From David P.
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Pensions: In Chile, a major
study shows the nation's private retirement accounts provide workers pensions
worth 87% of their salaries, 73% of that from profits on savings. So much for
the canard about the perils of markets.
The story was front-page news in Chile's largest newspapers, El Mercurio
and La Tercera, on Sept. 3, a powerful affirmation of what former Republican
presidential candidates Newt Gingrich and Herman Cain called "The Chilean Model"
of private retirement accounts.
The study of 28,000 households by Dictuc, a consultancy affiliated with the
Catholic University of Chile, showed that male workers who contributed just 10%
of their salaries to their retirements for 10 years or more on average earned
retirement checks worth about 87% of their top salaries. No 401(k) account
needed.
That's because in 1981 Chile Labor Minister Jose Pinera replaced the
country's bankrupt social security system with this famous system of private
accounts.
It redirected workers' existing social security taxes to a new market-based
system of investing choices that let workers make their own decisions in a
program run by private companies.
The Dictuc study shows Chile's private pensions over three decades have
yielded returns six times higher than what workers got under Chile's old social
security system — which, by the way, was similar to ours.
The study shows that saving for retirement through the market is actually
far less dangerous than relying on the government for pensions. Workers' returns
on Social Security in the U.S. for those currently retiring is zero. For workers
just starting their careers, the return is forecast to be negative as the trust
fund goes bust.
More to the point, anyone who has to live on Social Security income alone
is condemned to a life of poverty on those returns. The only alternative is for
workers to double-down by opening 401(k) or IRA accounts.
Some 30 nations have adopted a version of Chile's private system. But in
the U.S., the radical left, led by the same Big Labor unions that assured
workers ObamaCare would improve their lives, have been warning that markets are
far too dangerous to entrust workers' pensions to them.
The details of the Dictuc study shatter this pernicious myth: Data show
workers earn an extraordinary 8.7% compound rate of return above inflation over
a period of 32 years from the 10% of their salaries put away.
The compounding means that 73% of the pensions workers retire on comes from
profit made on investments, with only 27% coming from their actual
contributions. Profits accumulate even through market downturns, as was seen in
2008, because cost-averaging of investments cushions the impact.
Financial markets will never fall to zero, as scaremongers warn, except
maybe if Armageddon hit. And if that's the case, Social Security would go
bankrupt right along with it. There would be no economy to support it.
With Social Security's trust fund slated to go bust in 2035, maybe it's
time to start thinking about how the lessons of Chile can benefit American
workers, too.
Read More At Investor's Business Daily: http://news.investors.com/ibd-editorials/092613-672776-score-another-one-for-the-chilean-model-of-private-pensions.htm#ixzz2g34Nz7Tl
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