No Runny Eggs

(H/T – Fausta)

The Investor’s Business Daily editorial board noted the phenominal success story that the privatized Chilean social security system has become:

(Then-labor minister Jose) Pinera’s proposal began with scrapping the payroll tax on the country’s social security system and inviting all workers to take the money they were contributing and move it into a private pension.

Workers would be free to choose the fund, how much to put in, and at what age they would retire, with a minimal safety net built into the design. Past contributions would be refunded to workers by government bond. And anyone who didn’t like the idea was free to remain with the system as it was. It was a huge success: 95% of Chile’s workers chose the private system.

Pinera told the public to expect a compounded 4% rate of return under the private plan. But as of 2010, the average annual rate of return was 9.23%, far higher than promised.

By contrast, the U.S. social security system, which today accounts for a quarter of the U.S. government budget, is slated to give retiring workers in the next decade a 1% to 2% rate of return. And those entering the system today will see a negative return.

In order to compare apples to apples, one has to compare the rate of return to inflation. The bad news is Chile’s inflation averaged 10.72% between 1981 and 2009, which means the 9.23% rate of return only covered 98.7% of inflation. The ugly news is that is still better than the SocSecurity rate of return compared to the likely rate of inflation over the next decade, in which the rate of return is expected to cover barely 98% of inflation.

Let’s move to the effect on government finances:

Chile’s implicit pension debt fell to just 6% of GNP — compared with 100% in the U.S., 300% in France and 450% in Italy, leaving Chile with no net debt.

Better still, the accumulated savings in the pension funds fueled Chile’s spectacular economic ascent, taking real incomes from about $4,000 per capita in the early 1980s to $15,000 today, and GDP to the 6% range most years for nearly 20 years.

That, folks, is the real payoff; a government and a people able to weather economic storms that is sinking the rest of the world. Even when one takes out the dysfunctional Disability Insurance, the cost of providing the benefits of the Old-Age and Survivors Insurance (including a transfer of funds to cover railroad retirees) outstripped the taxes paid by $2.14 billion on $577 billion of benefit payouts, and $6.06 billion on $580 billion in total program cost, in FY2010. That’s $6.06 billion that, because of the nature of the “Trust Funds”, the Treasury had to borrow, which gives the lie to the accounting trick that counts “interest earned” by said “Trust Funds” as income into Social Security.

With the level of publicly-held debt rapidly approaching 100% of GDP, and current trends showing that increasing at an exponential rate, how long can it be before everybody stops buying US Treasuries? The first time that happens, the value of those “Trust Funds” will be $0.00, and we’ll be up a swollen Shit Creek without a paddle.