Politico reports that:
Newt Gingrich Sunday said that he'd like to see the United States adopt a 'Chilean model' for Social Security — a pension system that is reliant on a government mandated purchase of a private investment account. ...
The idea of personal savings accounts was first raised in a September GOP debate by then-presidential candidate Herman Cain. Conservatives are in the midst of a battle against President Barack Obama's health care law, citing the individual mandate as a violation of personal liberty. But the Chilean pension model relies on a similar regulatory scheme, forcing workers to contribute at least 10 percent of their pre-tax wages into a private investment account.
If the idea got traction, I'd be quite leery of the mandate aspect of the Chilean system. Of course, I'm not all that crazy about the current tax-based system. I'm quite confident that the money I pay into Social Security would earn a significantly greater rate of return if I could put it into an IRA-type vehicle instead of a government program.
In any case, it's not clear that the Chilean system is superior to our Social Security system. A NBER report found that:
The Chilean reform gets high marks for defending the system from political risk and for its effects on capital accumulation and on the functioning of the capital market. The Chilean reform gets low marks for the provision of insurance and for administrative cost. Perhaps the most surprising aspect of the Chilean reform is the high cost of running a privatized social security system, higher than the 'inefficient' system that it replaced. Valdes-Prieto has estimated that the average administrative charge per effective affiliate while active is U.S. $89.10 per year (for 1991) which is 2.94% of average taxable earnings. This is close to 30% of the 10% mandatory savings rate. The cost per person is not far from costs observed in other privately-managed pension systems, such as defined-benefit private pensions in the U.S. However, it compares unfavorably with administrative costs in well-run unified government managed systems.
High admninsitative costs translate into a substantial reduction in effective yield. But I wonder if we could significantly reduce those costs by giving people a limited array of choices emphasizing low-fee index funds rather than actively managed funds.
