Can Privatization Save Social Security? Let's Look to Chile

My recent A&Q on how the U.S. can salvage Social Security questioned several solutions for how the program can pay out what was promised beyond 2034, including ways to increase revenue by raising taxes or reducing benefits. The most pertinent question is finding a solution that both feels fair to Americans and will make it through Congress. A reader offers this solution, which is to take Social Security out of the government altogether:


I would love to see the U.S. transition to something closer to the Chilean model; a mandatory retirement account placed in a broad range of bonds and index mutual funds. The money is yours, and you can pass it along to your descendants.


How could I forget about Chile? This is actually a great example to look at, as it is one of how privatizing public insurance—an idea supported by many Republicans—isn’t as easy as it sounds. The Chilean program, introduced in 1981, is a system of privately managed individual accounts that replaced its previous public system, which faced some similar problems as the U.S. system. Unlike your normal retirement savings account though, the Chilean program is mandatory. Workers in Chile contribute 10 percent of their monthly earnings to their account by law, and the maximum contribution is 20 percent. The argument for the privatized system is that it would increase national savings, as returns on private securities are riskier, but notably higher than Treasury securities.

But the Chilean private program hasn’t been problem-free.