El Salvador’s reform rivals Chile’s as the strongest. In the private system, employers pay 6.5 per cent of payroll into an individual account for each worker. The worker pays another 3.5 percent into the account, as well as up to 3 percent for life insurance, disability insurance and administrative fees.
Workers choose from a range of private investment management firms approved by the government to handle their accounts. These firms then pick the individual investments for the workers. At retirement, the accumulated funds finance an annuity that pays monthly benefits to the retiree for life.
The entire system is indexed for inflation, as in Chile. That is possible because the private capital investments supporting the system earn real returns, in excess of inflation, over the long run.
The system also guarantees workers a minimum retirement benefit. If the private benefits that can be financed by the accumulated account funds fall below this minimum for some reason, the government will pay supplemental benefits to bring total benefits up to the minimum. As a percentage of pre‐retirement income, this minimum is close to the average benefit under the U.S. system.
Those already in the work force who switch to the new system receive specially issued government bonds–called recognition bonds–to compensate them for their past taxes paid into the old system. These bonds will be sufficient to pay a proportion of the old system’s benefits in retirement equal to the proportion of lifetime taxes the worker paid into the system.
At standard market investment returns, workers in the new system can expect three times or more the benefits that the U.S. Social Security system promises, as a percent of pre‐retirement income. Moreover, these benefits would be fully funded, and not subject to the long‐term financing gaps of the U.S. system.