In your state of the union address you called for an open debate on Social Security reform. I wish to respond to that call.
At Georgetown University recently, you publicly recognized that the U.S. Social Security system is going broke. You are right. Like the Titanic, it is heading toward disaster, while some keep insisting that there is no problem.
The truth is that the U.S. has only two options: to prolong the agony of the current system, or as you have said, “to experiment boldly.” But so far only short‐term solutions have been proposed. Some have suggested raising the payroll tax, but this would hurt job creation and increase the burden of a regressive tax on low‐income workers. Others recommend increasing the retirement age, but that would especially burden blue‐collar workers. These half‐measures can only buy time. If the ship doesn’t change course, sooner or later you’re going to hit an iceberg – an aging population that cannot be supported by the workforce.
There is another way. When I was labor and social security secretary of Chile in 1980, my country faced the same problem the U.S. now confronts. We decided to save our social security system by converting it from a pay‐as‐you‐go model to individual retirement savings accounts. Workers now choose among competing private companies to invest the equivalent of what used to be their payroll taxes in a conservative portfolio of high rated bonds and equities. This allows workers to harness the powerful force of compound interest – reflecting the wealth‐creating effect of the market – to ensure their security in retirement.
If empowering the common man – turning every worker into a shareholder – were the only benefit of such reform, that would be reason enough to convert to individual retirement accounts. But the Chilean example gives many more reasons. In the 17 years since Chile embarked on this course, complemented by other important market reforms, a flood of investment has benefited both individuals and the economy as a whole. As unemployment has fallen to its lowest in history, productivity has increased sharply the savings rate has soared to around 25% of gross domestic product and economic growth has more than doubled to a 7% average during the last 13 years. If we keep up the present rhythm for another seven years, the size of the economy will have quadrupled in only 20 years.
This is a real economic and social revolution, allowing the country to improve education, health and the environment to a previously unthinkable level. This success has led seven other Latin American countries – Argentina, Bolivia, Colombia, El Salvador, Mexico, Peru and Uruguay – to emulate our example in the last five years, and several Central and Eastern European countries, including Russia, are actively considering similar reforms.