Social Security Systems of Chile and United States
Social Security Systems of Chile and United States
Author
Institution
Introduction
The importance of social security cannot be gainsaid as far as the wellbeing and overall economic stability of a country is concerned. Indeed, it is well acknowledged that any society or country will always incorporate some individuals who have special needs. These include the aged and disabled individuals. It goes without saying that the society has a duty and obligation to support the wellbeing of these individuals. This is indeed the basis for the crafting of the social security systems around the world. Social security Systems are defined as government programs that have the sole aim of providing fundamental or basic needs to their citizens who are unemployed, retired or even unemployable as a result of a disadvantage or disability. The funding for the social security system emanates usually emanates from mandatory payroll contributions, usually 5-8% of an individual’s paycheck, derived from both the employers and employees, as well as from the tax revenue of the government. The system also provides support for the disabled, dependent, neglected and needy children, rehabilitation for disabled individuals, alongside varied other social services. Social security programs take different forms in different countries depending on the policy framework that have been used in those individual countries. Such is the case for Social Security programs in the United States and Chile.
History of the United States Social Security System
The U.S Social Security system was established in 1935 after the enactment of the Social Security Act as part of the New Deal. It established a program that would provide retired workers with lifetime payments, thereby laying the foundation for the current Social Security program. In 1939, the Act was amended to include two new categories of benefits such as survivor benefits in case a worker died prematurely, as well as payments to minor children and spouses of the retired workers. The 1954 Amendments on the Act initiated a disability insurance program, with further amendments being made in 1956 to provide benefits to disabled adult children and disabled workers between the ages of 50 and 65 (Krugman, 2005). At this time, the scope of the program was broadened by the United States Congress to allow workers below 50-years of age and their dependants to be eligible for benefits, before disabled workers could qualify at any age. 1960s saw further amendments enacted on the program, with the most fundamental being the lowering of the eligibility age for men to 62. It was also around this time that Medicare was created, thereby extending health coverage to beneficiaries of social security from 65 years of age and above. 1972 saw the creation of the Supplemental Security Income program under the Social Security Administration. The SSI aimed at providing cash payments to disabled and low-income individuals aged 65 and above. Further changes were enacted in early 80s after the program was faced by an immense financial crisis (Krugman, 2005). The amendments proposed by the Greenspan Commission and finally signed into law in 1983 included coverage of federal employees, taxation of benefits, increased reserves in the Trust Funds, as well as a raised age of retirement by the year 2000 (Feldstein, 1998). The United States Social Security has, since its inception, grown to become the largest federal program in the country. Testament to its large size is the fact that as at the end of 2004, the program was paying monthly benefits to about 48 million disabled and retired workers, as well as their survivors and families. At the same time, approximately 92% of the United States population aged 65 years and above were entitled and receiving the Social Security benefits. The total benefit payments at this time amounted to about $487 billion or about a quarter of the out whole federal budget.
History of the Chilean Social Security system
The history of the social security system in Chile can be traced to 1920s, about 10 years prior to the creation of the United States Social Security program. The program was established as part of varied labor reforms, with more than 150 systems eventually coming to being. Underlining the expansive use or reach of these systems is the fact that by early 70s, more than 75% of the country’s workers were covered by the systems, with certain occupations including such add-on benefits like low-interest home purchase loans and healthcare (Orenstein, 2009). However, the Chilean Social Security model underwent a major reform in the 80s, resulting from the financial concerns, as well as system coordination deficiency in the late 70s. Some options considered but rejected in the reforms included increasing taxes and raising the retirement age. Instead the country moved to a system that had individual accounts, where privately operated pension companies, as well as Pension Savings Accounts (PSAs) were established.
The PSA system is crafted in such a manner that it would offer a benefit that is equal to 70% of the final salary of the employee. This benefit is founded on a 10-present rate of saving, coupled with a 4-percent rate of return within the course of a typical work life of an individual. Of particular note is the fact that workers who have been making contributions for a minimum of 20 years but whose funds is not sufficient to offer the 70% targeted benefit would have the state offering them a benefit upon the depletion of their account (Scheil-Adlung, 2000). Indeed, individuals that do not have 20 years of contribution have access to welfare-type pensions offered at considerably lower rates (Krugman, 2005). On the same note, individuals whose accounts exceeded the threshold of the targeted benefits may be used in retiring early, providing survivor or spouse protection or both, buying additional benefits, as well as offering the retirees a lump sum apart from the periodic pension payments.
Similarities between the United States and Chile’s Social security program
While there are fundamental differences in the nature of the social security programs in Chile and United States, the two are also similar in varied ways.
First, both systems allow individuals to make additional plans for retirement. Of course, it is understood that Chile’s case currently involves private insurers only, while the United States case involves the federal government sponsored social security programs, with the option for additional private retirement programs for the workers (Orenstein, 2009). For the two countries, however, such additional contributions would technically not be seen as social security contributions, in which case they would be subject to income tax. Nevertheless, the savings account would be blended with the social security to finance the retirement.
In addition, both of them are still under considerable control from the government. The Chilean Social Security program is administered by the Superintendent of Pension Fund management Companies, which is an independent government agency that is under the Ministry of Labor and Social Security. This agency oversees and keeps an eye on the individual pension fund management companies, and authorizes the creation of any new AFPs, monitors their performance, revokes their licenses and levy’s fines among other responsibilities (Feldstein, 1998). The United States Social security program, on the other hand, is wholly controlled by the federal government under the Social Security Administration (SSA), which, upon receipt of the contributions from workers and their employers would pay out the benefits to the retirees and other individuals with special needs. The surplus or remaining amount would be used to buy the United States treasury bonds. In essence, the government through the Social Security Administration would be loaning the surplus thus derived from the contributions to itself. The Social Security Administration is also required to issue reports on the system’s financial system so as to determine its sustainability (Scheil-Adlung, 2000). It is worth noting, however, that there are other government agencies that play a role in the administration of the Social Security program in the United States. For instance, there is the Social Security advisory council, established by the Social Security Act and required to convene periodically so as to carry out an assessment of the varied features and elements of the Social Security system (Krugman, 2005).
Differences between the Chilean and United States Social Security Programs
One of the key differences between the Social Security program in Chile and that of the United States revolves around the percentage of income that is paid. In Chile, workers are required to contribute 10% of their monthly income to a maximum of 60 Unidades de Fomento (UFs) or US$2,427 every month to their individual accounts (Orenstein, 2009). Every month, the pension fundm management companies (AFPs) would charge the contributors an administrative fee, as well as a premium for disability and survivor’s insurance, an amount that averaged about 0.99 percent of the contributors’ income and approximately 1.71 percent of their income respectively (Scheil-Adlung, 2000). This may be contrasted from the United States social Security program where the total contribution to the Social Security program amounts to 12.4 percent, with 6.2 being obtained from the employees’ income whereas the remaining 6.2 percent is paid by the employer (Feldstein, 1998). In instances where the individual is self employed, he or she would be required to contribute the entire amount. Of particular note is the fact that Americans are not compelled to make contributions and could actually choose not to contribute to their retirement. Chile’s social security system, on the other hand, requires all individuals to make contributions but would not impose the employers with the requirement for contributing on their employee’s welfare.
One of the most fundamental differences between the Chilean model of social security and that of the United States revolves around the control of the government. In late 1980, Chile acknowledged the deficiency of coordination of the social security programs, as well as financial sustainability of the same. In essence, Chile moved from the unsustainable public pensions program to a private program that was (and still is) founded on individual decision-making. Upon getting into the workforce, workers would be provided with a private pension fund that would require them to contribute about 10% to 20% of their income depending on the age at which the employee wants to retire (Béland, 2005). Upon retirement, the private fund would be moved to an annuity with an insurance company with the individual being left to decide the insurance company with which he or she would want to work, as well as the plan that would be most suitable to his or her circumstances. In instances where the individuals were dissatisfied with the insurance companies or the plans provided to them, they always have the option of changing companies. This, in essence, allowed insurance companies to compete as far as the quality of plans and services was concerned, thereby resulting in increased efficiency, as well as better returns with time (Béland, 2005). A set of transitional rules were set up for insurance companies so as to ensure safety. The government aimed at directing companies to undertake safe investment agreements so as to prevent loss of money thanks to the privatization’s radical nature. Nevertheless, continued security of insurance companies increased the freedom of insurance companies to broaden their investment. Individuals that were already paying to public systems had the option of getting into the private system or staying in the public one. The main cost emanating from the transition revolved around the loss of money due to the change to the private system. This cost, however, was financed through the sale of state-owned enterprises that provided for individuals that stayed on the public pension system. The success of the process of privatization resulted in about 93 percent of workers in Chile switching to the new program. The United States Social Security program, however, has remained a public system where the federal government has total control of the fund and all its operations (Orenstein, 2009). In essence, workers in the United States have had to pay 12.4 percent of their income to the federal government as part of the social security. In this case, the contributions of the present workforce are used in financing the benefits of the retirees. For a long time, the contributions have remained considerably higher than the benefits that the federal government has had to pay to the disabled and the retirees. However, recent times have seen increased concern on the sustainability of the system thanks to the increasing number of retirees, which has decreased the gap between the contributions to social security and the benefits that are paid out.
In addition, there are variations as to the manner in which the Social security benefits in the two countries are treated with regard to tax. In Chile, the mandatory savings made via the AFP system were complemented by tax incentives aimed at encouraging individuals to make voluntary contributions via the varied financial instruments (Scheil-Adlung, 2000). In this case, the savings that make use of these products are exempted from tax for all the years in which deposits were made. In addition, the interest that is generated from the savings is exempted from tax, although the pension that is financed using these resources is considered a taxable income. The United States case is slightly different as Social Security benefits would attract federal taxes in instances where the total income of an individual surpasses the $25000 mark (Orenstein, 2009). In instances where a joint return is filed, an individual would have to pay taxes if the total income surpasses the $32,000 mark.
References
Krugman, P (2005), Confusions about Social Security. The Economists’ Voice, Volume 2, Issue 1, The Berkeley Electronic Press
Béland, D. (2005). Social security: History and politics from the New Deal to the privatization debate. Lawrence, Kan: University Press of Kansas.
Feldstein, M. S. (1998). Privatizing social security. Chicago, Ill. ;London: Univ. of Chicago Press.
Scheil-Adlung, X. (2000). Building social security: The challenge of privatization. Piscataway, NJ: Transaction Publishers.
Orenstein, M. A. (2009). Pensions, social security, and the privatization of risk. New York, N.Y: Columbia University Press.
