Unlike the United States and most European nations, Chile does not face a long-term Social Security crisis. This is because lawmakers shifted to a system of personal accounts almost 30 years ago. As a result, Chile’s economy is much stronger, the financial system is healthy, workers are better off, and taxpayers are protected. It also turns out that a system of personal accounts has a positive impact on the labor supply of older workers. Instead of getting lured into retirement by a punitive tax-and-transfer government system, they remain active to reap the rewards of a system that rewards them (rather than tax collectors) for continued work. A former World Bank expert has the details in a new report from the National Center for Policy Analysis.
American workers live longer each decade but they continue to retire early. They often begin receiving Social Security benefits, quit working and stop contributing to national output well before age 65. Reversing these trends must be an important objective when designing long-term reforms to balance revenues and expenditures on elderly entitlements. Chile faced similar problems prior to 1981. It had a traditional pay-as-you-go defined benefit system, like Social Security in the United States. Workers had strong incentives to start their retirement benefits as soon as possible, because postponing pensions and adding contributions did not increase benefits commensurately. Labor force participation dropped dramatically when workers became eligible for pensions. This changed with reforms in 1981 that replaced the defined benefit system with a defined contribution system. All new workers were required to join the defined contribution system while existing workers had a choice. Most workers are now in the new system and are required to contribute 10 percent of their wages to an individual account. Contributions are invested in a pension fund chosen by the worker and accumulate a market rate of return. Payouts take the form of inflation-protected annuities or gradual withdrawals during retirement. The new system increased incentives for older workers to postpone retirement and continue working. The response was dramatic….Following the 1981 policy changes and reforms, and after controlling for other sources of change in retirement behavior, the percentage of individuals receiving early benefits fell significantly: The proportion who received benefits before age 65 decreased by about 8 percentage points. The proportion of individuals who started receiving retirement benefits by their early 60s fell by about a quarter. The proportion who started receiving benefits by their 50s was cut in half. Postponing the commencement of benefits could be due to market returns on additional contributions, which made workers more willing to continue working in order to save more money for retirement. Or it could be due to tighter preconditions on early retirement, which required more individuals to continue working until age 65. Tighter preconditions seem to dominate, as the percentage of individuals who receive benefits after 65 has not changed. More older workers kept working following the reform, after controlling for other factors: Labor force participation rates for individuals in their 50s rose 12 percentage points. Labor force rates rose 13 percentage points for those aged 65-70. Individuals aged 60-64 increased their labor force participation the most – by 19 percentage points. The biggest change in labor force participation was for individuals who had started receiving benefits from their retirement accounts: Participation rates rose by 15 percentage points for pension recipients in their late 60s. Rates rose by 28 percentage points for those in their 50s and early 60s. Among all pension recipients under age 70, the proportion who continued working more than doubled.
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] As mentioned in the column, Jose Pinera created Chile’s system of personal retirement accounts. […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] type of pension reform or the type of fiscal rule. I like to think the authors were referring to personal retirement accounts and spending caps, but it’s not […]
[…] hearts in the right place (reducing poverty) and even occasionally support the right policies (social security reform and regulatory […]
[…] The benefits of privatized Social Security systems. […]
[…] flagship reform in Chile was the creation of a funded retirement system based on personal accounts. Basically […]
[…] systems based on real savings. I’m a big fan of the Australian approach. Chile also has a great system, and Switzerland and the Netherlands are good role models as well. Hong Kong and Singapore also […]
[…] bad studies, but it also is the source of good research on topics such as government spending, Social Security reform, tax complexity, financial regulation, and economic liberty. And the rankings in Doing Business are […]
Sorry, but the Chilean solution is now in failure, because the CL Peso was devalued over 20% and still dropping and those retirement savings don’t buy much anymore.
[…] that rely solely on tax-and-transfer entitlement schemes. Hong Kong is a good example, as are Chile and […]
[…] when the bureaucracy does good work. It has played a positive role in helping some nations set up private retirement systems, and it has produced research warning about the link between corruption and complicated tax […]
[…] of which underscores why I think we should have a system similar to what they have in Australia or Chile (or even the Faroe […]
[…] starts by acknowledging Chile’s personal retirement accounts are a gold standard for reform and then asks why there’s a desire to change something that […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] retirement accounts. This “funded” approach is working very well in nations such as Australia, Chile, and the Netherlands. Since there would be less payroll tax revenue going to government, there […]
[…] accounts. This “funded” approach is working very well in nations such as Australia, Chile, and the Netherlands. Since there would be less payroll tax revenue going to government, there […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] privatised its state pension in 1981. New workers were obliged to join a new defined contribution system […]
[…] genuine reform based on private retirement savings, including Australia, Sweden, the Faroe Islands, Chile, and The […]
[…] genuine reform based on private retirement savings, including Australia, Sweden, the Faroe Islands, Chile, and The […]
[…] Piñera fue el arquitecto del sistema de seguridad social privado de Chile que facultó a millones de trabajadores y fomentó el crecimiento de una […]
[…] Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This […]
[…] suerte, una de las mayores innovaciones en cuanto a reforma de la seguridad social salió de Chile durante su recuperación económica. […]
[…] one of the great innovations in social-security reform came from Chile itself during its economic turnaround. Spearheaded by one […]
[…] data, including the fact that “funded” accounts already exist in nations such as Australia, Chile, Sweden, and the […]
[…] data, including the fact that “funded” accounts already exist in nations such as Australia, Chile, Sweden, and the […]
[…] data, including the fact that “funded” accounts already exist in nations such as Australia, Chile, Sweden, and the […]
[…] “funded” accounts already exist in nations such as Australia, Chile, and the Netherlands, but some critics say that there’s too much risk in that kind of […]
[…] “funded” accounts already exist in nations such as Australia, Chile, and the Netherlands, but some critics say that there’s too much risk in that kind of […]
[…] “funded” accounts already exist in nations such as Australia, Chile, and the Netherlands, but some critics say that there’s too much risk in that kind of […]
[…] why I’m a big fan of the very successful reforms in places such as Chile andAustralia, where personal accounts are producing big benefits for workers. These systems also […]
[…] why I’m a big fan of the very successful reforms in places such as Chile and Australia, where personal accounts are producing big benefits for workers. These systems also […]
[…] I’m also a huge fan of Chile’s system of private accounts. At the risk of oversimplifying, Chile’s system is sort of like universal IRAs and Australia’s […]
[…] The current government of the Faroe Islands, which includes the People’s Party, has modernized its Social Security regime with a system of personal retirement accounts. Starting next January, workers will begin setting aside some of their income to finance a comfortable retirement income. When fully implemented, workers will be putting 15 percent of their income in their accounts, creating a system that’s even larger than the private retirement models in Australia and Chile. […]
[…] good news is that dozens of nations have fully or partially shifted to mandatory private savings as a pro-growth way of modernizing bankrupt tax-and-transfer Social Security […]
[…] I’m also a huge fan of Chile’s system of private accounts. At the risk of oversimplifying, Chile’s system is sort of like universal IRAs and Australia’s […]
[…] I’m also a huge fan of Chile’s system of private accounts. At the risk of oversimplifying, Chile’s system is sort of like universal IRAs and […]
[…] In that post, I noted that Chile was a pioneer in the shift from unsustainable tax-and-transfer entitlement schemes to savings-based personal retirement accounts. And with good reason. That system, which has been in place for more than three decades, is hugely successful. […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. Thisinterview with Jose Pinera, who designed […]
[…] […]
[…] In that post, I noted that Chile was a pioneer in the shift from unsustainable tax-and-transfer entitlement schemes to savings-based personal retirement accounts. And with good reason. That system, which has been in place for more than three decades, is hugely successful. […]
[…] In that post, I noted that Chile was a pioneer in the shift from unsustainable tax-and-transfer entitlement schemes to savings-based personal retirement accounts. And with good reason. That system, which has been in place for more than three decades, is hugely successful. […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] retirement accounts that was introduced in the early 1980s, but we explain in the article that pension reform was just the beginning. Let’s look at how Chile became the Latin Tiger. Pension reform is the […]
[…] retirement accounts that was introduced in the early 1980s, but we explain in the article that pension reform was just the beginning. Let’s look at how Chile became the Latin Tiger. Pension reform is the […]
Exactly…
[…] […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] know that personal accounts work. Nations such as Australia, Chile, and Sweden have reaped big benefits by making the […]
[…] I think about Social Security, my first instinct is to copy dozens of other nations and implement personal retirement […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] that’s the optimistic scenario). Or we can go with personal retirement accounts – an approach that is working all over the world, while simultaneously boosting growth and creating more retirement […]
[…] is a force for good. The World Bank for years has been actively involved in helping nations develop and implement private Social Security systems. And the bureaucracy’s “Doing Business Index” and “Governance […]
[…] I was vehement when we saw that Professor Martin Feldstein of Harvard University had a column in yesterday’s Wall Street Journal entitled, “Private Accounts Can Save Social Security.” This is great, we thought, another chairman advocating a kind of pro-growth, pro-freedom reform that has taken reason in about 30 nations all over a world. […]
[…] I was excited when I saw that Professor Martin Feldstein of Harvard University had a column in yesterday’s Wall Street Journal entitled, “Private Accounts Can Save Social Security.” This is great, I thought, another person advocating the kind of pro-growth, pro-freedom reform which has taken hold in about 30 nations all over the world. […]
[…] May 3, 2011 by Dan Mitchell I was excited when I saw that Professor Martin Feldstein of Harvard University had a column in yesterday’s Wall Street Journal entitled, “Private Accounts Can Save Social Security.” This is great, I thought, another person advocating the kind of pro-growth, pro-freedom reform which has taken hold in about 30 nations all over the world. […]
[…] Now Brawner praises Pryor for saying that Social Security is on the table. I am encouraged by that too. However, we must move to privatize Social Security or it will fail. There is no way around this economic reality. Thirty countries have moved in this direction and the results have been outstanding. Chile did this in 1980 and now they are reaping the benefits. […]
ohh yah, now a days Private Social Security System a Big Success.. think is must be use to every one and its must be for every one…..Thanks for update.
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed […]
[…] should be a surprise. Other nations have made remarkable gains through privatization, including Social Security personal accounts in Chile and 30 other nations, education choice in places such as Sweden and the Netherlands, and privatized […]
[…] should be a surprise. Other nations have made remarkable gains through privatization, including Social Security personal accounts in Chile and 30 other nations, education choice in places such as Sweden and the Netherlands, and privatized […]
[…] via Chile’s Private Social Security System a Big Success « International Liberty. […]
The system works, I have been living and contributing to this AFP for the past 2 years. It has grown 40%. You also have the ability to change your investments to ultra safe conservative if you wish.
I would compare it to a money market IRA or CD investment for those who choose the lower risk category.
When a country is fiscally responsible with a surplus it makes good sense to offer the citizens lower taxes, more subsidies. However, the USA is extremely in debt, they should be scaling back spending and cutting Soc Security to a private system for all new graduates.
Today is a prime example as copper as an export if at a high dollar price and the peso is as strong as it has been in 2 years vs. a dollar.
[…] also have an empirical example of a private social security system that has worked, and worked well, for decades: Unlike the United States and most European nations, […]
Eh… I dunno about this, Dan. Once again, you seem to extremely choosy and cherry-picky about your sources for this information. I googled this topic a few weeks ago, and the only people saying it was a success seemed to be right-wingers, libertarians and think-tanks thereof promoting a certain agenda. Folks who did more objective studies of the subject don’t have such a rosy view of Chile’s system. You should know this. National Center for Policy Analysis may not be the best source for something like this. Do you have a peer-reviewed study (or 5 or 10) to back up this from a respected academic journal?
It’s kind of like when you wrote that article about government stimulus supposedly failing on Heritage’s website years ago, and you linked to a lot of interesting studies on fiscal policy. However, reading the actual studies shows that they were a lot more complex than you let on, and you seemed to have cherry-picked the “evidence” or parts that suited your views on economics.
I’m just sayin