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Tuesday, April 26, 2005

 

Senate Starts Talking About SS Reform; Pablo Smiles

Today, the US Senate Finance Committee began hearings about Social Security Reform by listening to some experts give their views. No doubt, this process will take some time and no one can tell how or when it will end. But Pablo Serra is not concerned; he is smiling at the prospect of getting his pension. Why?

Because Pablo lives in Chile and, on a comparable basis, he can retire on his country's version of a Social Security Personal Account with 3 times as much income as he would in the US Social Security system or, at his option, with 2 times as much annual income and a one-time payment of $250,000 (yes! a Quarter Million$ up front plus twice as much per year).

The Senate can debate the theory about Personal Accounts, and the Democrats may suceed in killing them for US Citizens, but Pablo has had one for over 20 years in Chile and he can smile at our folly while enjoying a long and comfortable retirement.

So, who is Pablo and what do I know about him? Good Questions. I've never met the gentleman; I learned about him from John Tierney, who knew him as a child and wrote a perceptive account of his own and Pablo's experience with the US and Chilean Social Security systems - both of which ran into significant financial problems in the early 1980's. It's a very easy and personal tale to read in the New York Times and the title says it all - The Proof's in the Pension .

He begins his Op-Ed by asking the simple question What would Pablo Serra do? The answer seems to be : smile while buying a nice retirement villa and taking home a large pension. As Mr. Tierney puts it : "After comparing our relative payments to our pension systems (since salaries are higher in America, I had contributed more), we extrapolated what would have happened if I'd put my money into Pablo's mutual fund instead of the Social Security trust fund. We came up with three projections for my old age, each one offering a pension that, like Social Security's, would be indexed to compensate for inflation:

(1) Retire in 10 years, at age 62, with an annual pension of $55,000. That would be more than triple the $18,000 I can expect from Social Security at that age.

(2) Retire at age 65 with an annual pension of $70,000. That would be almost triple the $25,000 pension promised by Social Security starting a year later, at age 66.

(3)Retire at age 65 with an annual pension of $53,000 and a one-time cash payment of $223,000."

That about sums up the whole lesson. Personal accounts do work. I don't know either Pablo Serra or John Tierney; but I do know what results from putting money over decades into Social Security and into Personal Accounts (call them 401k or equivalents). And Tierney's story is completely credible to me. If you don't trust a US-Chile comparison, just ask anyone who has put comparable amounts of money into FICA taxes and into a personal account like the TIAA - CREF system used by Universities and see which investment paid off better. They will probably tell you that personal accounts did a great deal better; just as Pablo would say. Experience is the best proof.

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