23 June 2005

Answers to many common Social Security-related questions

Social Security Q&A

Of particular interest (not that the other content was devoid of significance), was this piece on how other privatized social security schemes and 401K programs stack up to the existing social security setup.

Chile’s system is one that President Bush often mentions. His proposal is likely to be similar because one of his advisors, José Piñera, designed the system in Chile for the Pinochet military dictatorship. Under that government, workers were encouraged to opt out of the system of pension insurance and into private accounts. Over the past 25 years, the return on stocks in Chile has averaged over 10%—a higher return than we can expect in the U.S. stock market over the next 25 years. Yet, even with that extremely high rate of return, the average Chilean retiree relying on private savings will receive a benefit less than one-half as large as someone who had remained in the old system, and that benefit lasts only 20 years. If a retiree is "unlucky" enough to live longer than that, he will simply run out of retirement income. Those in the old system not only receive a higher benefit, but the benefit lasts as long as they live, and continues to provide benefits to their surviving spouse.

A recent survey shows that 90% of Chileans who opted for the private accounts wish they had remained in the old system. The only people who have benefited by the new system are the wealthiest top 2% of the population.

The United States’ Social Security system is the most efficiently run insurance program in the world, with overhead of only 0.7% of annual benefits; for every $100 paid into the system, $99.30 is paid out in benefits to retirees. In the British and Chilean systems, at retirement, workers convert their private accounts to annuities provided by private insurance companies. In the United States, overhead for annuities provided by private firms averages about 20%; for every $100 paid in, $20 gets siphoned off. And almost no annuities are indexed for inflation.

How can Americans not view this as a massive transfer of financial wealth to bankers and brokers, at the expense of American workers?


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