PINOCHET RETURNS THE FAVOR:

Retiring in Chile: The Chilean pension model is an excellent example of how the United States could reform its Social Security system. (JOSÉ PIÑERA, 12/01/04, NY Times)

For 24 years, I have championed the Chilean retirement system, which is based on ownership, choice and personal responsibility. Having discussed our reforms with Mr. Bush as long ago as 1997 when he was governor of Texas, and having spoken at the White House Summit on Social Security in 1998 during the Clinton administration, I believe there is now an opportunity for a bipartisan agreement in the United States in this crucial area of public policy.

The Chilean retirement system was originally based on exactly the same principle that guides the United States' system. It originated in 19th century Prussia, where Bismarck created a pay-as-you-go-system. But such a defined-benefit system is not only hostage to demographic trends, it also has a fatal flaw: it destroys the link between individual contributions and benefits, or, in other words, between personal effort and reward.

Chile's Social Security Reform Act of 1980 allowed current workers to opt out of the government-run pension system financed by a payroll tax and instead contribute to a personal retirement account. What determines those workers' retirement benefit is the amount of money accumulated in their personal account during their working years. Neither the workers nor the employers pay a payroll tax. Nor do these workers collect a government-financed benefit.

Instead, 10 percent of their pretax wage is deposited monthly into a personal account. Workers may voluntarily contribute up to an additional 10 percent a month in pretax wages. The invested amounts grow tax-free, and the workers pay tax on this money only when they withdraw it for retirement.

Upon retiring, workers may choose from three payout options: purchase a family annuity from a life insurance company, indexed to inflation; leave their funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a worker dies, the remaining funds form a part of his estate); or any combination of the previous two. In all cases, if the money exceeds the amount needed to provide a monthly benefit equal to 70 percent of the workers' most recent wages, then the workers can withdraw the surplus as a lump sum.

A worker who has reached retirement age and has contributed for at least 20 years but whose accumulated fund is not enough to provide a "minimum pension," as defined by law, receives that amount from the government once funds in the personal account have been depleted. (Those without 20 years' contributions can apply for a welfare-type payment at a lower level.)