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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Friday, October 29, 2010

These Are The Only 5 Countries Whose Pension Systems Can Survive

There are only 5 pension systems that this grading system considers survivable. The USA does not have one of these 5. Surprising to me, is that Japan is in such a bad situation and with their rapidly aging population (deaths are much higher than births in Japan) their pension system will not be able to cope with these negative demographics.

In the top 5, Chile has an old age pension system that is considered sustainable. I know a little bit about this one since after the troublesome 1970's political environment there, where Marxist government created havoc, the nation adopted the principles of greater economic freedom and started an obligatory PRIVATE pension system. Founded by the military dictator, Pinochet, it was the first to be entirely managed by the private sector.
On November 4, 1980, Chile, under the leadership of José Piñera, Secretary of Labor and Pensions under Augusto Pinochet, implemented with the collaboration of his team of Chicago Boys (a group of free market economists influenced by the Chicago school of economics of American economist Milton Friedman) the first comprehensive change of a state-run, defined-benefit pension scheme to a defined-contribution system managed entirely by the private sector (by pension management companies called "AFP"), under the supervision of a dedicated government agency, the Superintendency of AFP.

The Chilean system of personal retirement accounts started operating on May 1, 1981. Civilian workers covered under the previous defined-benefit plan had the choice of opting-in to the new system or of remaining under the previous system, such election being irrevocable. Workers hired after Jan. 1, 1983 must join the new system. Today 97% of civilian salaried workers are officially in the private system. According to the Superintendency of AFP, the system had accumulated USD $100 billion at October 30, 2007, an amount equivalent to 70% of the GNP of Chile.
From here. There are many positive aspects of this kind of idea. People in this pension plan (everyone) will only collect if the investments made on their behalf are successful. The people have an economic interest in the performance of the economy overall assuming that these investments are made in Chile (which I think that they are but do not know for sure).

There are things that one needs to consider; first is that savings of this kind create investment capital that is reinvested into the economy to create jobs and income. The other is that the risks to performance are borne by everyone and these risks are not socialized and given the participation rate of 97% (excluding the police and military covered under a separate system), socialization of risk is exactly what is happening but through investment risk not through the political hands of the government. The government is now largely out of the business of old age pensions in Chile. The last thing that one must think about is comparing a system that Chile has with the one that the US has through Social Security. Chilean participants save money, the money actually goes into an account and they are entitled to these funds. In the US, participants put money into Social Security and it is immediately spent on current benefits paid to others and any excess is spent on other government programs. The only thing that Social Security has is the ability of the American government to tax in the future on their behalf and there is a very real possibility that the promises made to people with respect to their Social Security will not be met.

These Are The Only 5 Countries Whose Pension Systems Can Survive


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