Social Security is back in the news. First, Republican presidential candidate Steve Forbes suggested a market-based retirement system for young people. Now press reports indicate that the Advisory Council on Social Security will soon endorse a privatization of Social Security.
Add these developments to the 1994 Kerry-Danforth Commission Report recommending that employees be permitted to invest 1.5% of the 6.2% they pay in Social Security taxes in private Individual Retirement Accounts, and you see the beginning of a serious debate on what to do about America's failing retirement system.
Interestingly, two private sector retirement systems that already exist in other nations are significantly outperforming U.S. Social Security in helping both younger and retired families.
The first is the Chilean system. Beginning in 1980, the Chilean government guaranteed the lifetime benefits of all retirees. It then gave current workers a choice: stay in the existing government pension system with full benefits, or enter a new, private sector retirement system in which benefits are based upon the individual's contributions to an IRA and market yields on deposited funds, but you may contribute up to 20% of your income if you desire higher benefits upon retirement.
Over the past 14 years, the average annual yield of an individual's retirement account has been 10%. That compares to a 2.2% lifetime yield for a 45-year-old (and even less for younger people) in the U.S. Social Security system. Contributions by Chilean workers have created a huge pool of investment capital, allowing the economy to grow 7% annually, while the U.S. is averaging less than 3%. The Chilean savings rate is now 26%, compared to 4% in America.
Back in 1955, the government of Singapore created its Central Provident Fund (CPF), a compulsory savings plan in which 40% of a worker's income – 20% each from the employee and employer up to a salary ceiling of S$6,000 per month (about $4,285 U.S.) – is deposited into a private CPF savings account.
Each Singaporean's CPF contribution is divided among three accounts, with 30 percentage points going into what is called the Ordinary Account, 6 percentage points being deposited into a Medisave Account and 4 percentage points going toward the Special Account.
The Ordinary Account is used for making investments, purchasing a home or paying for education. The Medisave Account is a type of self-insurance used to pay for health care expenses. And the Special Account is a retirement account to provide income after retirement.
Has the CPF been successful in establishing a pattern of personal savings? Singapore has the highest savings rate in the world. According to a National Center for Policy Analysis study by University of Singapore economist Mukul G. Asher, in 1994 CPF members held accounts totaling $57 billion, or 72% of the country's GDP.
Two-thirds of those reaching age 55, the basic retirement age, have CPF balances exceeding what's considered the "minimum sum" of $40,000. And because these funds are available for housing, some 85% of the population live in a house they own, the highest rate of home ownership in the world.
Perhaps the most innovative CPF program was the creation in 1984 of the Medisave Scheme. The financial incentives inherent in a system in which most health care expenses are paid out of a personal account has led to a system in which technology and services are high, but costs are relatively low. According to Dr. Thomas Massaro, a physician and researcher at the University of Virginia Health Sciences Center, Medisave has resulted in hospital stays as low as those of the most aggressively managed care hospitals in the U.S., provided technology equal to the best hospitals in Europe, yet still kept overall health care spending low — about 3.1% of GDP (compared with 14% in the U.S.).
In 1986 the government introduced a program that let Singaporeans invest up to 80% (above a set amount) of their CPF funds in board-approved stocks, mutual funds and gold. The investment possibilities were expanded in 1993, and in 1995 account holders were permitted to invest in approved foreign markets.
Singapore's Central Provident Fund has had a significant, positive impact. People take financial responsibility for their own futures, and the country has developed a significant pool of private funds to spur investment. Most importantly, perhaps, Singapore has created a way in which to privately finance most of the "social goods" such as housing, health care, education and retirement in a way that does not pass the financial burden to future generations.
Chile and Singapore offer real-life experience with retirement systems that are far superior to U.S. Social Security. We can hope the Congress will move in their direction in time for the retirement of the baby boom generation.