A former Soviet republic is moving to privatize its national pension system, adopting a system of personal retirement accounts similar to what the Bush administration has proposed for the United States.
Jose Piñera, architect of groundbreaking social security reform in Chile, is working to promote personal retirement accounts (PRAs) worldwide. Citizens for a Sound Economy (CSE) recently released a letter Piñera received from the minister of labor in Slovakia announcing the country’s decision to privatize beginning in 2005.
“On Tuesday, the 16th December 2003, the Slovak Parliament approved the law on the old-age pension savings scheme,” wrote Ludoviit Kaniik, Minister of Labor and Social Affairs. “Thus, as of 1 January 2005, Slovak workers will start depositing 9% into their personal savings accounts.”
“American workers deserve the same security, control, and wealth-building opportunity as Slovakians,” asserted a CSE statement that accompanied the release of Kaniik’s letter. “Tell Congress to get moving!”
Private Accounts Worldwide
According to Amy K. Frantz, a research analyst with the Public Interest Institute at Iowa Wesleyan College, “Since Chile’s adoption of a private retirement system, many other countries have followed, implementing plans to partially or fully privatize their own social security retirement systems.”
Frantz reports the following countries also have successfully privatized:
- Great Britain–allowed firms with their own pension programs to start opting out of the government-run social security system as early as 1978. By 1988, the Thatcher administration had enacted a personal account option. About 80 percent of British workers have opted out of the government-run system and into a private alternative system.
- Mexico–in 1997, adopted a personal account option for all beneficiaries under the country’s retirement system.
- Hungary–on January 1, 1998, Hungarian workers began paying into personal accounts for their retirement benefits, replacing the bulk of the government-run retirement system.
- Kazakhstan–this former Soviet Republic adopted a system similar to Hungary’s in 1998 as well.
Even China is making strides in pension privatization. “This Communist country has already adopted a personal account system for urban workers and is developing plans to extend the accounts to the entire country,” notes Frantz.
Australia also has had a private retirement system for many years. “Australia has a strong and effective retirement system, providing detailed and comprehensive retirement accounts for individuals who wish to retire with dignity and economic security,” said David Harris, a native of Australia and research associate with Watson Wyatt Worldwide when he addressed The Heritage Foundation in May 1998.
U.S. Behind the Curve
The need for similar reform is strong in the United States. The Social Security Reform Center Web site, affiliated with the Citizens for a Sound Economy Foundation, points out, “Public concern is well grounded; studies and official reports confirm that Social Security cannot be sustained in its current form and, even if its revenue and expenditures were in long-term balance, it is providing poorer and poorer retirement income security for the money contributed by today’s workers.”
Piñera, who is co-chairman of the Cato Institute’s Project on Social Security Choice and former secretary of labor and social security for Chile, has been advocating the privatization of social security systems for more than a decade, worldwide and in the U.S.
“It is a fact that the United States Social Security system, like the Titanic, is heading toward disaster,” said Piñera. “If the ship doesn’t change course, sooner or later you’re going to hit an iceberg: an aging population that cannot be supported by the workforce. The truth is that there are only two options: to prolong the agony of the current system, or to take the bull by the horns and move towards personal retirement accounts.
“When I became Labor and Social Security Secretary of Chile in 1978,” said Piñera, “my country faced the same problem the U.S. now confronts. We decided to save our social security system by giving every worker the choice to move from a pay-as-you-go model to one of personal retirement accounts.
“Workers now choose among competing private companies to invest the equivalent of what used to be their payroll taxes in a conservative portfolio of high-rated bonds and equities,” Piñera explained. “This allows workers to harness the powerful force of compound interest–reflecting the wealth-creating effect of the market–to ensure their security in retirement.
“The main winners [of social security reform] are the poor, not the rich,” said Piñera. “High-wage earners can always save for their own retirement. But medium and lower-income workers don’t have spare cash to save in separate individual retirement accounts; they suffer the most with negligible returns on their Social Security payments. They will gain the most from a system that allows them to invest their payroll taxes in real assets.”
John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].