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My personal musings about anything that gets on my radar screen--heavily dominated by politics.
|On Social Security Reform|
I missed this article when it was first run in the New York Times, but I caught today's re-printing of it in the Rocky Mountain News.
It seems that Chile has had a system of private accounts available to its citizenry since 1981; it also seems that John Tierney, the author of this article, has a good friend who is a successful economist in Chile. So Tierney asked his friend, Pablo, to run a comparison of his Social Security status with Pablo's retirement in Chile.
After comparing our relative payments to our pension systems (since salaries are higher in America, I had contributed more), we extrapolated what would have happened if I'd put my money into Pablo's mutual fund instead of the Social Security trust fund. We came up with three projections for my old age, each one offering a pension that, like Social Security's, would be indexed to compensate for inflation:
(1) Retire in 10 years, at age 62, with an annual pension of $55,000. That would be more than triple the $18,000 I can expect from Social Security at that age.
(2) Retire at age 65 with an annual pension of $70,000. That would be almost triple the $25,000 pension promised by Social Security starting a year later, at age 66.
(3)Retire at age 65 with an annual pension of $53,000 and a one-time cash payment of $223,000.
Well, sure--but the system probably works a lot different down in Chile, right?
As it happened, our countries have required our employers to set aside roughly the same portion of our income, a little over 12 percent, which pays for disability insurance as well as the pension program. It also covers, in Pablo's case, the fees charged by the mutual-fund company managing his money.
I visited Pablo, who grew up to become an economist, at his office at the University of Chile and showed him my most recent letter from the Social Security Administration listing my history of earnings and projected pension. Pablo called up his account on his computer and studied the projected retirement options for him, which assume that he'll keep working until age 65 and that the fund will get an annual return of 5 percent (which is lower than its historical average).
Oh, well. . . yes, but Pablo is a successful economist--surely he knows how to game the system, right?
You may suspect that Pablo has prospered only because he's a sophisticated investor, but he simply put his money into one of the most popular mutual funds.
Yeah, but he's wealthy, and that must have something to do with it.
He has more money in it than most Chileans because his salary is above average, but lower-paid workers who contributed to that fund for the same period of time would be in relatively good shape, too, because their projected pension would amount to more than 90 percent of their salaries.
By contrast, Social Security replaces less than 60 percent of your salary - and that's only if you were a low-income worker. Typical recipients get back less than half of their salaries.
Just in case you needed a model to go from. Or, we could look at how Congress invests its retirement monies--very, very far away from Social Security.