Long hailed by free market economists as the model for how to create a pension system, news out of Chile that it plans on making payouts to low income seniors, has government interventionists jumping for joy.
The AP writes:The new $2 billion-a-year program will expand public pensions to groups left out by private pensions - the poor and self-employed, housewives, street vendors and farmers who saved little for retirement - granting about a quarter of the nation's work force public pensions by 2012.
The fact is that this move is the way that governments should generally function. Stay out of things unless there is a real need to do something. No one is of the opinion that low income seniors should be thrown out into the street. Of course they should be helped. I would rather see the community take care of them and set up a network of charity, but if that doesn't work, then the government should step in.
What government interventionists miss is just how successful the 1981 pension reform has been.
The AP report cites a study by Estelle James, a former World Bank economist.
The private funds earned an average 10 percent return since their start, ensuring that typical workers who contributed since 1981 now collect about 85 percent of their final wage upon retirement. That's more than double the average 40 percent paid to full-career, middle-income Social Security recipients in the U.S.
For young workers this has been huge. They have basically been assured that they will have a very secure retirement. This is a far cry from the U.S. Social Security system where twenty and thirty-somethings keep paying in, but have no real idea if they will even see a penny back when they hit retirement.
It's time for the U.S. to follow Chile's lead and create privatized pension savings accounts. Where needed, the government can still play a limited role, taking care of those with no savings or low income seniors.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no position in any stock mentioned as of 3/10/08.
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