The Chilean Model

No, not this Chilean model. I’m talking about Chile’s retirement scheme that Herman Cain has mentioned in the various and numerous GOP debates over the last few months. Cain proposes that the US adopt a similar system and use it to replace the current Medicare and Social Security programs.

The Chilean model adopted in 1981 was pioneered by the “Chicago Boys” (yes that’s UChicago) led by Milton Friedman and basically consists of personal, private retirement accounts for every citizen. It outperforms Social Security in that its rate of return is more than 9% over thirty years, over four times the Social Security payout. A key component of the program is personal choice and each citizen gets to decide how much risk they want, how much they want to contribute, and when to retire. Also, unlike Social Security these retirement accounts are the property of the citizen they were created for, which means that they can be passed on to heirs.

The program is criticized by those who claim that the pensions provided are sometimes inadequate and one forecast claims that half of retirees will have to rely on government subsidies to be able to retire. It’s not totally surprising that such an ambitious program would have some issues but if Cain (or whoever GOP decides to nominate) can overcome the political death trap that is Social Security then this Chilean model will be as appealing as the one pictured above.

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