[Congressional Record Volume 144, Number 111 (Friday, August 7, 1998)]
[Extensions of Remarks]
[Pages E1577-E1578]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            SOCIAL SECURITY

                                 ______
                                 

                          HON. PHILIP M. CRANE

                              of illinois

                    in the house of representatives

                        Thursday, August 6, 1998

  Mr. CRANE. Mr. Speaker, as we move into the 21st century, we must 
address the issue of Social Security. When I support privatizing the 
system which would allow Americans to more fully control the financial 
aspects of their retirement years, I realize we must have a national 
debate on the issue. In an effort to contribute to the discussion, I 
would recommend that my colleagues read this following column written 
by Jose Pinera as it appeared in the European edition of the Wall 
Street Journal on June 25, 1998.

          [From the Wall Street Journal Europe, June 25, 1998]

                  A Way Out of Europe's Pension Crisis

                            (By Jose Pinera)

       On the wall of my office in Santiago, Chile, I have a map 
     of the Americas with South America's sharp southern tip 
     pointing toward the top and the United States and Canada at 
     the bottom. Visitors often look puzzled, then exclaim, ``Oh, 
     they've hung your map upside down.''
       ``No,'' I say, ``It's just a different way of looking at 
     the world.'' I often think of that map when I'm asked how 
     Europe's crisis-riddled pension systems can fixed.
       Reform is possible, I reply, if people are willing to look 
     at the world in a different way. Most importantly individuals 
     will need more power to provide for their own retirement--and 
     the government's role must be scaled back. We've accomplished 
     this in Chile, and reform on the Chilean model is being 
     seriously considered in the United States. In the meantime, 
     the system has already spread to several other nations around 
     the globe.
       Beneath its veneer of egalitarianism, Europe's present 
     pension systems are hideously unfair to tens of millions. 
     Most young workers can look only to paying more and more to 
     support those on retirement today--and then to receiving less 
     and less when they themselves retire. Many under-40 members 
     of today's working population may end up on income support to 
     make ends meet in the next few decades, even though they pay 
     up to 20% or more of their income in social security taxes.


                           Simple Yet Radical

       Part of the problem is demographics. Europe's state pension 
     systems are based on the so-called pay-as-you-go (Paygo) 
     principle, meaning that the pension payroll taxes of today's 
     working populations are passed through immediately to today's 
     retirees. This system worked half-a-century ago in a world 
     where there were seven or more workers for each retiree, who 
     typically lived only a few years after he left the work 
     force.
       That world is gone. Thanks to a sharply declining birth 
     rate and longer life expectancy, there is now an average of 
     only four people of working age to support each pensioner in 
     the 15 member states of the European Union. By 2040 there 
     will be only two, and in some countries like Germany the 
     ratio of workers to pensioners will be closer to one to one.
       As a result, the financial burdens will become enormous. 
     Pension contributions in Germany, for example, are now 20.3% 
     of earnings, and the government has just increased VAT to 
     finance the cost of pensions. And that is just the beginning. 
     In France, pension contributions may have to double to 40% of 
     earnings. But higher payroll taxes lead to even high 
     unemployment and thus fewer contributions to the pension 
     system.
       At the same time, the payouts will be rimmed. European 
     governments have already begun doing so, for example, by 
     increasing the retirement age.
       Meanwhile, every pressure group grants to cut the best deal 
     for its members. Thus we see that Italian civil servants 
     retire in their early 50s and that French truck drivers can 
     end their working lives at 55. Does anyone seriously believe 
     that such a system can survive in the 21st century?
       Twenty years ago my country faced a similar crisis. Chile 
     had created a state pension system in 1925 and by the 1970s 
     it was on the brink of bankruptcy, life with special 
     privileges and burdened by high payroll taxes.

[[Page E1578]]

       When I was appointed minister of labor and social security, 
     my team and I hit upon a simple, yet radical way to keep the 
     idea of a national retirement system, but change the way it 
     is structured. Every worker's payroll taxes, we proposed, 
     could go into a private, individual pension account that 
     would be his own property. His money would be invested in 
     professionally managed funds of stocks and bonds. If he 
     changed his job, his retirement accounts would move with him. 
     These would fuel--and keep up with--a growing economy, 
     yielding a far better pension income than if the same sums 
     went to the government.
       Here's how the Pension Savings Account (PSA) system works. 
     To start with every working man and woman gets a PSA passbook 
     to keep track of how much as accumulated and how well the 
     investment fund has performed.
       To manage these growing assets, individuals choose freely 
     among a number of private companies that invest in a 
     diversified, low-risk portfolio of stocks and bonds. Since 
     workers can change freely from one company to another, they 
     compete to provide better customer service and lower 
     commissions. Many have user-friendly computer terminals where 
     individuals can calculate the value of their pensions or find 
     out how much to deposit in order to retire at a given age.
       The companies are regulated by the government and there's 
     also a safety net: the state guarantees a minimum pension if 
     the worker's savings fall short.
       The PSA system changes the very notion of what a pension 
     is. For example, Chile no longer has a right legal retirement 
     age. People can retire whenever they want, as long as they 
     have sufficient savings in their accounts for a ``reasonable 
     pension'' (50% of average salary of the previous 10 years, as 
     long as it is higher than the minimum pension). If they want 
     to, they can continue working without contributing to the 
     plan after their pension begins. No longer is anyone forced 
     to leave the labor force--or work on the black market--
     because he draws a pension.
       The result? Today Chile's private pension system has 
     accumulated an investment fund of some $30 billion, in a 
     country of only 14 million people and a gross domestic 
     product of only $70 billion. As University of California 
     economist Sebastian Edwards noted, the system ``has 
     contributed to the phenomenal increase in the country's 
     savings rate, from less than 10% in 1986 to almost 29% in 
     1996.''
       Chilean people have reaped a rich harvest. The average 
     worker has earned 12% annually after inflation, and pensions 
     today are much higher than under the old system nearly 80% of 
     annual income over the last 10 years of working life.
       Can this system work in Europe? Some economists assert that 
     it can't. Let's examine their objections.
       ``The transition to an investment-based system is too 
     costly.'' If today's worker's taxes get redirected into 
     individual retirement funds, critics wonder, who will pay the 
     pensions of today's retired workers? In Chile, we covered the 
     guarantees to already retired workers in several ways. The 
     government issued new bonds, which spread some of the cost 
     over the generations. Privatization of state-owned business, 
     and a reduction in government spending elsewhere, were also 
     important. We levied a small temporary transition tax; and 
     the economic growth unleashed by the PSA system brought in 
     greater overall tax revenues.
       In the meantime, during the transition, everyone 
     contributing to the old system could remain in it, but those 
     who moved had their rights to partially accrued pension. 
     Income guaranteed by the government. All new entrants by the 
     work force were required to go into the PSA system.
       ``Operating costs of an investment-based system are 
     higher.'' True, professional pension fund managers do have 
     advertising and investment costs that tax-and-spend 
     government programs run by civil servants do not incur. But 
     the costs are low--and are dwarfed by the higher returns the 
     PSA system generates.
       ``Private pensions are less reliable and safe.'' In fact, 
     it's hard to consider the present setup reliable, with 
     governments increasing taxes and decreasing payouts. The 
     investment results of private funds cannot be guaranteed. But 
     all studies of past performance show that the long-term gains 
     of a well-chosen portfolio of bonds and equities have been 
     far greater than that of paygo systems. The government 
     supervises the investment companies, and of course the fund 
     manages themselves keep a constant watchful eye on the 
     accounts.


                           Empowering Workers

       The PSA system has other benefits. For example, if this 
     system were adopted Europe-wide, workers would not risk 
     losing their pension rights if they left a job in one country 
     for a job in another. Interestingly, the EU Commission is 
     considering a change from Paygo to an investment-based 
     retirement system for its own workers.
       Harvard University economist Martin Feldstein has estimated 
     that the value of future benefits to the American economy of 
     privatizing Social Security pensions could reach an 
     astounding $20 trillion. ``It is difficult to think of any 
     other policy,'' he recently wrote, ``that could produce such 
     a substantial permanent rise in the standard of living of the 
     vast majority of the population.'' Europe could also derive a 
     similarly huge benefit.
       I cannot emphasize enough that the PSA is not a solution of 
     the political right or left; it empowers all workers. It 
     allows them ownership of financial capital that many have 
     never had, giving them a greater stake in the economy than 
     ever before. It may seem revolutionary to suggest that 
     Europeans give up their dependence on the state for their 
     old-age livelihood in favor of taking their pension provision 
     into their own hands. Nevertheless, millions of people in 
     countries such as Peru, Argentina, Colombia, Bolivia, El 
     Salvador, and Mexico have already done so, with excellent 
     results for themselves, their economies and their societies.
       To all who say it cannot be done, my reply is twofold: it 
     has been done, and--considering the ruinous state of Europe's 
     pensions financing--It must be done.

     

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