The Blog of the Frances Perkins Center

Privatization — Been there, done that — in Chile

In Economics, Legislation Today on November 4, 2010 at 10:10 am

It’s no secret that Wall Street would like to get its hands on all the retirement funds that currently go to Social Security. After all, there is currently a $2.5 trillion surplus. Imagine what Goldman Sachs could do with that…

But what really happens when a social insurance system is privatized? Chile provides a great lesson, enumerated today by a blogger on DirigoBlue.com. Here are some points:

Because the service providers are competing for the business, administrative costs (read: advertising and sales commissions) have been far higher than in the US Social Security system, where administrative costs have been at .07% of distributions, or lower, since 1990. To put this another way, during the 1990s the US Social Security Administration was paying $18.70 per year to administer a claim; at the same time Chile’s various providers were paying an average of $89.10 to do the same thing.

Many Chileans, despite living in a system that has, for almost 30 years, required them to manage their own money, actually know very little about that money.

Less than half know that the contribution rate is 10%, only 1/3 know how much (within 20%) is in their accounts, and, according to work done at the University of Chile, “few” actually know what they pay in fees and commissions.

Those who end up in the welfare program are guaranteed 75% of the poverty level; that suggests that if you’re elderly and on welfare, you’re living in poverty. Because of limited funding, there are qualified elderly poor in Chile who do not receive any benefit.

Today, in the US, about 12% of the elderly live in poverty. Without the current Social Security system in place, it’s estimated that 49.9% of the elderly would have been living in poverty in 2002.

Doesn’t sound like a advertisement for changing our system, does it. And the kicker is that it costs real money to make the transition. In Chile, the transition costs have been 6.1% of GDP in the 1980s, 4.8% in the 1990s, and 4.3% until 2037. As the blogger explains:

If we were to duplicate the Chilean experience in the US economy, 6% of the 2008 GDP (about $15 trillion) means about $900 billion annually in transition costs for the first ten years, and something north of $600 billion annually for the last 37 years of the exercise.

Ok. Now, can anyone explain why people are talking about privatizing Social Security as a way of reducing the federal deficit???

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