About that Social Security Privatization thing. In Townhall Finance, Daniel J. Mitchell writes about the effects of converting from what is an effective PAYGO system in the US to a private one like Australia has. Australia vs. the United States: Two Charts that Tell You Everything You Need to Know about Social Security Reform. First he restates the problems with Social Security in a nutshell:
There are two serious problems with America’s Social Security system. Almost everyone knows about the first problem, which is that the system is bankrupt, with huge unfunded liabilities of about $30 trillion.
The other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are particularly disadvantaged, as are African-Americans because of lower life expectancy.
He provides some charts that are instructive. He then explains how Australia, seeing the same symptoms in their system as we do, radically changed their retirement system to the “Superannuation Guarantee” system. In this system each worker has a mandatory contribution to their retirement of 9% of their income. The Wiki article on it provides a very good explanation of the nuts and bolts of how it works. One key point is that it integrated the exisiting superannuation funds that unions had won in negotiations and private packages other workers had. New Zealand has a similar, but voluntary plan, called Kiwi Saver.
All the way back in 1986 the Labour Government began to shift the Australian Social Security system to a system of mandatory retirement savings. It formalized this is 1992 and set a ten year window to have everyone at a 9% rate.
Interestingly, the most serious challenge that the Superannuation Guarantee Act faces is whether it is Constitutional. This is a fairly recent development (2010) spurred by the losses the funds endured during the Global Great Recession. The Right argues that people should not be forced to invest their money, the Left argues that there is a lack of proper oversight by responsible people…just like they do here.
Regardless of whether there are structural defects in the system the result of 20 years of this program is that now Australians have saved in cash investments and not government IOU’s the equivalent of one year of the National GDP!
I first read about this program when the Heritage Foundation began a major push during the Newt Congress to reform Social Security. That paper is now available on line. Interestingly they actually underestimated how much savings would grow.
All across the world PAYGO pension plans are changing to fully funded capitalization system, either by economic meltdown such as Chile, or the clear knowledge that an aging population and lack of revenue would cripple a government system such as in Australia, New Zealand and Hong Kong.
The Mandatory Provident Fund in Hong Kong was established when the UK ceded Hong Kong back to China. It was a natural extension of the Inland Revenue Department which had run Hong Kong as a for-profit entity for decades. As a virtual city-state within China it was clear that the societal differences and increased likelihood of a large elderly population than on the Mainland meant Hong Kong could cripple the system. Thus the Chinese leadership declared that since HK residents made more money and were more capitalistic then the rest of the country (and more westernized in that the traditional extended family system was gone) they should pay their own retirement plan. It’s doing very well. As is Singapore’s similar system, that differs by more government involvement, yet still offers individual choices.
Virtually all of Britain’s former colonies have some sort of “Provident” plan. These are combinations of pensions and insurance (Life or Annuity). Many give a lump-sum payout on death…which would be something our African-Americans could greatly benefit from since they have a lower life expectancy and get screwed by the current Social Security rules…or offer other arrangements similar to our 401K. Clearly the Brits didn’t want their Wogs dragging down the Exchequer. And now the former colonies are bearing the blessings that capitalization of retirement accounts accrues.
With all these working models to choose from it seems incredible that we can’t find a better way then we currently have. Or we could be like Argentina and when the wheels really go off the rail simply seize the private retirement accounts.
