Tuesday, May 3, 2011

Bureaucracy vs. Prosperity

Compare the US Social Security system with the Chilean pension system. The US Social Security system has an unfunded liability of trillions of dollars. The Chilean pension system is celebrating its 30th anniversary and has presided over an economic boom in Chile, according to Monica Showalter.

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.

Chilean workers are putting 10 percent of their income away in a real savings plan that will create jobs for their children when they are ready to retire. In the US, the 12.6 percent FICA tax just goes to pay current retirees. No savings; no jobs for the next generation.

There is a message here. The bureaucratic, administrative method is a dead method. It transfers money from productive uses into the political bazaar of government programs. And there is never enough, so the government always ends up cheating with the tax of inflation. But the free economy is different. There the system of credit and ownership rewards people for serving their fellows with products and services. People save for retirement and contribute to the prosperity of the next generation. They retire when they can afford to, not when they hit 30 years service in a government bureaucracy, or age 62 in the government's Social Security program. The free economy is a self-adjusting system. You want to live frugally and save money? Then you get to build a nest egg and you get to quit work when your nest egg is big enough. You want to spend it and live large? No problem, but reckon on working till you drop.

Talk to the man in the street, though, and you'll find someone that would rather rely on the government than the stock market. He believes in political power rather than economic power, in Senator Claghorn rather than Fidelity and Vanguard.

Meanwhile there is the example of Chile, where the private sector has given ordinary people 9 percent on their retirement money, compared to 1-2 percent in the US Social Security system.

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