Wednesday, December 01, 2004

Social Security Overhaul Successful in Chile

As someone who look sforward to retiring in about 30 years (lol) I found this article on Chile's Social Security reform very appealing. It touts the successful privatized social security structure President Bush has been touting all throughout his campaign.

Chile's Social Security Reform Act of 1980 allowed current workers to opt out of the government-run pension system financed by a payroll tax and instead contribute to a personal retirement account. What determines those workers' retirement benefit is the amount of money accumulated in their personal account during their working years. Neither the workers nor the employers pay a payroll tax. Nor do these workers collect a government-financed benefit.
Instead, 10 percent of their pretax wage is deposited monthly into a personal account. Workers may voluntarily contribute up to an additional 10 percent a month in pretax wages. The invested amounts grow tax-free, and the workers pay tax on this money only when they withdraw it for retirement.
Upon retiring, workers may choose from three payout options: purchase a family annuity from a life insurance company, indexed to inflation; leave their funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a worker dies, the remaining funds form a part of his estate); or any combination of the previous two. In all cases, if the money exceeds the amount needed to provide a monthly benefit equal to 70 percent of the workers' most recent wages, then the workers can withdraw the surplus as a lump sum.
A worker who has reached retirement age and has contributed for at least 20 years but whose accumulated fund is not enough to provide a "minimum pension," as defined by law, receives that amount from the government once funds in the personal account have been depleted. (Those without 20 years' contributions can apply for a welfare-type payment at a lower level.)
Workers may choose any one of several competing private pension fund companies to manage their accounts. Those companies can engage in no other activities and are subject to strict supervision by a government agency. Older workers have to own mutual funds concentrated in short-term fixed-income securities, while young workers can have most of their funds in stocks. The law encourages a diversified portfolio, with no obligation to invest in government bonds or any other security.
Each worker receives a statement from the manager every three months, and can keep track of the retirement capital at any moment. Workers with enough savings in their accounts to buy a "sufficient" annuity (50 percent of their average salary, as long as it is 20 percent higher than the minimum pension) can stop contributing and begin withdrawing their money. But there is no obligation to stop working, at any age, nor is there an obligation to continue working or saving for retirement once a worker has met the "sufficient" benefit threshold.
Because the personal retirement accounts are tied to the workers, not the employers, workers can take their accounts with them when they move to other jobs, keeping the labor market flexible. The system does not penalize or subsidize immigrants, who receive what they have contributed, even if they return to their homelands. We set three basic policy rules for the transition to personal accounts: the government guaranteed retirees that their benefits would not be affected by the reform; everyone already in the work force could stay in the government system or move to the personal retirement account system (those who opted out were given a "recognition bond" calculated to reflect the money the worker had already accrued); and all new workers were required to enter the personal account system.