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.