In less than 20 years, according to current projections, Social Security will face a serious financial crisis. The surplus will be gone, and we’ll be paying out more in benefits than Social Security is getting from current workers. Unless something is done, the Social Security trust fund will be totally exhausted in less than 40 years.
In order to keep our commitment to our senior citizens Congress and the President would have to consider alternatives to ensure that Social Security can keep paying benefits.
One option is to increase payroll taxes - by some estimates as much as 15 percent. Many Americans already pay more in payroll taxes than they do income taxes, and a further tax hike will only strain family budgets further. We’ve already raised payroll taxes more than a dozen times to keep Social Security solvent, but it’s no long-term solution.
An alternative to more tax hikes would be to cut benefits for current retirees. Some experts suggest a 13 percent benefit cut, but that would only prolong the problem and be unfair to seniors who depend on Social Security for their sole source of income.
Perhaps the best solution can be found all the way in South America, specifically the nation of Chile. More than 20 years ago, Chile’s leaders realized that their retirement system faced a similar fiscal crisis. Rather than cut benefits or raise taxes, they offered Chileans a chance to own and manage their own retirement incomes.
Chileans were asked to decide whether they wanted to continue participating in the government retirement plan or instead create personal retirement accounts that still guaranteed them a minimum pension.
As the Heritage Foundation explains, under Chile's private system, workers are required to deposit 10 percent of the first $22,300 of their income in the approved pension fund of their choice. They may also voluntarily contribute up to an additional 10 percent of income into the same account. For workers with very low incomes or other problems that prevent them from saving enough, the Chilean government also provides a safety net.
The Chilean experiment turned out to be a rousing success. Participants in the personal account program are able to retire with an average annual income worth 70 percent of their pre-retirement income--more than three times the amount promised under the old system. Over the last 18 years, the average real rate of return on retirement accounts is about 11.3 percent - a far higher return than U.S. workers will ever get from Social Security as it exists today.
Chile’s program has become so popular that today, over 95 percent of workers choose to participate in the system. This new investor class has also benefited Chile’s economy. The retirement saving assets of these workers totals over $34 billion--about 42 percent of Chile's Gross Domestic Product.
Perhaps the most telling sign of Chile’s success: many neighboring Latin American nations are now trying to copy its program.
You can see now why the Chilean experience has caught the attention of many in Washington as we consider reforms to protect and save Social Security here at home.
Of course, a personal retirement program in the U.S. will be of little benefit to current retirees, or those very close to retirement age. That’s why I strongly believe any Social Security reform plan must protect benefits that current and near-term retirees expect. I also strongly believe that younger workers who might choose to own and manage their own retirement accounts be given sufficient safeguards to ensure that their investments are protected.
Still, it’s comforting to know that there may be a better way to save Social Security - without having to slash benefits or raise taxes on already overtaxed American families. It’s time we start having a national discussion about these and other alternatives.
