Privatized Retirement Plans? Good or Bad? – Guest Post
Republican presidential candidate Herman Cain has brought the question of what to do about the Social Security dilemma back into the forefront of political debate. His privatized retirement plan proposal has everybody talking about possible options.
Cain’s privatized retirement plan proposal is based off the plan that has been used in Chile for the past 30 years. Apparently the Chilean government faced a similar problem to our current Social Security program dilemma—too few people paying in and too many people withdrawing funds for too long of a time—and switched to a privatized plan. Cain is claiming Chile’s program is optional (which it is not), and is saying that his proposal for the US would be optional.
How Has Privatized Retirement Plans Worked in Chile?
Workers in Chile must contribute 10% of the first $33,360 they make each year into one or more of the five privately-owned (but government-mandated and approved) pension plans. The plans have invested that money and have seen a growth rate of approximately 9% each year (this number was derived after inflation was factored in). Each citizen owns his or her pension plan and can choose which plan to invest in (each of the five plan features different investment options, some of which are riskier and some of which are safer investment vehicles).
When a Chilean citizen retires, he or she owns that pension fund and can take it out as he or she wishes and spend it as he or she wishes. If the citizen passes away before using up all the money, the remaining funds can be left as an inheritance to family members.
The Chilean companies do not have to contribute to these retirement plans. Chileans can invest up to 10% more (and withdraw that money at any time, paying only taxes on that money, and no additional penalties). This has proven to be a popular investment tool.
Are the Chilean Citizens Happy With the Privatized Retirement Plans?
Unfortunately, Chilean citizens complain that the investments are not paying out enough and that they aren’t getting enough out once they retire. Most Chilieans complain about the high fees and commissions associated with the program and say they wish they could have invested their money freely anyway they desired instead of being forced to participate in the plan.
Would Cain’s Plan Work Here in the USA?
That’s the big debate right now up in Washington. Proponents of Social Security say the stock market volatility makes privatized retirement plans too risky. Social Security funds reinvested in US Treasury bonds. Although these bonds deliver low returns, they are considered very safe and reliable investments. Opponents to privatized retirement plans say the risk of employees losing their investments to the volatility of the stock market could be devastating—a risk that may be too great to take.
Proponents say the risk is worth it—and should be each individual’s choice to take or not take. They also point out that relying on a broken Social Security program is a higher risk, and one they hate being forced into taking.
Now that you’ve heard about Cain’s proposal, we’d love to hear your thoughts—and how you’re preparing for your retirement.
Erinn Stam is the Managing Editor for scholarships for nursing school. She attends Wake Technical Community College and is learning about nursing scholarships for single mothers. She lives in Durham, NC with her lovely 4-year-old daughter and exuberant husband.