Thursday, April 28, 2005

US vs. Chilean Social Security

The Social Security debate in the US is so theoretical with people throwing out crazy possibilities of what could happen if we privatized the system. So I was glad to see this article where someone compares actual numbers of the US Social Security plan vs. Chile's privatized system. John Tierney compares the Social Security benefit he is going to get with the one his friend in Chile will get.

I wanted to compare our pensions to see the results of an accidental experiment that began in 1961, when he and I were friends in second grade at a school in Chile. He remained in Chile and became the test subject; I returned to America as the control group.

As it happened, our countries have required our employers to set aside roughly the same portion of our income, a little over 12 percent, which pays for disability insurance as well as the pension program.

We came up with three projections for my old age, each one offering a pension that, like Social Security's, would be indexed to compensate for inflation:
1) Retire in 10 years, at age 62, with an annual pension of $55,000. That would be more than triple the $18,000 I can expect from Social Security at that age.

(2) Retire at age 65 with an annual pension of $70,000. That would be almost triple the $25,000 pension promised by Social Security starting a year later, at age 66.

(3)Retire at age 65 with an annual pension of $53,000 and a one-time cash payment of $223,000.
Two similar people, one gets 3 times the benefit of the other when both set aside roughly the same amount through their careers. This is why I find the Democrat's stance of "guaranteed benefit vs. guaranteed gamble" so frustrating. Some gambles are worth taking. Is this one of them? For 3 times the benefit, I would sign up in a heart beat.

Now that being said, Chile's situation when they privatized and the current US situation are very different so the results could also be very different. But lets have that debate.

via New York Times

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