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Let's Sink Bismarck's Socialist Security And Follow Chilean Reform!

by Randy Barker (8-06-01)

As a Pre-Boomer baby, I'm close to being eligible for Social Security. And since I'm just as pessimistic about the program's longevity as most GenXers, I'm going to be taking my benefits at 62, or 62 and 8 months to be exact, hoping that I will at least get back a portion of the money I put in before this giant Ponzi scheme goes bust.

It's too bad that Roosevelt and Depression Era Democrats chose to follow Germany's Otto Von Bismarck and institute a system that was ultimately destined to fail. In 1883, Bismarck created the first pay-as-you-go social security system. Unfortunately, other European countries, mistakenly thinking Bismarck knew what he was doing, followed suit. And when Roosevelt came along with his me-too socialism, he also chose this flawed system. Of course, FDR's Democrats did cover their rear ends and cynically set the retirement age at 65 (fewer people lived that long back then) to make sure few  would collect, and lumped FICA taxes in with the General Fund so they could use it for more social spending. But even cynicism can't save social security now.

Changing times and medical science have made this 118-year-old system terribly obsolete. Birth rates are down in both America and Europe, with Catholic Italy having a negative rate. So fewer workers are supporting an individual retiree. It soon will be just two. At the other end of the spectrum, medical advances are turning a bad situation into a demographic nightmare; people living way beyond their biblical threescore and ten. The stocks in my Dresdner RCM Biotechnology Fund (DRBNX-$26.46 ) will be creating a huge problem.

President Bush is trying to partially privatize the existing system, but even this BandAid approach  won't get through a Democrat Senate. Not as long as Democrat demagoguery on this issue works like a charm. Scaring uninformed old people about social security is a well-proven vote-getter. Plus, social security money has been stolen by Democrat congresses for so long that even Republicans have grown to love the thievery.

What Roosevelt should have done in the 1930s and what we should do now is adopt a capitalist solution to a social problem. That means following the lead of Chile and establishing a social security program that works. Sixteen years ago, Chile privatized their system allowing workers to voluntarily put their payroll tax into portable, individual pension savings accounts which they own, and can pass on to their heirs. Workers receive a variety of investment options which are managed by competing financial institutions. They even figured out how to make the transition to the new system without shafting retirees, financially ruining young people, or raising taxes.

What's happened in Chile since 1986 ? Nine out of ten Chilean workers have chosen to be in the PSA System. And they have earned an average of 12 % above inflation  over those 15 years. Chile's old people have been taken care of, Chile's savings rate has zoomed to 27 % of GNP, unemployment is down to 5.5 % and the economy has grown to the point where President Bush wants Chile to be part of  NAFTA.

Instead of following Bismarck and Roosevelt down the road to insolvency, we need to follow the lead of Jose Pinera, the then 30-year-old father of Chile's successful system. Jose, Si ! Otto and Franklin, No!

Excerpt From NotSo SERIOUS MONEY
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written by randybarker@aol.com