Breeding prosperity and eliminating political interference

By Kevin Avram
web posted November 29, 1999

The country with the highest rate of personal savings in the world is Singapore. A cornerstone of that savings record is the Singaporean Social Security System. Established in 1955, it always has been a private plan.

The first country in the Western Hemisphere to establish a government-run Social Security System was Chile. That was in 1929. In 1981, it was also the first country to completely privatize a Social Security System. Britain began moving in that direction as early as 1978. Today Britain has a two-tiered type of system. At a certain point, workers have the choice of opting for a private sector pension. Nearly 80 per cent are going the private sector route, which is yielding an average annual return of 13 per cent. On average, British workers in the privatized plan are accumulating assets at more than twice the rate of the government-run program.

Hungary, Poland, and other former communist nations are also exploring or moving to privatize Social Security. In Hungary, where pension payouts consume almost 10 per cent of the economy, privatization was absolutely necessary. In the 1980s, there were two Hungarians working for each pensioner. By the year 2000, there will be one worker for each pensioner. Slovenia and Lithuania are considering a mix of public and private pension approaches.

Sweden, long identified with extravagant welfare programs, decided last June that it had to move in the direction of privatized Social Security. In order to stay solvent, the old system would have eventually required payroll taxes of 36 per cent. What's especially interesting is that the Swedes rejected the idea of government-managed investment funds - similar to what is being advocated by the Clinton administration. They say that such a plan will result in the gradual nationalization of major companies, creating a situation where the government owns and controls an even larger chunk of the national economy and of peoples' lives.

Australia initiated Social Security reform in 1986. Since then, workers have contributed a set percentage of their income through their employers to private savings. In 2002, when the new system is fully implemented, all workers will be required to set aside 9 per cent of income, which could be augmented by voluntary contributions.

In Central and South America, seven Latin American countries have followed Chile's lead on privatized Social Security. Peru was the first to follow. It initiated Social Security privatization in 1993. Argentina and Columbia followed in 1994, Uruguay in 1995, Bolivia and Mexico in 1997. Fledgling El Salvador privatized last year.

The irony of international pension reform is that while an increasing number of nations are embracing the free market and its benefits, the US approach is to place its confidence in central planning and the performance of a political administration. Chilean, British, and other workers from around the world are enjoying double-digit average annual percentage growth in their retirement funds. Meanwhile, the US Social Security system is paying an average annual return of 2 per cent. At the same time, we know that if it is kept in the hands of government, it will be bankrupt in the first part of the next century. Despite this, the Clinton administration is fighting to keep the program and its management in the hands of government.

Some months ago, Jose Pinera, the former Chilean Secretary of Social Security spoke to Congress about this issue. He drew attention to the fact that due to the dramatic results of Chile's Social Security privatization, one study rated it as a more competitive nation than Japan - although it lacks Japan's capital base. Its savings rate is nearly 29 per cent of GNP 1, real GNP has been growing at a rate that is more than double what it was prior to privatization, and Chilean citizens have seen their savings grow at an average annual rate of 11 per cent above inflation, for nearly two decades.

1 Hearing Transcripts, Budget Committee and Ways & Means Committee, US House of Representatives; National Center for Policy & Analysis; Heritage Foundation; Cato Institute.

Kevin Avram is a former director of the Prairie Centre/Centre for Prairie Agriculture, Inc. and continues to sit as a member of the Prairie Centre's Advisory Board.

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