Chile beats the United States hands down when it comes to retirement account savings. The Cato institute’s Chris Edwards shows what Chile is doing, and lays out the gory details of America’s entitlement time bomb.
Harvard University’s Martin Feldstein estimates that every dollar of increased payroll taxes causes about 50 cents of added deadweight losses. So let’s say that Congress raised the payroll tax by two percentage points to help “fix” Social Security’s finances. That hike would not just hit workers with an extra $120 billion in annual taxes, it would also cause $60 billion of damage to the economy from labor market distortions.
The good news is that there is a way to reform Social Security that would both fix its finances and reduce the economic damage. That is to convert Social Security to a system of personal retirement accounts, as more than two dozen nations have done since Chile pioneered such reforms three decades ago. The reforms have shown that privatized retirement systems can benefit workers, retirees, and the overall economy.
Chile’s personal retirement accounts are funded by contributions of 10 percent of wages. Because workers own these funds, it greatly reduces the labor market damage — or deadweight losses — caused by the system. Chilean workers can look at their paystubs and see that their earnings are going into a secure account that will benefit them. That acts as an encouragement to work. By contrast, in our system Social Security taxes go into a government black hole, which simply frustrates workers and reduces work effort.
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