Commentary

Social Security: Franklin vs. Bismarck

Otto von Bismarck, chancellor of Germany from 1871 to 1890, an aristocrat, a monarchist, and a Prussian nationalist, put in place the first social security system in 1889 in Germany. The U.S. Social Security Administration, on its website, traces its intellectual roots to Bismarck and to the 19th century European idea of the welfare state.

This was the Europe of Saint-Simon, Comte, and Marx, where central planning and collectivism were becoming the popular places to turn for the answers to the human condition. The folly of these ideas when taken to their logical conclusions, a process which Nobel laureate economist F.A. Hayek called the “fatal conceit,” became widely appreciated after the fall of the Berlin Wall and the collapse of the Soviet Union.

On another continent, a century before Bismarck, lived Benjamin Franklin, whom historian H.W. Brands called the “The First American.” This master of technology saw human potential in creative, responsible individuals living in freedom. He wrote a famous memorandum on the 13 virtues — such as frugality and industry — needed for personal success. The individual is not a passive data point for central planners, but the locus of initiative, creativity, and individuality.

Franklin fully understood the extraordinary power of compound interest. In his will, he left 1000 pounds sterling each to the cities of Philadelphia and Boston, carefully calculated how much these funds would yield over 200 years at 5 percent interest, and stipulated loans to young artisans to help them start their businesses.

Chile’s new social security paradigm, anchored in personal retirement accounts, captured Franklin’s virtues of individual responsibility and ownership, savings and thrift, wealth creation through the “miracle of compound interest,” and passing a legacy onto the next generation.

Since Chile’s new system was approved on November 4, 1980, around twenty other nations of the world, including such countries as Poland, Mexico, Sweden, and Hong Kong, have adopted retirement systems with personal account provisions. Already 100 million workers in the world have personal retirement accounts. So, if we include their families, around 500 million lives may have been changed by this idea.

While celebrating this July 4th, I wondered: How can the greatest and freest country in the world continue in the paradigm of the Iron Chancellor and ignore the path so successfully lived and demonstrated by “The First American”?

José Piñera, president of the International Center for Pension Reform and co-chairman of the Cato Institute’s Project on Social Security Choice.