Herman Cain favors transitioning the existing Social Security program to a privatized model, and he cites Chile as an example of how it can be done. Did it work in Chile? Let’s find out.

From Investors Business Daily.

Excerpt:

Chile’s system, enacted in 1981, took government out of the pension business altogether and replaced it with a system of personal retirement accounts.

It’s one of most successful fiscal reforms in history.

It outperforms Social Security on returns, yielding about 9.23% compounded annual returns over 30 years under private management.

That means Chilean retirees take home pension checks four times what they would have gotten if they had remained in their old Social Security system.

Workers chose the types of investments, the level of risk, the size of their contributions — 10% to 20% — and the day they intended to retire.

Unlike Social Security, accounts are by law property. A worker who dies early can will his account to heirs.

[…]Moving from public to private accounts spooks some because of the continuing cash-flow need to pay out retirees and people nearing retirement.

Chile solved this problem by issuing bonds for 40% of its transition, selling off state assets, and temporarily using a small portion of the old payroll tax.

Because Chile’s architect, Labor Secretary Jose Pinera, motivated the government to make it work, the size of government was cut too. The move boosted savings and economic growth — increasing the country’s tax base.

As for the other concern —that fund managers would steal the money or make risky investments — that too has never happened in the well-regulated Chilean system, where private managers must invest their funds broadly in easy-to-understand investments, and are subject to strict reporting requirements and supervision.

Would it work here? Chilean economists, such as Pinera, believe it would. Something similar has already been done in more than 30 countries, most of which were in far worse financial shape when they started.

Incredibly, the benefits of this privatization do not stop at just the retirees themselves. The private pension pools have given Chile the widest, deepest capital market in Latin America. That turned the country into an economic powerhouse.

After the program began, per-capita incomes soared — from $4,000 in 1981 to $17,000 in 2010. GDP grew for nearly 20 years at a 7% average, while joblessness plunged from nearly 30% to around 5% today.

Most Tea Party-friendly of all, private pensions meant Chile’s savings rose to 100% of GNP, leaving Chile with no net debt. In 1981, its debt was north of 100% of GNP.

More about Chile’s privatized retirement program from IBD.

Excerpt:

Instead of paying a 12.4% Social Security tax as we do here, Chilean workers must pay in 10% of their wages (they can send up to 20%) to one of several conservatively managed and regulated pension funds. From the accumulated savings, they get a life annuity or make programmed withdrawals (inheriting any funds left over).Over the last three decades these accounts have averaged annual returns of 9.23% above inflation. By contrast, U.S. Social Security pays a 1% to 2% (theoretical) return, and even less for new workers.

[…]In 2005, New York Times reporter John Tierney worked out his own Social Security contributions on the Chilean model and found that his privatized pension would have been $53,000 a year plus a one-time payout of $223,000. The same contributions paid into Social Security would have paid him $18,000.

We don’t have to do things the old way. The old way just leads to more debt, and more tax hikes, and, as surely as night follows day, higher unemployment – as capital moves outside of our country for greener pastures.

Investors Business Daily explains the economic policies that allowed Chile to post 15.2% yearly growth.

Excerpt:

As the U.S. languishes, Chile posted a head-turning 15.2% yearly gain in GDP in March, and forecasts for the year are rising. Why can’t we do that here?

A year ago, Chile lay in rubble, victim of the world’s fifth most powerful earthquake. So Chile’s 15.2% growth is a big bounce from a bad setback.

But it shouldn’t be dismissed as an anomaly. It’s a showy number, but not the only one.

The same day Chile released its data, Goldman Sachs raised its 2011 growth forecast for the country to 6.4% from 6%. In its annual regional business index, Latin Business Chronicle ranked Chile as having the best business climate in Latin America in 2011.

Such numbers are so alien to the U.S. in the economically debilitated Obama era, it makes sense to look at what Chile has done.

First, Chile’s policies for long-term growth were put into effect in the 1980s by the group of Milton Friedman-inspired economists known as the Chicago Boys.

Under them, Chile’s pension privatization cost nothing and left the country with no net debt. The private funds now hold assets worth 90% of GNP ($185 billion) — capital used to develop the country. Already, Chile’s education and infrastructure are the best in Latin America as a result.

Second, there’s free trade, of which Chile is a global champion, signing at least 58 treaties to gain access to 2 billion customers.

That’s a big reason Chile is close to full employment and is scrambling to attract growth-hungry U.S. entrepreneurs — and getting them.

[…]Bamrud says Chile has been turning heads with investors the past year and a half because of its emphasis on improving its corporate environment, its tax regime and its economic freedom, all of which rate highly.

“Chile has always been held out as a model for Latin America, but the reality is … it’s now a model for the U.S.,” he said.

Corporate taxes are the second lowest in Latin America at 18%, behind Paraguay’s 10%. The Latin average is 28%.

Meanwhile, Goldman Sachs’ chief economist for Latin America, Alberto Ramos, says Chile has wisely fostered growth by reducing the size of government and not printing too much money.

In 2011, it cut government spending to 5% of GDP, or $700 million, more than its projected 5.5%. So GDP has room to grow 6.4%, rather than 6% as first estimated.

Chile is doing the exact opposite of the socialist Barack Obama. Chile is cutting government spending, removing tariffs, enacting free trade deals, and cutting corporate taxes. Businesses and investors are moving there, and there are not enough people to work at all the jobs that are being created. Meanwhile, in Venezuela, communist dictator Hugo Chavez just reported 0.6% gain in the last quarter of 2010.

But wait! There’s more good news from Chile!

Investors Business Daily writes again about Chile’s privatized retirement program. (H/T Tina)

Excerpt:

May Day — socialists’ paean to class warfare — evokes memories of Soviet tanks in Red Square and leftist radicals rioting. But Chile celebrates the actual empowerment of workers.

May 1 marks the 30 years since Chile became the first nation to privatize its social security system. By turning workers into investors, the move solved an entitlement crisis much like the one America faces today.

“I like symbols, so I chose May Day as the birth date of Chile’s ‘ownership society’ that allowed every worker to become a small capitalist,” wrote Jose Pinera, former secretary of labor and social security and the architect of this pension revolution. He is now a senior fellow at the Cato Institute in Washington, D.C.

What he designed has succeeded beyond all expectations. Yet Congress remains reluctant to adopt anything like it, despite efforts by Presidents Bill Clinton and George W. Bush to partially privatize an American system.

Instead of paying a 12.4% Social Security tax as we do here, Chilean workers must pay in 10% of their wages (they can send up to 20%) to one of several conservatively managed and regulated pension funds. From the accumulated savings, they get a life annuity or make programmed withdrawals (inheriting any funds left over).

Over the last three decades these accounts have averaged annual returns of 9.23% above inflation. By contrast, U.S. Social Security pays a 1% to 2% (theoretical) return, and even less for new workers.

[…]In 2005, New York Times reporter John Tierney worked out his own Social Security contributions on the Chilean model and found that his privatized pension would have been $53,000 a year plus a one-time payout of $223,000. The same contributions paid into Social Security would have paid him $18,000.

The biggest threat to American solvency is the growth in entitlement spending on Medicare, Medicaid and Social Security. The Democrats are stubbornly opposed to reforming these benefits, because they like the idea of transferring wealth from children, who cannot vote, to people who depend on government hand-outs, who can vote. And the best part of their scheme is that young people can be easily indoctrinated by the public schools to believe that have their future mortgaged away to buy votes is a good idea. It’s really very sad and unfair to young people.