The following column appeared in the June 20, 1996 Portland Oregonian newspaper. The author, David Reinhard, is an associate editor of the paper.

Social Security fit for a king and worker

You can almost hear the question: What could a small developing nation like Chile possibly have to teach the United States about our Social Security program?

In fact, I did hear a variation on this theme right before Tuesday's breakfast talk by José Piñera, Chile's former minister of labor and social welfare who privatized his country's government pension system.

But gringos given to such snootiness should consider this: Chile had its own old age pension program in 1925 -- a full decade before the ever-so-advanced United States established Social Security. Also, by the late 1970s, Chile's pay-as-you-go program was in the same financial fix that our own Social Security system faces in the not-far future.

And what future fix is that? Recently, the system's Board of Trustees reported that our Social Security Trust Fund will be broke by the year 2029. But that's not necessarily the most alarming date. That's 2012, the year the system starts paying out more in benefits than it takes in revenues. It then must dip into the Social Security trust fund. There's only one problem. The trust fund is like Gertrude Stein's Oakland -- there's no there, there.

All those payroll taxes that the federal government has been taking out of your paycheck and socking away for your retirement ? Uncle Sam has spent it already, leaving some IOUs and some accounting entries behind in the piggy bank.

Possible solutions to the pay-as-you-go pension system's problems? Slash benefits -- say, raise the retirement age and end early retirement -- or jack up payroll taxes to between 14.6 percent and 23 percent from today's 12.4 rate. These solutions, the Cato Institute's Michael Tanner said at Tuesday's Cascade Policy Institute program on privatizing Social Security, are "only going to make the situation worse."

The other problem with the current Social Security system, says Tanner, is more basic and personal: "It's simply a lousy retirement program." Today you get about a 2 percent rate of return on your investment, and younger Americans will actually receive a negative rate of return. They'll be taking out less than they pay in. You'd be better off stashing your cash in a mattress.

Not so participants in Chile's privatized pension program. They're paying less into the new system than they did into the old government-run one, and their average rate of return has been a smart 12.8% a year over the last 15 years. More to the point, Chile's privatized program puts the emphasis on personal freedom. Chileans must put at least 10 percent of their gross earnings into tax-exempt pension funds, but they get to direct their savings into any of 20 approved private investment plans.

Every Chilean has a passbook, showing how much is in his or her private pension account. With the push of a computer key, the account-holder can calculate how much is needed to retire at different ages.

And the choice of a retirement age is up to each Chilean. Workers can put as much as an additional 10 percent of their gross wages into tax-free savings so they can retire earlier. Piñera notes how odd it is that the government wouldn't think of telling you what color car to buy, but will tell you when you can or cannot work.

When ready to retire, Chileans can choose one of two courses. They can take monthly withdrawals from their pension accounts. Or (and this is the preferred course) they can buy a life insurance annuity to provide them with monthly income for the rest of their lives. Their choice.

If a Chilean hasn't saved enough to purchase an annuity, the government will pay the difference in order to provide a minimal retirement. True, this safety net violates the notion of individual responsibility. Shouldn't those who've failed to save for old age simply suffer the consequences?

But Piñera doesn't think any society would -- or should -- let poor oldsters die in the streets while it wags its finger at them about having not saved enough for retirement: "I'm a free-market revolutionary, but I'm a realistic man."

Piñera was realistic, as well, in dealing with folk's legitimate anxieties about reforming their pension system. He and Chile's pension privatizers ensured that (1) the benefits pensioners were currently receiving would go on forever and (2) anyone currently in the government system had the right to stay there for life. Again, the hallmark of the reform was individual sovereignty and personal choice. If someone had a socialist gene and wanted to remain in the government program -- and earn less on the investment -- they were free to do so, he said.

Today, as Chileans approach retirement, the poorest workers are visited by representatives of private insurance companies who solicit their business. "The worker is king," says Piñera, who went on impishly to show that he's no stranger to the United States. "The Social Security Administration doesn't treat you this way."