Chile was the first country in the western hemisphere to set up a social security system, and the first country in the world to reform it using individual investment accounts. It has again broken new ground by becoming the first country to use individual accounts in an unemployment insurance (UI) system. Chile's move should prod the United States to rethink the way it provides a safety net for unemployed workers.
- Chile previously had only a limited system of unemployment assistance. Some of the unemployed received a very small public benefit - $14 to $30 a month, and a few companies paid severance to displaced workers.
- · Workers will pay 0.6 percent of their wages into individual accounts, while employers will pay a 2.4 percent payroll tax divided between individual accounts and a "joint account." [See Figure I.]
· The accounts will be administered by the same private pension funds that manage Chilean workers' retirement accounts, and the funds will invest conservatively in a variety of securities.
· The individual account will be in the worker's name and will not be paid out until the worker becomes unemployed or retires.
- Unemployed individuals will be able to draw 30 percent to 50 percent of their previous wages for up to five months. The joint account will provide benefits to unemployed people who exhaust the balances in their individual accounts.
- The Chilean approach avoids the need for an adjudication system. In the United States, benefits often are not paid to workers who quit voluntarily or are fired "for cause." In one state, for example, the cost of determining whether a worker's job separation qualified for benefits and adjudicating the disputed claims adds up to 22 percent of the total administrative cost. - - Brief Analysis No. 424 Tuesday, November 12, 2002 by William B. Conerly, Ph.D. Conerly, Ph.D.
General retirement
- · By 2050, the number of people age 64 to 84 worldwide will grow threefold, from 400 million to 1.3 billion.
· The number of people age 85 and older will grow from 26 million to 175 million (more than a sixfold increase).
· The number age 100 and over will jump from 135,000 to 2.2 million (a 16-fold increase). (United Nations Population Division, World Population Prospects: The 1998 Revision (New York: United Nations, 1998).
Ratio of Workers to Pensioners.
Due to population aging and declining fertility, the ratio of working taxpayers to nonworking pensioners in the developed world is around three to one. By 2030, absent reform, this ratio will fall to 1.5:1. In some countries, such as Germany and Italy, it will drop to 1:1 or lower. ( Jonathan Gruber and David Wise, "Social Security, Retirement Incentives and Retirement Behavior: An International Perspective," Employee Benefit Research Institute, Issue Brief No. 209, May 1999.)
- Let us look at a 25-year-old worker earning $25,000 a year.9 Assuming annual pay increases of 4.25 percent (and annual inflation of 3.25 percent), by age 65 he will be earning $126,744 per year. Figure I shows the difference the three major elements make.
· If the worker retires at age 65, he can expect to live 23 years in retirement, and thus will have 1.7 years of future work for each expected retirement year.
· With an average investment return of 5 percent (1.75 after inflation), if he contributes 5 percent to his 401(k) plan, he can expect a pension of $19,136 per year, or 15.1 percent of preretirement income.10
· If the worker doubles his contribution to 10 percent, it will double his pension to $38,271 per year, or 30.2 percent of preretirement income.
· If the rate of return also doubles to 10 percent (6.75 after inflation), the worker can expect a pension of $165,176 per year, or 30 percent more than his preretirement income.
· If the worker stays on the job until age 70, when his income will be $156,066, he will have 2.5 years of future work for each expected retirement year, and his pension will be $291,640 per year, more than four-fifths greater than his preretirement income.
