Occassional reflections of a moderate (hey at least I think I am)

Tuesday, April 26, 2005

Chile -- It just doesn't matter

Prof. Reynolds points us to this editorial by John Tierney which concludes that we have it much worse off here than they do in Chile. Ok, he really says that “our”social security is worse that Chile’s private system. It may be the case that the U.S. should scrap Social Security in favor of personal private accounts. I wish, however, that both sides would stop having us look to Chile for answers.

When pro-privatizers point to Chile, they generally (I realize that this is, in itself a generalization) they look anecdotally at the situation. They find a “man on the street” ask him how his pension account is doing and go from there. Mr. Tierney is no different. Only the man on the street he uses is a friend of his from second grade when Mr. Tierney was in school in Chile. Tierney frames his editorial as “an accidental experiment”. Mr. Tierney was the unfortunate soul who came to the United States and had to be subjected to our Social Security system. His friend, Pablo Serra stayed behind in Chile. In 1981, Chile replaced its social security system a “pioneering” system of private accounts.

It bears mentioning at this point that in 1981, Chile was not (in any real sense) a representative form of government. So one thing that Chile cannot teach us is how you convince people that they should support the change. This is not to say that we should dismiss the Chilean experience because it was not a representative government at the time the changes occurred, just to note that they did not have to deal with the ugliness of public discourse on the matter. (Call me old fashioned but I prefer such ugliness to a dictatorship.)

[Let me interject for a moment and say that choosing Pablo as the “man on the street” (admittedly my term and not Mr. Tierney’s) is suspect. I think it is a fair assumption to say that any Chilean who attended school with Mr. Tierney while Mr. Tierney’s family lived in Chile was upper-middle class at a minimum. Not only that but Pablo “grew up to become an economist”. Not only that (assuming this is the same economist Pablo Serra from the University of Chile), Pablo is an economist who has written (for the most part) favorably about the privatization (in .pdf format) of social services in Chile. That would be like taking the pulse of the American populace on the Iraq war and using Juan Cole as the barometer.]

Rather than comparing Mr. Tierney’s and Mr. Serra’s experiences, there is a better “accidental experiment”. As Mr. Parra and his co-authors note (on page 4), some individuals chose to stay in the old pension system. This sets up a real “apples to apples” comparison opportunity. As someone closer to the situation has noted (though probably with an axe to grind)
”if two work colleagues reach retirement age in Chile today, both with the same salary and the same number of years contributing to social security, one of them who remained in the old pay-as-you-go and the other who changed to the AFP system back in 1981, the latter will receive less than one-half of the pension of the former.”

My point is not that Chile’s experience has been good or bad – if you ask CATO they will tell you it is a success, if you ask the World Bank (among its milder critics) they will tell you that, despite its successes, “failure to extend access to formal financial protection for old age to a broader segment of society has been a major disappointment.” With all due respect to the all the ink that has been spilled debating Chile’s success or failure with the experience, I do not see why the debate in the United States should depend at all on the experiences of a country that is part of the “developing world”.

I would respect pro-privatizers more if they would say they don’ want 4% of wages to go into private accounts, they want all of the contributions to go to private accounts. At that point Social Security is just a paternalistic forced savings program by the federal government and I would think those individuals would be more consistent to say they don’t want Social Security at all.


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