April 5, 2011


A Personal Account Option For Social Security (Peter Ferrara, 4/06/11, Forbes)

As in Chile, workers would choose investments by picking a fund managed by a major private investment firm from a list officially approved and regulated by the federal government for safety and soundness. The personal account investments would be kept strictly separate from the rest of the company, again as in Chile, so any financial troubles the company might experience would have no effect on the personal account investments. This would also be very much like the highly successful private retirement investment systems used for the federal employee Thrift Savings Plan and for the private alternative to Social Security used for local government workers in Galveston, Texas.

The Chilean personal account system that has been so successful for 30 years now includes a government guaranteed minimum benefit for the personal accounts that is roughly equal as a percent of income to the average benefit under the U.S. Social Security system. That is feasible because market investment returns are so much higher than what Social Security even promises, let alone what it can pay.

That is why over 30 years of personal accounts, even through the financial crisis, Chile has never had to make a payment on that guarantee. Through its regulation of the private investment firms among which personal account investors can choose, the government can limit and control the risks workers can take on with their personal accounts, preventing moral hazard from the guarantee.

Posted by at April 5, 2011 6:05 AM

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