32 (Author at Cato Institute) https://www.cato.org/ en José Piñera gives a lecture “How Market Reforms Transformed Chile” hosted by the Friedberg Economics Institute https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-gives-lecture-how-market-reforms-transformed-chile-hosted Sat, 19 Nov 2016 14:16:00 -0500 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-gives-lecture-how-market-reforms-transformed-chile-hosted José Piñera discusses the needed pension reforms for Spain on Libertad Digital TV https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-needed-pension-reforms-spain-libertad-digital Sat, 05 Nov 2016 12:24:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-needed-pension-reforms-spain-libertad-digital José Piñera discusses Chilean pension reform on Libertad Digital TV https://www.cato.org/multimedia/media-highlights-radio/jose-pinera-discusses-chilean-pension-reform-libertad-digital-tv Sat, 05 Nov 2016 12:22:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-radio/jose-pinera-discusses-chilean-pension-reform-libertad-digital-tv José Piñera discusses the impossible promises of the welfare state on Libertad Digital TV https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-impossible-promises-welfare-state-libertad Thu, 13 Oct 2016 12:55:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-impossible-promises-welfare-state-libertad José Piñera discusses pensions in Chile on TVN (Televisión Nacional de Chile) https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-pensions-chile-tvn-television-nacional-de-chile Wed, 03 Aug 2016 11:20:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-pensions-chile-tvn-television-nacional-de-chile José Piñera discusses pensions in Chile on AN (AhoraNoticias de Mega) https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-pensions-chile-ahoranoticias-de-mega Wed, 03 Aug 2016 11:18:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-discusses-pensions-chile-ahoranoticias-de-mega José Piñera is featured in a segment on “The importance of José Piñera in the 80’s pension reform” on Cultura Verdadera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-featured-segment-importance-jose-pinera-80s-pension Mon, 18 Jul 2016 13:54:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-featured-segment-importance-jose-pinera-80s-pension President Clinton and the Chilean Model https://www.cato.org/policy-report/januaryfebruary-2016/president-clinton-chilean-model José Piñera <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>“It’s 12:30 or 1&nbsp;at night, and Bill Clinton asks me and Dottie: ‘What do you know about the Chilean social security system?’&nbsp;” recounted Richard Lamm, the three‐​term former governor of Colorado. It was March 1995, and Lamm and his wife were staying that weekend in the Lincoln Bedroom of the White House.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>I read about this surprising midnight conversation in a&nbsp;<em>Newsweek</em> article by Jonathan Alter (May 13, 1996), as I&nbsp;was waiting at Dulles International Airport for a&nbsp;flight to Europe. The article also said that early the next morning, before he left to go jogging, President Bill Clinton arranged for a&nbsp;special report about the Chilean reform produced by his staff to be slipped under Lamm’s door.</p> <p>That news piqued my interest, so as soon as I&nbsp;came back to the United States, I&nbsp;went to visit Richard Lamm. I&nbsp;wanted to know the exact circumstances in which the president of the world’s superpower engages a&nbsp;fellow former governor in a&nbsp;Saturday night exchange about the system I&nbsp;had implemented 15&nbsp;years earlier.</p> <p>Lamm and I&nbsp;shared a&nbsp;coffee on the terrace of his house in Denver. He not only was a&nbsp;most genial host to this curious Chilean, but he also proved to be deeply motivated by the issues surrounding aging and the future of America. So we had an engaging conversation. At the conclusion, I&nbsp;ventured to ask him for a&nbsp;copy of the report that Clinton had given him. He agreed to give it to me on the condition that I&nbsp;not make it public while Clinton was president. He also gave me a&nbsp;copy of the handwritten note on White House stationery, dated 3–21-95, which accompanied the report slipped under his door. It read:</p> </div> , <blockquote class="blockquote"> <div> <p>Dick, Sorry I&nbsp;missed you this morning. It was great to have you and Dottie here. Here’s the stuff on Chile I&nbsp;mentioned. Best, Bill</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Three months before that Clinton‐​Lamm conversation about the Chilean system, I&nbsp;had a&nbsp;long lunch in Santiago with journalist Joe Klein of <em>Newsweek</em> magazine. A&nbsp;few weeks afterwards, he wrote a&nbsp;compelling article entitled, “If Chile Can Do It … Couldn’t (North) America Privatize Its Social‐​Security System?” He concluded by stating that “the Chilean system … is perhaps the first significant social‐​policy idea to emanate from the Southern Hemisphere” (December 12, 1994).</p> <p>I have reasons to think that probably this piece got Clinton’s attention and, given his passion for policy issues, he became a&nbsp;quasi‐​expert on Chile’s social security reform. Clinton was familiar with Klein, who covered the 1992 presidential race and went on anonymously to write the bestseller <em>Primary Colors</em>, a&nbsp;thinly veiled account of Clinton’s campaign.</p> <p><strong>“THE MOTHER OF ALL REFORMS“</strong><br>While studying for a&nbsp;master’s and a&nbsp;PhD in economics at Harvard University, I&nbsp;became enamored with America’s unique experiment in liberty and limited government. In 1835 Alexis de Tocqueville wrote the first volume of <em>Democracy in America</em>, hoping that many of the salutary aspects of American society might be exported to his native France. I&nbsp;dreamed of exporting them to my native Chile.</p> <p>So, upon finishing my PhD in 1974 and while fully enjoying my position as a&nbsp;teaching fellow at Harvard and a&nbsp;professor at Boston University, I&nbsp;took on the most difficult decision in my life: to go back to help my country rebuild its destroyed economy and democracy along the lines of the principles and institutions created in America by the Founding Fathers.</p> <p>Soon I&nbsp;became Secretary of Labor and Social Security, and in 1980 I&nbsp;was able to create a&nbsp;fully funded system of personal retirement accounts. Historian Niall Ferguson wrote in The Ascent of Money that this reform was “the most profound challenge to the welfare state in a&nbsp;generation. Thatcher and Reagan came later. The backlash against welfare started in Chile.”</p> <p>Unfortunately, at some point during the 20th century, the culture of self reliance and individual responsibility that had made America a&nbsp;great and free nation was diluted by the creation of an entitlement state, reminiscent of the increasingly failed European welfare state. What America needed was a&nbsp;return to basics, to the founding tenets of limited government and personal responsibility.</p> <p>In a&nbsp;way, the principles America helped export so successfully to Chile through a&nbsp;group of free‐​market economists needed to be reaffirmed in their home country through an emblematic reform. I&nbsp;felt that the Chilean solution to the impending Social Security crisis could be applied in the United States. Once my country had finished its transition to democracy and once I&nbsp;had done everything possible to ensure the stability of its free market model and its structural reforms, including my own “educational” presidential campaign in 1993, I&nbsp;decided to dedicate my life to sharing the Chilean Model around the world.</p> <p>At the same time, at the beginning of 1995, when President Clinton was having midnight conversations about the Chilean Model, I&nbsp;received an extraordinary invitation that would greatly help my fight for America. Ed Crane, co‐​founder and president of the libertarian Cato Institute, invited me to become a&nbsp;distinguished senior fellow and co‐​chairman of its Social Security Choice Project. I&nbsp;accepted immediately.</p> <p>Cato had been publishing books and studies on Social Security and private accounts since 1979 and was then gearing up for a&nbsp;new push. In the following years I&nbsp;traveled around the United States sharing the Chilean experience in conferences, town hall meetings, congressional hearings, and media interviews. The audiences were extremely receptive and interested, but what Milton Friedman called “the tyranny of the status quo” made it difficult for political leaders to embrace such a&nbsp;new solution to the growing Social Security problem.</p> <p>However, in January 1996, Mack McLarty, President Clinton’s special envoy to the Americas and former chief of staff, traveled to Chile and wanted to know firsthand about the success of the first private personal accounts system in the world. We met for hours and he quizzed me about both the principles and the details of the system. A&nbsp;few weeks later, I&nbsp;received a&nbsp;letter from him with an enthusiastic message:</p> </div> , <blockquote class="blockquote"> <div> <p>José, Without doubt, the reform of Chile’s pension system has been a&nbsp;critical contributing factor — some have called it the mother of all reforms — to Chile’s ongoing economic success. The social security reforms which you developed and fought for have put your country on a&nbsp;stable footing for the future.</p> <p>Although the Chilean and North American experiences are different in several key respects, I&nbsp;believe we can learn a&nbsp;great deal from your country’s bold initiative, which is widely envied throughout the hemisphere.</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p><strong>A LETTER TO THE PRESIDENT OF THE UNITED STATES</strong><br>Then, in his January 1998 State of the Union address, President Clinton warned the nation of the coming Social Security crisis and called for an open debate on the needed reforms: “We will hold a&nbsp;White House conference on Social Security in December. And one year from now, I&nbsp;will convene the leaders of Congress to craft historic bipartisan legislation to achieve a&nbsp;landmark for our generation, a&nbsp;Social Security system that is strong in the 21st century.”</p> <p>On the heels of this speech, I&nbsp;realized that no momentum could be lost. I&nbsp;needed to reach the president himself. Knowing Clinton’s reputation as a&nbsp;voracious reader, I&nbsp;resolved to write an open letter to the president in a&nbsp;major newspaper, where he was sure to take notice. And so that April, at a&nbsp;Tokyo conference organized by the Cato Institute and the powerful Keidanren, the Japanese business association, I&nbsp;broached the idea of my open letter to a&nbsp;fellow speaker, George Melloan of the <em>Wall Street Journal</em>. He told me it was highly unusual for the <em>Journal</em> to publish such a&nbsp;piece, but after reading a&nbsp;draft he enthusiastically accepted. Melloan asked me to send it by fax to the <em>Journal</em>’s Americas columnist Mary O’Grady in New York. From the Imperial Hotel my Cato colleague Bob Borens and I&nbsp;spent the whole night exchanging faxes between Tokyo and downtown New York, revising every comma of the draft until we were all fully satisfied.</p> <p>The letter was published on the editorial page on April 10, 1998. In it I&nbsp;described the success of the Chilean reform and urged the president to embrace a&nbsp;private‐​accounts option for Social Security, to avert the looming insolvency and to spread wealth more widely.</p> <p><strong>THE WHITE HOUSE SUMMIT ON SOCIAL SECURITY</strong><br>My expectations were surpassed when I&nbsp;received an invitation from Gene Sperling, economic policy adviser to the president, to speak on private accounts at the coming White House Conference on Social Security, to an audience from all areas of civil society: senior groups, youth organizations, think tanks, labor unions, business leaders and academia. Perhaps more importantly, a&nbsp;bipartisan assortment of 60 members of the House and Senate would be in attendance, along with other officials from the administration.</p> <p>The stakes were high. In a&nbsp;press briefing on December 2, 1998, in the week leading up to the White House conference, Sperling declared that the summit was needed “to derail the third‐​rail mentality that has often stifled Social Security reform.” He showed a&nbsp;keen awareness of the moment:</p> </div> , <blockquote class="blockquote"> <div> <p>I think the political realities are that 1999, as an off‐​election year with a&nbsp;Democratic president in his second term, and a&nbsp;year of focus on Social Security that we have had, offers a&nbsp;unique opportunity to address this, and also with having the strong fiscal situation that we’re in. So I&nbsp;think, in a&nbsp;practical, political sense, one does have to worry that if we do not get Social Security reform done this year, we do not have a&nbsp;good effort, that one does not know when another opportunity will come that is as opportune as this.</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>While I&nbsp;was both honored and humbled to be invited, especially given the fact that I&nbsp;was the only speaker who didn’t possess an American passport, I&nbsp;was at the same time sobered by the inherent challenges of such an address. In just a&nbsp;few minutes, I&nbsp;would need to introduce my prior involvement with social security reform in Chile, outline the technical details of the system, and explain why a&nbsp;1980 economic restructuring in a&nbsp;small, distant nation had relevance to the American way of life.</p> <p>As the C-SPAN cameras rolled, I&nbsp;delivered the message I&nbsp;had wanted so long to give.</p> </div> , <blockquote class="blockquote"> <div> <p>Every Chilean worker has a&nbsp;pension passbook — I&nbsp;always carry one of them. The worker has his money put here in the passbook and they know every month how much money they have. And they accumulate money during all their working life, and in this way we have allowed the working poor to benefit from that extraordinary force of compound interest …</p> <p>We gave every worker the choice to stay in the old system if they didn’t like this very small element of market risk and preferred the demographic or political risk. Or, they could move to the new system with recognition bonds recognizing their past contributions. Ninety‐​three percent of Chilean workers have chosen the system of the passbook, rather than the pay‐​as‐​you‐​go system. …</p> <p>So, the reform was not about savings or about macroeconomic equilibrium. It was about workers’ dignity, workers’ freedom, workers’ choice, and workers’ empowerment. I&nbsp;believe this can be done in America.</p> <p>In Chile, no one was investing in stocks 18&nbsp;years ago. In your country, you have 40 percent that are already investing in stocks. You have the best capital markets in the world that can diminish risk to a&nbsp;tolerable level. The technological revolution is allowing individuals to manage millions of accounts at negligible costs. And finally, you are such an open‐​minded country that you have invited a&nbsp;Chilean to be here.</p> <p>So, I&nbsp;have enormous hope for this country that I&nbsp;love. And I&nbsp;would like my son, who was born in Boston and carries an American passport, to also be able to someday have a&nbsp;pension retirement passbook like this.</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p><strong>SEX AND SOCIAL SECURITY</strong><br>Two months later, President Clinton said in his January 1999 State of the Union address:</p> </div> , <blockquote class="blockquote"> <div> <p>Our fiscal discipline gives us an unsurpassed opportunity to address a&nbsp;remarkable new challenge: the aging of America. With the number of elderly Americans set to double by 2030, the baby boom will become a “senior boom.” … The best way to keep Social Security a&nbsp;rock‐​solid guarantee is not to make drastic cuts in benefits; not to raise payroll tax rates; and not to drain resources from Social Security in the name of saving it. … I&nbsp;propose a&nbsp;new pension initiative for retirement security in the 21st century. I&nbsp;propose that we use a&nbsp;little over 11 percent of the surplus to establish universal savings accounts — USA accounts — to give all Americans the means to save. With these new accounts, Americans can invest as they choose, and receive funds to match a&nbsp;portion of their savings, with extra help for those least able to save. USA accounts will help all Americans to share in our nation’s wealth, and to enjoy a&nbsp;more secure retirement.</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The opening salvo had been fired: “to establish universal savings accounts — USA accounts.” This was the first time that a&nbsp;sitting president had called for the creation of personal retirement accounts.</p> <p>But regrettably it was not to be. Just as Clinton was gearing up to reform Social Security, he found himself unexpectedly mired in the Monica Lewinsky scandal. The affair was a&nbsp;disgraceful event indeed, but it was the process of impeachment of the president that buried the possibility of making this reform at that moment.</p> <p>Reality quickly set in: the besieged president could not deliver on his proposal, no matter how genuinely he knew the country needed it. As a&nbsp;<em>New York Times</em> editorial asserted the day after his address, “since the Republicans control Congress and the impeachment battle will probably leave a&nbsp;bitter aftertaste, the President’s plans are certain to be more of a&nbsp;conversation opener than a&nbsp;blueprint for the future.”</p> <p>Even though Clinton was acquitted by the Senate and thus allowed to remain in office, the ordeal exhausted both his political capital and his resolve to tackle major reforms. Clinton would not spearhead any major legislation during the remainder of his term. The Social Security time bomb would be passed along to a&nbsp;successor. A&nbsp;vital opportunity had been squandered.</p> <p>In his 2002 book <em>The Natural: The Misunderstood Presidency of Bill Clinton</em>, Joe Klein, after many hours of conversations with the former president, drew the following conclusion:</p> </div> , <blockquote class="blockquote"> <div> <p>The Lewinsky scandal had a&nbsp;powerful, if usually overlooked, impact on the substance of Clinton’s last two years in office as well. When I&nbsp;asked the President what he might have accomplished absent the scandal, he said that he wasn’t sure. When pressed, Clinton acknowledged that he might have been able to reform the Social Security and Medicare systems if the Republicans — and the media — hadn’t been provided with an alternative form of diversion in 1998 and 1999. In fact, Clinton was poised, at the moment he delivered his “Save Social Security First” challenge in the 1998 State of the Union message, to do something few presidents ever had: to end his second term with a&nbsp;valedictory surge of significant accomplishments. He had tamed the Republican Congress. There were huge budget surpluses to play with. “Both parties were behind the curve on the big issues,” said Bruce Reed, Clinton’s domestic policy advisor. … “We could have added a&nbsp;private‐​investment option on to Social Security benefits.”</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>As one journalist stated, Clinton sacrificed “an enduring legacy when he had an affair with Lewinsky, the young White House intern. Liberal Democrats were opposed to his pension changes, so to get their support to avoid impeachment, Clinton postponed the package of reforms.”</p> <p>Three Clinton advisers — Douglas W. Elmendorf, Jeffrey B. Liebman, and David W. Wilcox — would later write a&nbsp;paper confirming that the possibility existed and that the impeachment destroyed it. As Glenn Kessler summarized it in the <em>Washington Post</em>: “In 1998 President Clinton and his economic advisers spent 18 months secretly discussing the elements of a&nbsp;plan to add individual investment accounts to Social Security, but abandoned it when it became clear the president would be impeached, according to a&nbsp;paper by three former administration officials that will be presented today at a&nbsp;Harvard conference.”</p> <p>As in a&nbsp;Greek tragedy, Clinton’s failure to reform Social Security can be explained in terms of his tragic flaw. Clinton was undoubtedly an extremely gifted politician and a&nbsp;very intelligent man, but regrettably he was not a&nbsp;statesman willing to sacrifice earthly pleasures for a&nbsp;lasting legacy. It was proven that he did not belong, in the immortal words of Lincoln, “to the family of the lion, or the tribe of the eagle.”</p> <p>It is astounding how our human imperfections can have unintended consequences of enormous importance. As I&nbsp;traveled back all night to my country in those early months of 1999, knowing full well that though the seed had been planted the flower would not bloom during the Clinton presidency, I&nbsp;kept coming back to the achingly beautiful words that Shakespeare gave Hamlet:</p> </div> , <blockquote class="blockquote"> <div> <p>Blest are those<br>Whose blood and judgment are so well commingled,<br>That they are not a&nbsp;pipe for fortune’s finger<br>To sound what stop she please. Give me that man<br>That is not passion’s slave, and I&nbsp;will wear him<br>In my heart’s core, ay, in my heart of heart…</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> </div> Thu, 28 Jan 2016 16:53:00 -0500 José Piñera https://www.cato.org/policy-report/januaryfebruary-2016/president-clinton-chilean-model José Piñera discusses the economic transformation of Latin America and challenges ahead at the Seminario International Fundacion Internacional Para La Libertad in Lima, Peru. https://www.cato.org/multimedia/video-highlights/jose-pinera-discusses-economic-transformation-latin-america-challenges-ahead-seminario-international-fundacion-internacional-para-la-libertad-lima-peru Wed, 28 Mar 2012 22:06:17 -0400 José Piñera https://www.cato.org/multimedia/video-highlights/jose-pinera-discusses-economic-transformation-latin-america-challenges-ahead-seminario-international-fundacion-internacional-para-la-libertad-lima-peru Jose Piñera discusses the privatization of Chile’s social security system on WNYC’s Brian Lehrer Show https://www.cato.org/multimedia/radio-highlights/jose-pinera-discusses-privatization-chiles-social-security-system-wnycs-brian-lehrer-show Fri, 09 Sep 2011 11:00:00 -0400 José Piñera https://www.cato.org/multimedia/radio-highlights/jose-pinera-discusses-privatization-chiles-social-security-system-wnycs-brian-lehrer-show Europe: Either Bismarck or the Euro, but Not Both https://www.cato.org/blog/europe-either-bismarck-or-euro-not-both José Piñera <p>The&nbsp;Maastricht Treaty requires countries in the eurozone&nbsp;not to exceed a&nbsp;public debt of 60% of GDP. Well, now almost all of them have&nbsp;an official debt exceeding that ceiling. But the situation is immensely worse because&nbsp;European states&nbsp;also have huge, and largely&nbsp;hidden,&nbsp;unfunded liabilities arising from their&nbsp;pension and health systems. According to <a href="http://www.ncpa.org/pdfs/st319.pdf">a&nbsp;2009 study</a>&nbsp;by my colleague Jagadeesh Gokhale, the true&nbsp;debt of the 25 European countries is, on average,&nbsp;434% of GDP. And the treaties that underpin European integration do not say a&nbsp;word about such debt. <br><br /> <br> Greece’s true debt is 875% of GDP and its&nbsp;current problems are just the first act of the coming fiscal bankruptcy of Europe. In my 2004 essay <a href="https://www.cato.org/pubs/journal/cj24n1-2/cj24n1-2-6.pdf">“Will the Pension Time Bomb Sink the Euro?”</a>, I&nbsp;concluded that Europe would end up facing a&nbsp;critical crossroads: either leave the Euro or abandon the Bismarckian welfare state paradigm. As it turns out, the DNA of the pay‐​as‐​you‐​go system allows for political manipulation and the consequent inflation of pension and health “rights.” This, exacerbated by falling fertility rates and increasing life expectancy, will lead to increasing fiscal deficits, unpayable debt, state insolvency, defaults, covert age wars, and the&nbsp;failure of the Eurozone project. <br><br /> <br> The&nbsp;welfare state has really become an arbitrary “entitlement state,” where everyone uses the state to rob someone else, and politicians from the right and the left play the transfer game&nbsp;to win elections.&nbsp;This crisis may serve to reveal&nbsp;the true nature and&nbsp;enormous flaws of the welfare state.&nbsp;Sooner or later, Europe will have to dismantle it&nbsp;and move toward a&nbsp;paradigm of personal responsability — that&nbsp;is, a&nbsp;system of personal accounts for pensions, health and unemployment benefits.</p> Tue, 23 Feb 2010 11:27:26 -0500 José Piñera https://www.cato.org/blog/europe-either-bismarck-or-euro-not-both José Piñera discusses privatizing social security on FBN https://www.cato.org/multimedia/video-highlights/jose-pinera-discusses-privatizing-social-security-fbn Sun, 21 Feb 2010 19:00:00 -0500 José Piñera https://www.cato.org/multimedia/video-highlights/jose-pinera-discusses-privatizing-social-security-fbn José Piñera on America’s soaring debts. https://www.cato.org/multimedia/cato-video/jose-pinera-americas-soaring-debts José Piñera Cato Senior Fellow José Piñera recently appeared on the Fox Business Network, discussing America’s soaring debts and pension obligations. He argues that real U.S. debt is closer to 700% of GDP if obligations are included. Sun, 21 Feb 2010 19:00:00 -0500 José Piñera https://www.cato.org/multimedia/cato-video/jose-pinera-americas-soaring-debts Why Chile Is More Economically Free Than the United States https://www.cato.org/blog/why-chile-more-economically-free-united-states José Piñera <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="28dc1c2c-bb97-41e0-a9ae-525be25fca7c" class="align-right embedded-entity" data-langcode="und"> <img srcset="/sites/cato.org/files/styles/pubs/public/wp-content/uploads/chile-flag.jpg?itok=jsmh8im9 1x, /sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/chile-flag.jpg?itok=KwK1hYXU 1.5x" width="286" height="400" src="/sites/cato.org/files/styles/pubs/public/wp-content/uploads/chile-flag.jpg?itok=jsmh8im9" alt="42-16335429" typeof="Image" class="component-image" /></div> <p>In the 2009 <a href="https://www.cato.org/pubs/efw/"><em>Economic Freedom of the World Report</em></a>, Chile is now #5, one place ahead of the United States. <br /><br /><br /> In 1975, of 72 countries, Chile was No 71. How did this happen? The explanation lies in what I call the “Chilean Revolution,” because it was as important and transformative to my country as the celebrated American Revolution that gave birth to the United States. <br /><br /><br /> The exceptional political circumstances of this period have obscured the fact that from 1975 to 1989 a true revolution took place in Chile, involving a radical, comprehensive, and sustained move toward economic and political freedom (from a starting point where there was neither one nor the other). This revolution not only doubled Chile’s historic rate of economic growth (to an average of 7% a year, 84–98), drastically reduced poverty (from 45% to 15%), and introduced several radical libertarian reforms that set the country on a path toward rapid development; but it also brought democracy, restored limited government, and established the rule of law. <br /><br /><br /> In 1998, <em>The Los Angeles Times</em> described the importance of the Chilean Revolution to the world: </p> <blockquote><p>In a sense, it all began in Chile. In the early 1970s, Chile was one of the first economies in the developing world to test such concepts as deregulation of industries, privatization of state companies, freeing of prices from government control, and opening of the home market to imports. In 1981, Chile privatized its social‐​security system. Many of those ideas ultimately spread throughout Latin America and to the rest of the world. They are behind the reformation of Eastern Europe and the states of the former Soviet Union today… which demonstrates, once again, the awesome power of ideas.</p> </blockquote> <p>The role and achievements of Chile’s team of classical liberal economists is well known. They were the ones who in 1975, once the quasi‐​civil war was over, decided to carry out a principled, “friendly takeover” of the military government that had arisen from the breakdown of democracy in 1973 (<a href="http://www.josepinera.com/pag/pag_tex_nuncamas_en.htm">here is my essay</a>, published in “Society”, on that drama). Much less well‐​known, however, is that they were also the foremost proponents of a gradual and constitutional return to a limited democracy. <br /><br /><br /> In fact, on August 8, 1980, a new Constitution, containing both a bill of rights and a timeline for the restoration of full political freedom, was proposed and approved in a referendum. In the period 1981–1989, what Fareed Zakaria has called the “institutions of liberty” were created—an independent Central Bank, a Constitutional Court, private television and universities, voting registration laws, etc—since they were crucial for having not only elections but a democracy at the service of freedom. Then on March 11, 1990, an extraordinary event happened: the governing military Junta surrendered its power to a democratically elected government in strict accordance to the 1980 Constitution (here is my note on <a href="http://www.josepinera.com/icpr/pag/pag_tex_restoredemocracy.htm" target="http://www.josepinera.com/icpr/pag/pag_tex_restoredemocracy.htm">the restoration of democracy</a> in Chile). <br /><br /><br /> Since 1990, Chile has had four moderate center‐​left governments and, despite minor setbacks on tax, labor and regulation policies, the essence of the free‐​market reforms are still intact. The 1980 Constitution is the law of the land, and has been amended by consensual agreements among all parties represented in Congress. Not only is Chile now at the top of rankings on free trade (number 3 in the world after Hong Kong and Singapore) and transparency (less corruption that in most western European countries), but it is expected to be a developed country by 2018, the first in Latin America. <br /><br /><br /> Nobel Laureate Friedrich Hayek proved, again, to have been a visionary when he stated in 1981: “Chile is now a great success. The world shall come to regard the recovery of Chile as one of the great economic miracles of our time.”</p> Thu, 17 Sep 2009 16:52:50 -0400 José Piñera https://www.cato.org/blog/why-chile-more-economically-free-united-states Using Twitter to Confront an Anti‐​Semitic Attack in Chile’s Paper of Record https://www.cato.org/blog/using-twitter-confront-anti-semitic-attack-chiles-paper-record José Piñera <p>After a&nbsp;morning workout and attending Mass this Sunday, I&nbsp;read <em>El Mercurio</em> (Chile’s paper of record) online. Although I&nbsp;seldom read Chilean newspapers blogs (too many attacks and too much dirt), I&nbsp;did so that morning because I&nbsp;was impressed by the indignation expressed by my friend Luis Larraín in his Sunday blog (titled “Canallas” – Shameless). I&nbsp;had named Larraín Superintendent of Social Security when he was 25&nbsp;years old. At that time I&nbsp;was 30 and Secretary of Labor and Social Security. <br><br /> <br> With astonishment I&nbsp;discovered that a&nbsp;certain “Mr. Murillo”, in the comment number 10 on the blog (which I&nbsp;copied immediately, and backed up electronically), explicitly attacked another commenter, Mr. José Fregoso Edelstein, by saying that his previous comment was due to the fact that he is from a “bad race” because he is Jewish. <br><br /> <br> I&nbsp;immediately logged in to Twitter and posted a ‘tweet’ demanding <em>El Mercurio</em> delete the blog comment, because it is a&nbsp;terrible insult directed at a&nbsp;group of people that have suffered indescribable horrors, not only in the 20th Century, but throughout history. I&nbsp;would have done the same thing if the insult was directed at Palestinians, Lebanese, Croatians, or any other racial/​religious/​national group. <br><br /> <br> However, I&nbsp;found an unexpected surprise. Instead of receiving immediate support for an action I&nbsp;thought just and reasonable, several people on Twitter attacked Jews, and me for defending them (one wrote, “You have used your enormous prestige in Chile to become “a shield for the Jews”). They also accused me of “encouraging censorship”, suggesting a “media dictatorship”, etc.…&nbsp;I&nbsp;replied inmediately in Twitter to the least offensive ones. Fifteen minutes later I&nbsp;received a ‘tweet’ from an editor at <em>El Mercurio</em>, saying that they had seen my complaint in Twitter and that they were studying the situation. With another tweet I&nbsp;insisted on immediate deletion of the comment. Twenty minutes later the newspaper editors deleted the offensive comment number 10. I&nbsp;want to emphasize that the editorial mistake, even this grievous one, does not compromise the newspaper <em>El Mercurio</em> as a&nbsp;whole, and its fast action in regard to the issue speaks to the newspaper’s chief editor’s integrity. It was an extraordinary triumph of the fast boat Twitter over the “media carrier” in Chile, another demonstration of the liberating potential of the wonderful new technologies being developed in the land of the free and the brave. <br><br /> <br> What left me very worried, and the reason I&nbsp;wrote this, is having detected a&nbsp;worrisome anti‐​Semitic sentiment among my fellow countrymen. Is this unjust anti‐​Semitic sentiment widespread, though hidden, in Chile, or was this only a “black swan?” I&nbsp;declare myself in a&nbsp;state of alert. We are building a&nbsp;free and good country. There should be no place whatsoever for the language of hate and the discrimination of minorities. As the great Albert Einstein said: “The world is a&nbsp;dangerous place, not because of those who do evil, but because of those who look on and do nothing.”</p> Thu, 06 Aug 2009 12:20:12 -0400 José Piñera https://www.cato.org/blog/using-twitter-confront-anti-semitic-attack-chiles-paper-record José Piñera discusses economics on IRN’s Unravelling the New World Order https://www.cato.org/multimedia/radio-highlights/jose-pinera-discusses-economics-irns-unravelling-new-world-order Wed, 28 Jan 2009 19:00:00 -0500 José Piñera https://www.cato.org/multimedia/radio-highlights/jose-pinera-discusses-economics-irns-unravelling-new-world-order To Milton What Belongs to Milton https://www.cato.org/blog/milton-what-belongs-milton José Piñera <p>When I&nbsp;was 18&nbsp;years old in 1966, I&nbsp;read this paragraph in Milton Friedman’s&nbsp;<em><a target="_blank" href="http://www.amazon.com/Capitalism-Freedom-Anniversary-Milton-Friedman/dp/0226264211">Capitalism and Freedom</a></em>: </p> <blockquote><p>The “social security” program is one of those things on which the tyranny of the status quo is beginning to work its magic.… [I]t has come to be so much taken for granted that its desirability is hardly questioned any longer. Yet it involves a&nbsp;large‐​scale invasion into the personal lives of a&nbsp;large fraction of the nation.…</p> </blockquote> <p>These words, and the brilliant Chapter 11 of that book, changed my life and the future of my long and narrow country. <br><br /> <br> Many years later, after we had fully privatized Social Security in Chile in 1980, I&nbsp;was honored to become an intellectual friend with this giant of liberty. We met at his beautiful San Francisco apartment, we interacted at many Cato events, and we even rode together in a&nbsp;very long black limousine with his wife&nbsp;Rose and Ed Crane from San Francisco to San Jose to a&nbsp;joint appearance in front of Sillicon Valley entrepreneurs.&nbsp;I&nbsp;saw him for the last time when he was&nbsp;honored at the White House on May 9, 2002, during an event appropriately called “A Lifetime of Achievement: Milton Friedman at 90.” <br><br /> <br> A&nbsp;great leader has left us. He was a&nbsp;man who understood the wisdom in T.S. Eliot’s words: “Only those who risk going too far can possibly find out how far one can go.” <br><br /> <br> Because Milton dared to “risk going too far,” he advanced decisively the frontiers of liberty.</p> Fri, 17 Nov 2006 11:13:58 -0500 José Piñera https://www.cato.org/blog/milton-what-belongs-milton What the U.S. Can Learn from Chile https://www.cato.org/multimedia/daily-podcast/what-us-can-learn-chile Thu, 28 Sep 2006 20:00:00 -0400 José Piñera https://www.cato.org/multimedia/daily-podcast/what-us-can-learn-chile Social Security: Franklin vs. Bismarck https://www.cato.org/publications/commentary/social-security-franklin-vs-bismarck José Piñera <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Otto von Bismarck, chancellor of Germany from 1871 to 1890, an aristocrat, a&nbsp;monarchist, and a&nbsp;Prussian nationalist, put in place the first social security system in 1889&nbsp;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.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>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&nbsp;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.</p> <p>On another continent, a&nbsp;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&nbsp;famous memorandum on the 13 virtues — such as frugality and industry — needed for personal success. The individual is not a&nbsp;passive data point for central planners, but the locus of initiative, creativity, and individuality.</p> <p>Franklin fully understood the extraordinary power of compound interest. In his will, he left 1000&nbsp;pounds sterling each to the cities of Philadelphia and Boston, carefully calculated how much these funds would yield over 200&nbsp;years at 5&nbsp;percent interest, and stipulated loans to young artisans to help them start their businesses.</p> <p>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&nbsp;legacy onto the next generation.</p> <p>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.</p> <p>While celebrating this July 4th, I&nbsp;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”?</p> </div> Tue, 05 Jul 2005 00:00:00 -0400 José Piñera https://www.cato.org/publications/commentary/social-security-franklin-vs-bismarck Retiring in Chile https://www.cato.org/publications/commentary/retiring-chile José Piñera <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>During his visit here last month, President Bush pointed out that the Chilean pension model was a “great example” for Social Security reform in the United States. </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>For 24&nbsp;years, I&nbsp;have championed the Chilean retirement system, which is based on ownership, choice and personal responsibility. Having discussed our reforms with Mr. Bush as long ago as 1997 when he was governor of Texas, and having spoken at the White House Summit on Social Security in 1998 during the Clinton administration, I&nbsp;believe there is now an opportunity for a&nbsp;bipartisan agreement in the United States in this crucial area of public policy. </p> <p>The Chilean retirement system was originally based on exactly the same principle that guides the United States’ system. It originated in 19th century Prussia, where Bismarck created a&nbsp;pay‐​as‐​you‐​go‐​system. But such a&nbsp;defined‐​benefit system is not only hostage to demographic trends, it also has a&nbsp;fatal flaw: it destroys the link between individual contributions and benefits, or, in other words, between personal effort and reward. </p> <p>Chile’s Social Security Reform Act of 1980 allowed current workers to opt out of the government‐​run pension system financed by a&nbsp;payroll tax and instead contribute to a&nbsp;personal retirement account. What determines those workers’ retirement benefit is the amount of money accumulated in their personal account during their working years. Neither the workers nor the employers pay a&nbsp;payroll tax. Nor do these workers collect a&nbsp;government‐​financed benefit. </p> <p>Instead, 10 percent of their pretax wage is deposited monthly into a&nbsp;personal account. Workers may voluntarily contribute up to an additional 10 percent a&nbsp;month in pretax wages. The invested amounts grow tax‐​free, and the workers pay tax on this money only when they withdraw it for retirement. </p> <p>Upon retiring, workers may choose from three payout options: purchase a&nbsp;family annuity from a&nbsp;life insurance company, indexed to inflation; leave their funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a&nbsp;worker dies, the remaining funds form a&nbsp;part of his estate); or any combination of the previous two. In all cases, if the money exceeds the amount needed to provide a&nbsp;monthly benefit equal to 70 percent of the workers’ most recent wages, then the workers can withdraw the surplus as a&nbsp;lump sum.</p> <p>A&nbsp;worker who has reached retirement age and has contributed for at least 20&nbsp;years but whose accumulated fund is not enough to provide a “minimum pension,” as defined by law, receives that amount from the government once funds in the personal account have been depleted. (Those without 20&nbsp;years’ contributions can apply for a&nbsp;welfare‐​type payment at a&nbsp;lower level.) </p> <p>Workers may choose any one of several competing private pension fund companies to manage their accounts. Those companies can engage in no other activities and are subject to strict supervision by a&nbsp;government agency. Older workers have to own mutual funds concentrated in short‐​term fixed‐​income securities, while young workers can have most of their funds in stocks. The law encourages a&nbsp;diversified portfolio, with no obligation to invest in government bonds or any other security. </p> <p>Each worker receives a&nbsp;statement from the manager every three months, and can keep track of the retirement capital at any moment. Workers with enough savings in their accounts to buy a “sufficient” annuity (50 percent of their average salary, as long as it is 20 percent higher than the minimum pension) can stop contributing and begin withdrawing their money. But there is no obligation to stop working, at any age, nor is there an obligation to continue working or saving for retirement once a&nbsp;worker has met the “sufficient” benefit threshold.</p> <p>Because the personal retirement accounts are tied to the workers, not the employers, workers can take their accounts with them when they move to other jobs, keeping the labor market flexible. The system does not penalize or subsidize immigrants, who receive what they have contributed, even if they return to their homelands. We set three basic policy rules for the transition to personal accounts: the government guaranteed retirees that their benefits would not be affected by the reform; everyone already in the work force could stay in the government system or move to the personal retirement account system (those who opted out were given a “recognition bond” calculated to reflect the money the worker had already accrued); and all new workers were required to enter the personal account system. </p> <p>With this system, we ended the illusion that both the employer and the worker contribute to retirement. As economists know well, all the contributions are ultimately paid by workers, since employers take into account all labor costs in making their hiring and salary decisions. To protect the net wages of workers, we initially recategorized the employer’s contribution as an additional gross wage. </p> <p>There was no “economic” transition cost, because there is no harm to the gross domestic product from this reform (on the contrary, there is a&nbsp;huge benefit). A&nbsp;completely different issue is how to confront the “cash flow” transition cost to the government of recognizing, and ultimately eliminating, the unfinanced Social Security liability. The implicit debt of the Chilean system in 1980 was about 80 percent of the G.D.P.</p> <p>We used five “sources” to generate that cash flow: a) one‐​time long‐​term government bonds at market rates of interest so the cost was shared with future generations; b) a&nbsp;temporary residual payroll tax; c) privatization of state‐​owned companies, which increased efficiency, prevented corruption and spread ownership; d) a&nbsp;budget surplus deliberately created before the reform (for many years afterward, we were able to use the need to “finance the transition” as a&nbsp;powerful argument to contain increases in government spending); e) increased tax revenues that resulted from the higher economic growth fueled by the personal retirement account system. </p> <p>Since the system started on May 1, 1981, the average real return on the personal accounts has been 10 percent a&nbsp;year. The pension funds have now accumulated resources equivalent to 70 percent of gross domestic product, a&nbsp;pool of savings that has helped finance economic growth and spurred the development of liquid long‐​term domestic capital market. By increasing savings and improving the functioning of both the capital and labor markets, the reform contributed to the doubling of the growth rate of the economy from 1985 to 1997 (from the historic 3&nbsp;percent to 7.2 percent a&nbsp;year) until the slowdown caused by the government’s erroneous response to the Asian crisis.</p> <p>Personal accounts have become the “third rail” of Chilean politics and the system has been accepted, and even marginally improved, by the three center‐​left governments of the last 14&nbsp;years. But it must be said that some labor market problems have increased unemployment and short‐​term labor contracts, reducing participation in the system and making the future safety net more expensive to maintain. </p> <p>When the system was inaugurated, one‐​fourth of the eligible work force signed up in the first month. Today 95 percent of covered workers participate. For Chileans, their retirement accounts represent real property rights. Indeed, the accounts, not risky government promises, are the primary sources of security for retirement, and the typical Chilean worker’s main asset is not his used car or even his small house (probably still mortgaged) but the capital in his retirement account. </p> <p>Since they have a&nbsp;personal stake in the economy, workers cheer the stock market’s surges rather than resenting them, and know that bad economic policies will harm retirement benefits. When workers feel that they themselves own a&nbsp;part of their country’s wealth, they became participants and supporters of a&nbsp;free market and a&nbsp;free society. </p> </div> Wed, 01 Dec 2004 00:00:00 -0500 José Piñera https://www.cato.org/publications/commentary/retiring-chile Wealth through Ownership: Creating Property Rights in Chilean Mining https://www.cato.org/cato-journal/fall-2004/wealth-through-ownership-creating-property-rights-chilean-mining Wed, 10 Nov 2004 23:00:00 -0500 José Piñera https://www.cato.org/cato-journal/fall-2004/wealth-through-ownership-creating-property-rights-chilean-mining Will the Pension Time Bomb Sink the Euro? https://www.cato.org/cato-journal/springsummer-2004/will-pension-time-bomb-sink-euro Mon, 31 May 2004 00:00:00 -0400 José Piñera https://www.cato.org/cato-journal/springsummer-2004/will-pension-time-bomb-sink-euro Free Trade and Social Security Choice https://www.cato.org/publications/commentary/free-trade-social-security-choice José Piñera <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Chile is the first South American nation to sign, with complete bipartisan support within the country, a&nbsp;Free Trade Agreement with the United States. Now, why do Chilean workers support free trade policies? Because while the nation in the 1970s was initiating its free‐​trade development strategy it was also establishing a&nbsp;pioneering system of personal retirement accounts as the foundation of its Social Security policy. </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The connection between the two is important. All around the world, trade liberalization is cast as a&nbsp;battle between capitalists and workers, between “global elites” and the “common man.” In Chile, however, market‐​invested retirement funds mean that every worker is a&nbsp;capitalist and has a&nbsp;visible stake in an internationally competitive economy. In Chile, to be anti‐​globalization is to be both anti‐​capitalist and anti‐​worker.</p> <p>A vast majority of Chileans benefits from free trade not just as consumers, but also as owners of the productive assets of the economy through their retirement accounts. Free trade is good for the economy, and what’s good for the economy is good for investors. Thus there is a&nbsp;virtuous cycle of trade liberalization that has so far thrived regardless of the political party in power.</p> <p>Chile already has a&nbsp;6 percent flat tariff rate that is low compared to the rates of most countries and, more importantly, it is applied equally to all imports. The flat tariff decision of the 1970s was critical. A&nbsp;differentiated tariff not only creates economic distortions that slow economic growth, but it continually generates special interest pressures and opportunities for corruption. With a&nbsp;flat rate, a&nbsp;politician can’t be bought on trade issues… because he has nothing to sell.</p> <p>Before this latest deal, Chile signed an FTA with the European Union and another with Korea. It also has several bilateral free trade agreements with countries like Canada and Mexico. Complete free trade is at hand. The mere possibility of zero import tariffs is stunning in an economy that in the 1960s was one of the most protectionist in the world. In those days, Chile was a&nbsp;devoted follower of the misguided import‐​substitution proposals of the Santiago‐​based United Nations Economic Commission for Latin America. </p> <p>But in the mid‐​1970s the country’s trade policy changed radically. Not only did Chile completely dismantle the system of quotas and other trade barriers, but also under the so‐​called Chicago boys’ liberal economic policies, the low flat tariff policy was adopted. The end result of all these reforms: more than a&nbsp;decade of economic growth at an “Asian tiger” level of 7&nbsp;percent a&nbsp;year that doubled the size of the Chilean economy and led, for the first time in history, to the highest income per person in the whole region.</p> <p>Trade liberalization does not take place in a&nbsp;vacuum; the proper overall economic and cultural climate is essential. Social Security choice as implemented in Chile, between the government‐​run pay‐​as‐​you‐​go system and one of personal retirement accounts has solved the retirement crisis and delivered enormous benefits to workers. It also has made trade and economic liberalization more possible by linking the interests of workers to that of the overall economy.</p> <p>U.S. Trade Ambassador Robert Zoellick, a&nbsp;real world hero of trade liberalization, courageously stated that “one of the nice things in this agreement is we have some additional access in terms of pension fund management with a&nbsp;Social Security system that I&nbsp;wish we could imitate.” </p> <p>I hope this FTA is only “the end of the beginning.” There are innumerable initiatives that could spring from greater trade integration. By a&nbsp;kind of intellectual osmosis, we Chileans can integrate into our own reality the basic economic and political concepts of a&nbsp;country “conceived in liberty” by its incomparable Founding Fathers‐​just as North Americans may benefit from learning about our culture and way of life, a&nbsp;process that, with 37 million people of Hispanic origin in the United States, is well under way.</p> <p>My dream is an “American Community” of independent nations, cherishing their own cultural identities but joined together in a&nbsp;common market for trade and investment, and with free movement of people and ideas. An American Community would comprise 830 million people and a&nbsp;gross domestic product of $13 trillion.</p> <p>I salute and join Walt Whitman who once said: “The spirit of the tariff is malevolent. It flies in the face of all American ideals. I&nbsp;hate it root and branch. It helps a&nbsp;few rich men to get rich, it helps the great mass of poor men to get poorer. I&nbsp;am for free trade because I&nbsp;am for anything that will break down the barriers between peoples. I&nbsp;want to see the countries all wide open.” </p> </div> Sun, 15 Jun 2003 00:00:00 -0400 José Piñera https://www.cato.org/publications/commentary/free-trade-social-security-choice Latin America: A Way Out https://www.cato.org/cato-journal/winter-2003/latin-america-way-out Fri, 10 Jan 2003 23:00:00 -0500 José Piñera https://www.cato.org/cato-journal/winter-2003/latin-america-way-out Toward a World of Worker‐​Capitalists https://www.cato.org/publications/commentary/toward-world-workercapitalists José Piñera <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>In mid 1999, The Economist sounded a&nbsp;clarion when it stated: “Radical reform of social security is the next great liberal reform, easily as significant a&nbsp;change as privatization of state owned enterprises — also dismissed in its time as Utopian. On pensions, Latin America has led the way. Let the world follow.”</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In fact, Chile’s pioneering pension reform of November 1980 — that ended its pay‐​as‐​you‐​go public pension system, in which current workers finance the pensions of current retirees, by approving the law that allowed workers to invest their full payroll contributions into private retirement savings accounts — is now serving as a&nbsp;model for what amounts to the beginning of a&nbsp;worldwide revolution in this area. Indeed, in the 1990s seven other Latin American countries — Peru, Argentina, Colombia, Uruguay, Mexico, Bolivia, and El Salvador — followed that path and today some 37 million Latin American workers own and accumulate real wealth in their retirement savings accounts. The late 1990s saw another landmark when Hungary, Poland and Kazakhstan introduced retirement savings accounts now enjoyed by 15 million workers in these former communist countries. </p> <p>The pay‐​as‐​you‐​go public pension system was created by German Chancellor Otto von Bismarck at the end of the 19th century. Today, such pension systems are heading toward bankruptcy all over the world. That is because such schemes carry the seeds of their own destruction: by cutting the link between individual contributions and benefits — that is between effort and reward — pay‐​as‐​you‐​go systems open the door to political manipulation. The inevitable result has been the creation of transfer states, where the possibility of winning elections by buying votes with other people’s money — even with the money of other generations — have led to an inflation of entitlements and thus, to gigantic unfunded pension liabilities. </p> <p>Global demographic megatrends, like longer life expectancy and reduced fertility rates, will accelerate the crisis of public pension systems. Over the next 35&nbsp;years, the number of people over 60&nbsp;years old in the world will triple, almost doubling their share to 16 percent of the total population by 2030. In the developed world, the elderly will make up 25 to 30 percent of the population in 30&nbsp;years. It is interesting to note that the recent breakthrough of decoding the human genome, with its promise to cure ills such as cancer, may become a&nbsp;nightmare to pay‐​as‐​you‐​go administrators around the world. As former U.S. Secretary of Commerce, Pete Peterson, has observed, “the costs of global aging will be far beyond the means of even the world’s wealthiest nations — unless retirement benefit systems are radically reformed. Failure to do so, to prepare early and boldly enough, will spark economic crises that will dwarf the recent meltdowns in Asia and Russia… . For this and other reasons, global aging will become not just the transcendent economic issue of the 21st century, but the transcendent political issue as well.” [1] </p> <p>Chile Leads the Way</p> <p>Chile’s pension reform replaces the state‐​run pay‐​as‐​you‐​go system with one of retirement savings accounts owned individually and managed by the private sector. [2] Workers already in the public system were given the choice to stay in that system or deposit their full 10 percent old‐​age monthly payroll tax in their own retirement accounts. Workers are free to select the manager of their choice and to contribute an additional 10 percent of their salary, tax‐​free, into their retirement savings accounts. Unlike pay‐​as‐​you‐​go systems, in which there is a&nbsp;compulsory legal retirement age, the Chilean system gives the worker the freedom to choose when he retires as long as he can buy with his own fund an annuity equal to at least 50 percent of his last wages (this threshold is to ensure that he will not become dependent on state money in the future, thus eliminating moral hazard). </p> <p>Upon retirement, a&nbsp;worker can choose to make programmed withdrawals from his retirement account (based on his life expectancy and that of his dependents) or use the capital in his account to buy an annuity from a&nbsp;life insurance company, or opt for a&nbsp;combination of the two alternatives. In each case, the worker can withdraw from his account a&nbsp;lump sum above that necessary to obtain a&nbsp;pension benefit equal to 70 percent of his last wages. A&nbsp;worker choosing programmed withdrawals can leave the remaining funds in his retirement account as an inheritance to his family or beneficiaries.</p> <p>The government’s role in the new system is to provide oversight of the pension fund companies through a&nbsp;technical superintendency, to place (by law) prudent portfolio diversification rules on the pension funds, and to add general tax revenue funds to provide a&nbsp;legally defined minimum pension when needed by a&nbsp;poor retiree (with at least 20&nbsp;years of contributions and older than 65&nbsp;years).</p> <p>The government set three rules for the transition to the new system. First, a&nbsp;guarantee to those already receiving pensions in the old system that their benefits would not be cut. Second, those who chose to move to the new system were given recognition bonds (marketable treasury bills) corresponding to the present values of the accrued rights in the public system (to be redeemed at retirement). Third, new entrants into the labor force had to join the new private system, closing the door of the state‐​run system.</p> <p>To finance the cash‐​flow budget requirement of the transition, the Chilean government derived resources from a&nbsp;combination of the following: a&nbsp;budget surplus that was previously and deliberately generated for this purpose; the issuance of debt to spread the costs out over time (Chile financed about 40 percent of the transition in this way); reduction in government spending; privatization of state assets; a&nbsp;temporary transition payroll tax (when added to the private pension contributions, the amount was still lower than the old payroll taxes); and increased tax revenues that resulted from greater economic growth.</p> <p>Today, 6&nbsp;million workers, more than 94 percent of the labor force, participate in the private pension system, while 6&nbsp;percent remain in the pay‐​as‐​you‐​go state system (when they retire, the public pension system will cease to exist). With pension contributions as a&nbsp;percentage of salary that are lower than under the pay‐​as‐​you‐​go system, pension benefits are much greater in the private system. The average retiree in the retirement savings account system receives about 78 percent of his mean annual income over the last 10&nbsp;years of his working life. Real rates of return on retirement accounts have averaged 11.1 percent since their inception in 1981. (A real rate of 4&nbsp;percent was used when explaining the reform to workers in 1981.) Assets under management have grown to $37 billion, or about 45 percent of GDP. The reform has not only created a&nbsp;huge pool of capital that can be used for domestic investment, but it has also increased the efficiency of capital by stimulating the creation of capital markets and the development of new financial instruments and a&nbsp;risk‐​rating industry.</p> <p>It is important to note that pension privatization in Chile was introduced as part of a&nbsp;coherent set of free‐​market reforms in recognition that implementing such changes simultaneously was the best way to increase economic growth and get the most out of each reform. As a&nbsp;result, the growth rate of the Chilean economy went from an average of 3.7 percent per year in the period 1961–74 to 7.1 percent per year in the period 1990–97. According to economist Klaus Schmidt‐​Hebbel, of that extra growth of 3.4 percentage points per year, the pension reform would have contributed 0.9 percentage points per year, that is, more than a&nbsp;quarter of the total, and of the total increase of 12.2 percentage points in the rate of savings during those two periods, the pension reform contributed 3.8 percentage points, that is, 31 percent of the total increase. [3] </p> <p>The impact of pension reform in Chile has gone beyond impressive economic indicators. Pension privatization led to a&nbsp;radical redistribution of power from the state to civil society and, by converting workers into individual owners of the country’s capital has created a&nbsp;political and cultural atmosphere more consistent with free markets and a&nbsp;free society. </p> <p>A Domino Effect in Latin America</p> <p>A&nbsp;decade later, Latin American countries began to follow the same path. Already seven countries have implemented pension systems based on private retirement savings accounts. In all cases, the structure of the private pension system closely follows the Chilean scheme, and in all of them the private funds are overcoming the difficult initial years and beginning to make a&nbsp;relevant contribution to the establishment of a&nbsp;free‐​market economy. Of course, the characteristics of the transition process have differed across countries, taking into account the diverse economic, social and political starting points of the reforms. [4] </p> <p>Mexico, Bolivia and El Salvador have adopted two crucial features of the Chilean reform: a) workers eligible for the private retirement savings account system do not contribute to the pay‐​as‐​you‐​go public pension system; and b) new entrants to the labor force join the private pension system. Together, the two conditions ensure that after the transition is finished, the public pension system is extinguished and there is only the private system for the vast majority of workers in the country (full privatization). Peru has adopted a), but not yet b). In Colombia, Argentina and Uruguay, workers are in both state pension and private pension systems (partial privatization).</p> <p>Mexico — despite a&nbsp;long tradition of state paternalism — undertook in 1997 a&nbsp;major reform by completely eliminating the public pension system for private‐​sector workers and replacing it with a&nbsp;system of private retirement savings accounts managed by competing companies. All private sector workers who were previously participating in the pay‐​as‐​you‐​go program had to begin contributing 11.5 percent of their wages to their retirement accounts, to which the government also contributes. Regrettably, public sector workers, including such large sectors as teachers, public health workers and the civil service, were forced to stay in the government pension system. The private system now has 16.1 million participants, the largest of any country in the region, and manages approximately $13 billion. </p> <p>Bolivia — one of the poorest countries in the hemisphere — closed its public pension system also in 1997 and replaced it with a&nbsp;privately administered system of retirement savings accounts. Bolivians now have 10 percent of their salaries placed in retirement accounts for the provision of old age benefits. The pension fund companies now manage $575 million, representing about 10 percent of GDP, and have 540,000 participants.</p> <p>El Salvador — until recently a&nbsp;country torn by civil war — approved its pension reform in 1998, even with the votes of some former guerilla comandantes turned members of Congress. The features of the system are very similar to that of Chile, with workers contributing 10 percent of their salaries into private retirement accounts. Assets under management are $213 million and 736,000 people are enrolled in the private system.</p> <p>Peru — the first country to follow the Chilean pension reform — established a&nbsp;private pension system in 1993. Peru gives workers a&nbsp;choice to move to a&nbsp;private system managed by companies of their selection and provides recognition bonds for those who do. Peruvian workers place 10 percent of their wages into the retirement accounts and pay nothing to the state. But the pay‐​as‐​you‐​go pension program has stayed in place for new entrants to the labor force, leaving the door open on an unfunded system that politicians may once again abuse. More than 2.3 million Peruvians have already moved into the new system, which has accumulated $2.5 billion.</p> <p>Colombia — even under threat from Marxist guerrillas allied to drug cartels — introduced pension reform in 1994. It too allowed workers to opt for investing 10 percent of their wages into retirement savings accounts. In a&nbsp;unique and most troublesome feature, however, workers can switch back and forth between the public and private systems, giving rise to a&nbsp;permanent struggle between a&nbsp;state‐​run agency and the private system, and perpetuating the pay‐​as‐​you‐​go system. Even so, the private system has attracted 3.6 million participants and has accumulated $3 billion in pension funds. </p> <p>Argentina — under a&nbsp;Peronist government that engineered a&nbsp;break with the populism of the disastrous Peron era — set up a&nbsp;private retirement system in 1994. Argentine workers are given the choice to place 11 percent of the salaries into their retirement accounts. However, the pay‐​as‐​you‐​go system was kept in place and provides all workers, including those in the public and private systems, a&nbsp;so‐​called “basic pension.” Thus, the law establishes that all workers provide 16 percent of their salaries to the public pension program. Those workers opting to stay in the public program face a&nbsp;total of 27 percent of payroll taxes for pensions, and receive benefits on top of the basic pension. By allowing the public pension scheme to continue, the Argentine government continues to add to its unfunded pension liability. Assets under management in the private pension system have grown to $18 billion and the number of participants to 8.1 million people. </p> <p>Uruguay — the Latin American country most influenced by the European social model — introduced a&nbsp;very limited reform in 1996, similar to the Argentine reform in that it keeps the pay‐​as‐​you‐​go system in place for all workers and allows for a&nbsp;portion of wages to be diverted into retirement savings accounts. As of this year, the pension fund companies are managing about $651 million in assets for 544,000 participants in a&nbsp;country of 3&nbsp;million people.</p> <p>It can be said that with eight countries already having private retirement systems, Latin America has become the world leader in structural pension reform. If Mexico and El Salvador are successful, pension reform will spread rapidly to the rest of Central America. In fact, Nicaragua approved a&nbsp;reform introducing retirement savings accounts a&nbsp;few months ago that will go into effect in May 2001.</p> <p>The biggest laggard in the continent is Brazil. Even though some companies offer their workers private pensions, the largest country by size and population in Latin America suffers under the weight of an unfair and unaffordable pay‐​as‐​you‐​go public pension system whose deficit amounted to 4.6 percent of GDP in 1998. Special privileges have made the system more unsustainable. For example, many workers, especially public sector employees, retire at middle age and receive generous benefits. Half of the pay‐​as‐​you‐​go public pension program payments went to 2.7 million retirees from the government sector, while the other half went to 17.7 million retirees from the private sector. So far, the government has kept the social and economic problem from exploding by tinkering with the system, an approach that is reaching its limits.</p> <p>From Communism to Property Rights</p> <p>The late 1990s saw another landmark when Hungary, Poland and Kazakhstan, as part of the transition from a&nbsp;collectivist system to a&nbsp;market one, reformed their pay‐​as‐​you‐​go pension schemes and allowed workers to use payroll taxes to build their own retirement savings accounts. [5] </p> <p>In 1998 Hungary became the first of the former communist countries in Europe to allow a&nbsp;portion of workers’ salaries to be invested in retirement savings accounts. Its pay‐​as‐​you‐​go public system, for example, was already experiencing deficits in the 1990s while imposing 30 percent payroll taxes. With an already large elderly population, the country would have had to raise payroll taxes to an unfeasible 55 percent while each pensioner would be supported by one worker by 2035. Current workers were given the choice to stay in the public system or move to the new one. New entrants into the labor force are required to enter into the new system. However, all workers still contribute to the public pension system. For those in the private system, 24 percent of their wages go to the pay‐​as‐​you‐​go system, while only 6&nbsp;percent go to their own retirement savings accounts. The main shortcomings of Hungary’s system are similar to those of Argentina and Uruguay: high payroll taxes are used to maintain the public system, thereby discouraging job creation, and the vulnerability of political manipulation inherent to a&nbsp;state‐​run pay‐​as‐​you‐​go system is maintained. Hungary’s private pension scheme has so far generated $1 billion in assets under management and has 2&nbsp;million participants.</p> <p>Kazakhstan — an oil‐​rich former Soviet republic — opted in 1998 for a&nbsp;reform of its pension system by allowing workers to place 10 percent of their wages into retirement accounts managed by competing pension fund companies, while continuing to contribute 15 percent of wages to the state run pay‐​as‐​you‐​go system. However, there is a&nbsp;dangerous requirement that a&nbsp;minimum of 40 percent of the funds has to be invested in government securities, and in fact 85 percent of the funds are now in government bonds, reflecting the infancy of its domestic capital market and the turmoil in the area after the Russian default of 1998. As in Argentina and Mexico, there is a&nbsp;state‐​run pension fund company that competes unfairly with the private sector. But while in 1999, that company managed around 70 percent of the assets in the system, that share has gone down to 42 percent and its privatization is contemplated when its share of the market is further reduced to 25 percent. There are 3.2 million workers enrolled in the private pension system, and pension assets have grown to $700 million (4.2% of GDP).</p> <p>Poland — the most successful of the former communist countries — introduced a&nbsp;pension reform in 1999. Workers between the ages of 30 and 50 at the time of the reform were given the choice to stay fully in the state run old age pension system — in which they have to pay a&nbsp;19.52 percent payroll tax — or divert 7.3 percent of their salary into their own retirement accounts and pay a&nbsp;12.2 percent payroll tax to build ‘virtual’ individual accounts in the state run system. Younger workers must join the private pension system, while older workers must stay in the pay‐​as‐​you‐​go one. So far, 10 million workers have enrolled in the retirement savings account system (60% of those that could choose a&nbsp;retirement account, that is, people between the ages of 30 and 50) and the funds have accumulated $1.5 billion.</p> <p>As in Latin America, the example of the pioneers is already generating followers in the region. Several countries, including Russia, [6] are planning to introduce Chilean‐​style pension reform in the near future, Croatia, Macedonia and Romania being among the most advanced. </p> <p>The Coming Crisis in Western Europe</p> <p>In stark contrast to some of its eastern neighbors and Latin America, the political elites in western continental Europe have so far been unwilling to engage in structural pension reform. For Europeans, that political paralysis will be disastrous if it continues, since the region’s looming pension crisis is perhaps the most severe in the developed world.</p> <p>According to the OECD [7] , European countries’ unfunded liabilities arising from pay‐​as‐​you‐​go public pension programs are enormous — more than 200 percent of GDP in France and Italy and more than 150 percent of GDP in Germany, for example. By 2025, nearly one third of Europe’s population will qualify for public pensions. In 30&nbsp;years, in Germany and Italy, each retiree will be supported by one worker. Combined with those countries’ generous benefits and weak or non‐​existent private savings for old age, drastic tax hikes or benefit cuts would be necessary just to keep the public pension schemes going. Italians who already face 33 percent payroll taxes for pensions could see those taxes increase to 48 percent, for example. For a&nbsp;region that faces chronically high unemployment rates, such a&nbsp;move would only make job creation more difficult.</p> <p>Yet even though continental European countries are spending up to 15 percent of their GDPs on public pension outlays — a&nbsp;figure that may rise to more than 18 percent for some countries within 40&nbsp;years — they have so far only implemented expedient measures. Germany, for instance, has recently proposed raising payroll taxes and using state funds to encourage workers to put additional money into private accounts. Needless to say, such a&nbsp;move would hardly solve the coming crisis in a&nbsp;country whose pension system costs 11.5 percent of GDP, more than twice the U.S. figure. </p> <p>Spain’s pay‐​as‐​you‐​go public pension system is the most expensive program in the federal budget and gives its workers a&nbsp;minimal rate of return. Yet despite the fact that an economically feasible transition to a&nbsp;private system has already been identified and that the government is committed to economic liberalization in other areas, political inertia has prevailed. [8] </p> <p>In Italy — the country with the lowest fertility rate in the world annual public pension outlays stand at around 14.5 percent of GDP. There is, moreover, blatant corruption in the system. In 1997, a&nbsp;Treasury Ministry study discovered that the government had been paying disability pensions to 30,000 dead people. Spot checks of 15,000 recipients of disability pensions found that 5,000 of them had faked their handicaps (they included a&nbsp;young woman who was collecting a&nbsp;pension for blindness while working as a&nbsp;chauffer). It is no wonder that professor Steve Hanke has asserted that “Italy’s pension system is the most generous and corrupt in Europe.” [9] </p> <p>France’s pay‐​as‐​you‐​go system is also in deep trouble. According to Prime Minister Lionel Jospin, the generous public pension system will go into deficit after 2010. Attempts by previous governments to tinker with the system have been crushed by political opposition and the current government assures that it will neither raise the retirement age nor the payroll taxes to address the shortfall. The almost total lack of a&nbsp;parallel private pension system will makes matters worse for future retirees. </p> <p>As UK economist Tim Congdon observed in 1997, “Europe’s growth prospect is worse now than at any time since the start of the industrial revolution. If Europe’s governments cannot solve the problem of unfunded pensions, they will not be able to control their larger fiscal difficulties or to prevent rises in taxation which will wreck their economies.” [10] </p> <p>A&nbsp;Breakthrough in the United States?</p> <p>Several developed countries have substantial private pension systems, especially the United States, Japan, the United Kingdom, the Netherlands, Switzerland, and Canada. According to Intersec Research, Americans now own three‐​fifths of the $13 trillion world retirement assets — that is, $7.8 trillion — versus Japan’s $1.5 trillion and the UK’s $1.1 trillion. But they coexist with important and flawed public pension systems.</p> <p>Only two rich nations — the United Kingdom and Australia — have so far undertaken a&nbsp;structural reform of their public pension system. In 1986, Great Britain gave its workers the choice to opt out of the second tier of its public pension system and with 4.6 percent of their wage purchase either defined‐​contribution or defined benefit plans in the private sector. Two thirds of the workers have opted out and contributed to the private funds. Currently, all workers contribute a&nbsp;percentage of their wages to the first, pay‐​as‐​you‐​go tier, and receive the Basic State Pension from the government upon retirement; the UK public pension system still has an unfunded liability of around 40 percent of its GNP. Australia’s previous system was a&nbsp;state‐​run operation funded by income taxes. In 1992, employers were required to establish superannuation accounts for all workers (9 percent of wages will be deposited by 2002) and they will form the primary source of retirement income for most workers. In February 1998, the UK Conservative government proposed the “Basic Pension Plus” plan, which would have allowed workers to open a&nbsp;retirement savings account with their first‐​tier contributions, but close elections prevented a&nbsp;real debate on that proposal from occurring. As the Financial Times noted at the time, the “scheme, which bears some resemblance to Chile’s restructuring of pensions in 1981would be the biggest change to Britain’s welfare state since its foundation in 1945.”</p> <p>In August 1995, the Cato Institute created its Project for Social Security Privatization to make the case for allowing American workers’ Social Security taxes to be invested private retirement savings accounts. In 1996, during the Republican primaries, candidate Steve Forbes made this proposal an important element in his presidential program. Since then important members of Congress from both parties have expressed support for private retirement accounts. In mid‐​1998, in a&nbsp;testimony before the Senate Budget Committee, Federal Reserve Chairman Alan Greenspan summarized the state of the debate when he said that “the general broad principles, which are somewhat similar to the Chilean‐​type system, strike me as the way in which convergence of opinion is starting to move and a&nbsp;valuable first step in moving toward a&nbsp;solution.” </p> <p>In May 2000, Republican presidential candidate George W. Bush took a&nbsp;courageous stand when he stated that Social Security reform should include personal retirement accounts for young people… . The idea works very simply. A&nbsp;young worker can take some portion of his or her payroll tax and put it in a&nbsp;fund that invests in stocks and bonds. We will establish basic standards of safety and soundness, so that investments are only in steady, reliable funds… . And money in this account could only be used for retirement, or passed along as an inheritance. Right now, the real return people get from what they put into Social Security is a&nbsp;dismal two percent a&nbsp;year. Over the long term, sound investments yield about a&nbsp;six percent return. Investing that four percent difference, over a&nbsp;lifetime, can show dramatic results. During the campaign, several polls indicated a&nbsp;majority support for this idea, and it was a&nbsp;main issue in the election. </p> <p>Social Security, the U.S. state pension system (at $400 billion a&nbsp;year, the largest government program in the world), has prevented the common worker from owning his retirement savings and has politicized decisions that should rightfully be made by individuals instead of politicians. Even though 40 percent of Americans have some sort of private retirement system (IRAs, 401K, etc.), another 60 percent do not. Yet they are still mandated to put one eighth (12.4 percent) of their covered earnings in a&nbsp;system that does not give them either ownership, market returns, or security.</p> <p>There are six key arguments for privatizing Social Security in the United States:</p> <p>1.The Moral Argument. A&nbsp;pay‐​as‐​you‐​go public pension system is a&nbsp;collectivist scheme that deprives individuals of freedom in organizing their lives and planning for their futures. A&nbsp;mandatory private retirement account system keeps compulsion at a&nbsp;minimum (the mandatory savings), thus maximizing the freedom to choose within a&nbsp;national retirement scheme.</p> <p>2.The Rate of Return Argument. Pay‐​as‐​you‐​go systems are, by their very nature, a&nbsp;good deal for their earliest recipients, but with time, what is essentially a&nbsp;financial pyramid scheme begins to expropriate younger workers. Today the implicit rate of return for current workers is less than 2&nbsp;percent, and those born today will probably see negative returns. Mechanisms to postpone the public pension system’s insolvency, like increasing payroll taxes or the retirement age, reduce the already minimal rates of return. In contrast, in the period from 1802 to 1997&nbsp;in the United States, the annual real rate of return for stocks has been 7&nbsp;percent and 3.5 percent for long‐​term government bonds. From 1802 to 1995, the average real rate of return for corporate bonds was 4.97 percent. [11] So, a&nbsp;private retirement system can provide a&nbsp;higher rate of return, even if all the funds are invested in zero risk government bonds.</p> <p>3. The Fairness Argument. Since the poor tend to start work earlier in their lives and have shorter life expectancy than the better off, the pay‐​as‐​you‐​go old age retirement system is actually regressive for certain categories of workers. One RAND Corporation study found, for example, that because of the lower life expectancy and marriage rates of blacks, Social Security actually ends up transferring about $10,000 from blacks to whites over a&nbsp;lifetime. [12] Under a&nbsp;system of retirement savings accounts, poor workers would be accumulating savings in their accounts and therefore would be allowed to benefit from the rewards that markets are giving to wealth ownership, preventing the recent increase in the so‐​called “wealth gap” — an unsurprising result given that most workers are forced to place all their savings in a&nbsp;program giving them less than a&nbsp;two percent rate of return. </p> <p>4. The Property Rights Argument. A&nbsp;system of private accounts gives retirees clearly defined property rights over their benefits. The elderly can make programmed withdrawals from their accounts, leaving money to their heirs if they die before they fulfill their life expectancy, or use the savings to buy indexed annuities from an insurance company. By contrast, the Social Security system provides no such rights over the money workers are forced to pay for their retirement, as the Supreme Court ruled in 1960&nbsp;in Nestor vs. Flemming: To engraft upon the Social Security system a&nbsp;concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever‐​changing conditions which it demands.</p> <p>5. The Macroeconomic Argument. The public pension system negatively impacts labor markets and savings because funds are immediately spent, rather than invested, and the payroll contributions amount to a&nbsp;tax on hiring labor. Harvard professor Martin Feldstein estimates that privatization of Social Security could add $10 to $20 trillion in net present value to the U.S. economy. [13] Contrary to conventional wisdom, the transition to a&nbsp;privatized system does not entail new costs to the government or to the economy. It would indeed make an unfunded liability explicit and force policymakers to find a&nbsp;way to pay for the promises made, while generating the mentioned gain to the economy. The projected budget surpluses for the next 10&nbsp;years have created an historic opportunity to finance the cash‐​flow challenge of the transition.</p> <p>6. The Social Harmony Argument. The privatization of Social Security would end the division between capitalists and workers by turning the United States into a&nbsp;country of worker capitalists, with consequent changes in the country’s political dynamics. It may well represent a&nbsp;paradigm shift in people’s relationship to the free market and a&nbsp;massive blow against the political manipulations of the transfer state. As Cato Institute’s President Edward H. Crane has observed, Social Security privatization means changing the political dynamics of America in a&nbsp;very fundamental sense. For when members of labor unions, the average blue collar worker, blacks and other traditional constituencies of the Democratic party start investing in stocks and bonds on their own, rather than counting on government as a&nbsp;security blanket, their attitude toward the free enterprise system, toward corporate profits, and indeed, toward big government itself is going to change. This dynamic has in fact already occurred in Chile. [14] </p> <p>Finally, it is interesting to note that there are several reasons why an retirement savings account system in the United States will work even better than in Chile: a) there is already an investor class comprising close to half of the population; b) the capital markets are by far the best in the world, providing multiple efficient mechanisms to optimize the management of risk; c) the information technology revolution has substantially lowered the cost of managing millions of accounts, allowing possibly substantial economies of scale.</p> <p>Conclusion</p> <p>Pension privatization is a&nbsp;megatrend in Latin America and the former communist countries of Europe. In the United States, a&nbsp;breakthrough may be at hand. The privatization of the U.S. Social Security system would not only transform every American worker into an owner of capital — creating a&nbsp;massive new investor class — but would put further pressure on the rest of the world, and especially continental Europe and Japan, to reform their own bankrupt pay‐​as‐​you‐​go public systems. The benefits to workers and economies around the world would be enormous.</p> <p>Chilean‐​style pension reform replaces a&nbsp;flawed and collectivist pay‐​as‐​you‐​go state retirement system and gives individuals the right to save and invest their own money so that they can live with freedom and retire with dignity. In the process, the reform not only resolves looming fiscal and social crises, but it creates a&nbsp;world far different than the one Bismarck engendered; it creates a&nbsp;world of worker‐​capitalists. </p> <hr><p>[1] Peter G. Peterson, Gray Dawn: The Global Aging Crisis, Foreign Affairs, January/​February 1999, p. 43.</p> <p>[2] For a&nbsp;personal account of the battle to introduce pension reform in Chile, see José Piñera, El Cascabel Al Gato (Santiago: Editorial Zig Zag, 1991). There are other language versions: Sin Miedo Al Futuro (Madrid: Editorial Noesis, 1994), with an introduction by Pedro Schwartz; Bez Obawy O&nbsp;Przyszlose (Warsaw: Adam Smith Institute, 1996), with an introduction by Waclaw Wilczynski; Auf dem Weg zum Mundig Burger (Vienna: IMADEC, 1998), with an introduction by Kurt Leube; Clopotelul Pisicii (Bucharest: Editura Expert, 2000), with an introduction by Cazimi Ionescu; and a&nbsp;Korean version published in 1999 by the Korea Center for Free Enterprise in Seoul.</p> <p>[3] Klaus Schmidt‐​Hebbel, Does Pension Reform Really Spur Productivity, Saving and Growth? Documentos de Trabajo del Banco Central (Chile), no. 33, April 1998, pp. 25, 29.</p> <p>[4] For a&nbsp;review of these countries’ pension reforms see Luis Larrain, Privatizing Social Security in Latin America, Policy Report no. 221, January 1999, NCPA. For individual countries, see Ian Vásquez, Two Cheers for Mexico’s Pension Reform, Wall Street Journal, June 27, 1997; L. Jacobo Rodríguez, In Praise and Criticism of Mexico’s Pension Reform, Cato Policy Analysis no. 340, April 14, 1999; Herman von Gersdorff, The Bolivian Pension Reform: Innovative Solutions to Common Problems, World Bank, Financial Sector Development Department, July 1997; Juan Manuel Santos, Testimonio: La Reforma de las Pensiones en Colombia, at <a href="http://www.pensionreform.org">www​.pen​sion​re​form​.org</a>; Carlos Boloña, Dueño de tu Jubilación? (Lima: Instituto de Economía de Libre Mercado, 1995).</p> <p>[5] See Michal Rutkowski, Restoring Hope, Rewarding Work: Pension Reforms in Post‐​Communist Economies, in Lucjan Orlowski, ed., Transition and Growth in Post‐​Communist Countries: The Ten‐​Year Experience (Northampton, Mass. Edward Elgar Publishing, forthcoming in 2000); and Dr. Krzysztof Ostaszewski, Testimony: Poland’s Pension Reform, at <a href="http://www.pensionreform.org">www​.pen​sion​re​form​.org</a>. </p> <p>[6] See José Piñera, A&nbsp;Chilean Model for Russia, Foreign Affairs, September‐​October 2000.</p> <p>[7] Van der Noord, Paul, and Richard Herd, Pension Liabilities in the Seven Major Economies, OECD Working Paper, 1993, cited in World Bank, Averting the Old Age Crisis (New York: Oxford University Press, 1994), p. 139.</p> <p>[8] See José Piñera, Una Propuesta de Reforma del Sistema de Pensiones en España, (Madrid: Círculo de Empresarios, 1996).</p> <p>[9] Steve Hanke, Is Chile on the Italian Menu? A&nbsp;Secret Recipe for Economic Survival, The International Economy, July‐​August, 1992.</p> <p>[10] Tim Congdon, Europe’s Pensions Time Bomb, The Times, March 1, 1997.</p> <p>[11] Jeremy Siegel, Stocks for the Long Run (New York: McGraw Hill, 1998). Ibbottson Associates, Stocks, Bonds, Bills and Inflation; 1997 Yearbook (Chicago: Ibbottson Associates), pp. 266–75. </p> <p>[12] Constantijn W.A. Panis and Lee Lillard, Socioeconomic Differentials in the Return to Social Security, RAND Corporation Working Paper Series no. 96–05, February 1996.</p> <p>[13] Martin Feldstein, Privatizing Social Security: The $10 Trillion Opportunity, Cato Social Security Privatization paper no. 7, January 31, 1997. </p> <p>[14] Edward H. Crane, The Case for Privatizing America’s Social Security System, S.O.S. Retraite‐​Sante Conference, Paris, December 1997, <a href="http://www.pensionreform.org">www​.pen​sion​re​form​.org</a>. For a&nbsp;complete case for privatizing U.S. Social Security, see Peter Ferrara and Mike Tanner, A&nbsp;New Deal for Social Security (Washington: Cato Institute, 1998).</p> <p>This article originally appeared on <em>Boston Conversazioni</em> in April 2001.</p> </div> Wed, 11 Apr 2001 00:00:00 -0400 José Piñera https://www.cato.org/publications/commentary/toward-world-workercapitalists