Wintery Knight

…integrating Christian faith and knowledge in the public square

What happened when Chile privatized its retirement program?

Map of South America

Map of South America

Here’s an editorial about how Chile privatized their government-run retirement program.

Excerpt:

Nearly 30 years ago, on the very day Ronald Reagan was sworn in as U.S. president, Chile became the first nation to privatize its social security system. Three decades hence, it has surpassed all expectations.

[...]Thirty years on, Pinera’s plan, adapted from the ideas of Milton Friedman, is, along with free trade, one of the two pillars of Chile’s success story, surpassing all predictions.

Pinera’s proposal began with scrapping the payroll tax on the country’s social security system and inviting all workers to take the money they were contributing and move it into a private pension.

Workers would be free to choose the fund, how much to put in, and at what age they would retire, with a minimal safety net built into the design. Past contributions would be refunded to workers by government bond. And anyone who didn’t like the idea was free to remain with the system as it was. It was a huge success: 95% of Chile’s workers chose the private system.

Pinera told the public to expect a compounded 4% rate of return under the private plan. But as of 2010, the average annual rate of return was 9.23%, far higher than promised.

By contrast, the U.S. social security system, which today accounts for a quarter of the U.S. government budget, is slated to give retiring workers in the next decade a 1% to 2% rate of return. And those entering the system today will see a negative return.

Chile’s implicit pension debt fell to just 6% of GNP — compared with 100% in the U.S., 300% in France and 450% in Italy, leaving Chile with no net debt.

Better still, the accumulated savings in the pension funds fueled Chile’s spectacular economic ascent, taking real incomes from about $4,000 per capita in the early 1980s to $15,000 today, and GDP to the 6% range most years for nearly 20 years. With that record, is it any surprise that Chile this year earned itself a membership card into the club of rich nations, the OECD?

The U.S. could have similar result if it had started on Chile’s path 30 years ago, with no debt and a phenomenal rate of growth.

But U.S. politicians, just like Chile’s fascist generals, have insisted the public is too stupid to fend for itself without big government. Given U.S. politicians’ fraudulent mismanagement and abuse of Social Security in recent years, such claims are outrageous.

And it even works in Canada – they privatized their air traffic control program.

Excerpt:

In 1996, Canada privatized its air traffic control system, in part due to the long waits endured by passengers. Today, it should take the same approach to improve its miserable health care waiting times.

Canada’s air traffic control might not have been a major embarrassment — though its health-care system might be — but it was performing poorly enough that policymakers felt they had to do something about it. So they sold it for $1.5 billion.

In turning over its air traffic control system to Nav Canada, the country relieved itself of a multitude of air travel issues.

Lengthy delays have been minimized, flight times have been cut, circling while awaiting a landing slot has been decreased and routes are more efficient. The overall flying experience has improved as has the business environment for airlines.

According to a Christmas Eve story in the Financial Post, privatization of the air traffic control system has “cut the fuel bill of airlines flying into Canada and above it by an estimated $1.4 billion collectively.” Nav Canada “estimates it will be able to save airlines a further $2.9 billion on fuel by 2016.”

At the same time, the private company, which does not operate through a command-and-control arrangement like a state-run system would, has kept airlines’ landing fees stable “and in some cases, like in 2006,” even reduced them.

Taxpayers have benefited. The system is no longer being propped up by $100 million to $200 million a year in public funds.

Though Nav Canada is a nonprofit company, it still makes money. Its profits go to pay down debt and are plowed back into the company for new innovations — an incentive that the clumsy government-owned air traffic control system didn’t have.

Why don’t we try things that we know will work – like privatizing wasteful government agencies and social programs? If it works for Chile and Canada, then it should work for us. If massive government spending did not work for Japan, then it shouldn’t work for us, either. Why govern by rhetoric and demonizing the opposition, when we can easily do what has worked for others? They are not really so different from us, are they?

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Socialists defeated by free-market conservative in Chile election

Story from Investors Business Daily.

Excerpt:

Amazingly, Concertacion’s center-left candidate, Eduardo Frei, lost the election… to pro-free-market Sebastian Pinera, a self-made billionaire who vows to expand free markets even more. Following his exuberant 52%-48% victory Sunday, Pinera vowed to make Chile “the best country in the world.”

Saying he meant to be an “entrepreneurial president,” Pinera promised to cut red tape, improve investment, make it easier to hire and fire workers, make bureaucrats accountable and improve the climate for Chileans to start businesses.

He wants to partially privatize state copper giant Codelco to attract investment. He also wants to get tough on crime. Because he’ll have to work with the Concertacion congress, he may not achieve all of it. But given the political winds, he’s sure to achieve some of it.

[...]So instead of the 3%-range economic growth seen lately, Pinera vows to grow in the vicinity of the 7.2% pace Chile racked up in the first heady years after Pinochet’s dictatorship, when economist Milton Friedman’s Chilean Chicago Boys were in charge.

Instead of producing just wine, fruit and fish, Pinera wants new measures to encourage new industries to enrich Chile and its buyers around the world.

Can a billionaire like Pinera lead Chile? His past suggests he won’t rest on his laurels. As a businessman, he liked introducing new things to Chile; during the ’80s he introduced credit cards when these were barely known and made them a fact of life.

He also has a knack for rescuing failing industries and transforming them. In the 1990s he bought Chile’s battered state airline and turned it into LAN Airlines, now South America’s biggest carrier.

Chile’s markets are optimistic. The stock market rose 1% to its highest level ever on news of Pinera’s election.

Although Chile was being run by socialists, they were actually really good on fiscal issues.

I blogged before about how a pro-free-trade economic policy had produced so much economic growth that Chile received an invitation to join the prestigious OECD, an organization of 30 economic super-powers! Well, Chile accepted the invitation – they are the first South American nation to ever be in the OECD!

The Wall Street Journal has the new rankings for the freest economies in the world. Chile is #10! Talk about punching above your weight!

Rank Country Year Score Change
1 Hong Kong 2010 89.7 -0.3
2 Singapore 2010 86.1 -1
3 Australia 2010 82.6 0
4 New Zealand 2010 82.1 0.1
5 Ireland 2010 81.3 -0.9
6 Switzerland 2010 81.1 1.7
7 Canada 2010 80.4 -0.1
8 United States 2010 78 -2.7
9 Denmark 2010 77.9 -1.7
10 Chile 2010 77.2 -1.1

Chile is the number one place I would like to live if I could choose to live anywhere. But they have these terrible earthquakes! I don’t know what to do about that. I have this crazy idea to live in an earth-sheltered house, just to save money on utilities and to lower maintenance costs, so that I have more time for pets and friends. I wonder if they have those in Chile?

I also like Honduras (#99) and Colombia (#58). I was showing off my Honduras-made shirts today at work to one of the atheist-Democrat guys who is suspicious of free trade. I explained the difference between between foreign investment and foreign aid. I prefer foreign investment. The clothes are well-made, and I like to help poorer nations to grow their economy by trading with them – so that they have jobs they can be proud of. Today, clothes, tomorrow, LCD monitors! My parents were born in a poor country, just like Honduras or Colombia.

Filed under: News, , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

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