What Herman Cain Isn't Going To Tell You About Chile's Privatized Pensions

My chiropractor is a nice guy - a Republican, but open-minded. But because he's so busy, he doesn't know that much about what's going on (like the majority of Americans). I think he's fairly representative of the interested but under-informed

My chiropractor is a nice guy - a Republican, but open-minded. But because he's so busy, he doesn't know that much about what's going on (like the majority of Americans). I think he's fairly representative of the interested but under-informed voter.

Anyway, he asked me if I'd seen the Republican presidential debate; he wanted to know what I thought. "If I were a Republican? The only one I'd consider voting for is Huntsman," I said. "But of course you have to be a nut to win the Republican primaries."

"I thought Herman Cain seemed pretty smart. He was talking about making Social Security like the Chilean model," he said. "What do you know about that?"

"Oh, jeebus," I said. "The Chilean model. The same one that right-wingers have been trying to shove down our throats for 30 years." (This was all mumbled, since I was face down on his table at the time.)

"First of all, it was a mess. It was imposed by Pinochet under his military dictatorship, and the generals revolted. They insisted they get to keep the old plan, and they did. Second, a lot of people didn't get anywhere near the money they actually needed to retire, but the administrators made a fortune."

I didn't even get into the meat of it. Chileans were charged exorbitant fees (15 to 20 percent for all costs) in order to choose which pension fund association in which to invest. Depending on which risk level they choose, they're equivalent to our mutual funds, IRAs or CDs; by law, they have to have a minimum return. From Contingencies, the magazine of the American Academy of Actuaries, March/April 1998:

There are currently 13 privately run AFP's authorized to manage a private pension fund covering a group of workers. The original 12 in 1981 grew to 22 in 1993, but competition caused this to fall to 13. Investments now totaling around $30 billion are regulated by law, and about 28 percent is currently invested in equities, 42 percent in government bonds, 30 percent in Chilean financial institutions and companies, and a small amount in foreign securities.

So it's not like you get to watch CNBC all day and make a killing in the stock market -- you're limited to the official funds, and they all have roughly the same investments. And it's a much better deal for someone with a big paycheck. (IIRC, a big shortfall was caused by the fact that women, especially poor women, dropped out of the job market to raise children or take care of a sick relative. So when it came time to retire, they had very little money from which to draw. They since added a minimum benefit -- gee, sounds almost like their original Social Security program!)

The article goes on to warn about the private plans being pushed by Republicans at the time:

In the event of a stock calamity in the fashion of 1929, the privatization groups tell us that the government, not they, will assume the responsibility of payments to retirees of specified minimum amounts. This will, of course, require that federal borrowing be repaid by the public. In addition, the purchasing power of retirees will be cut at a bad time for the economy. Workers in desperate need because of lost jobs or pay cuts cannot be expected to take kindly to a sharp reduction in their nest eggs and will likely make demands on the government for restitution.

Opportunities for fraud: The financial media have stories practically every day about scams being perpetrated on even highly sophisticated investors. Will the scamming of workers and their beneficiaries become a major growth industry? The lesson from Chile may well be summed up in two words: Caveat emptor.

The big hero of the latest right-wing push is Jose Piñera, former secretary of labor and social security and the architect of this pension plan. Would you be surprised to hear that he now draws wingnut welfare as a senior fellow at the Cato Institute? Of course not. Piñera founded "The International Center for Pension Reform" in order to promote the Chilean model everywhere else. I occasionally see him on my teevee. What I don't usually hear him acknowledge is that in 2008, the Chilean plan started moving back toward more government oversight and control.

But you won't hear many Bobbleheads talking about that. It might ruin the free market fairy tale.

About Susie Madrak

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