

The overarching problem for Chile — and the real lesson for the United States — is that private savings are not a substitute for a guaranteed core tier of old-age support. The first measure of success of a retirement system is not how much certain individuals manage to sock away, but whether the system as a whole provides basic dignity for all. By that measure, Chile’s privatized system has failed and Social Security has succeeded.

Social Security does need some changes to protect it over the long term. The best solution would involve a combination of modest benefit cuts and modest tax increases, which could be phased in gradually over decades and could guarantee a government benefit that replaces about 30 percent of preretirement income on average, compared with a replacement rate of about 35 percent today.

Getting there would require sacrifices from both political parties. Republicans would have to give up on their privatization efforts. And the Democrats would have to control their knee-jerk tendency to preface any discussion of Social Security with a pledge never to cut anyone’s future retirement benefits. President Bush will also have to go further if there is to be any chance of progress while he is still in office. Tax increases must be a part of any plausible Social Security reform mix. Unfortunately, the president appears unalterably opposed even to something as overdue as raising the cap on earnings that are subject to Social Security tax.

As long as tax increases are off the table, severe benefit cuts become unavoidable. If the gap in Social Security’s finances were closed through benefit cuts only, the average worker’s payout would equal only about 10 percent of preretirement earnings. Such bare-bones benefits would signal the end of Social Security, as surely as would privatization.

As the debate unfolds anew in 2007, another vital lesson to remember from the Chilean experience is that institutions, once dismantled, are not easily restored.