Conservatives don’t usually call for the US to emulate other countries when it comes to public policy, but one exception to that rule is Chile. The story of how Milton Friedman’s “Chicago Boys” turned Augusto Pinochet’s military dictatorship into a laboratory for successful free market policies which in turn lead to democracy is a milestone in the history of conservatism. At the September 7th GOP debate, presidential candidate Herman Cain specifically cited the “Chilean Model” of privatizing social security as a policy worth implementing.
So how many conservatives know that Chile’s privatized social security system makes use of a mandate to purchase private insurance in a regulated market, much like the tyrannical Romneycare and Obamacare?
The key architect of the Chile’s Pension system was José Piñera, currently a Distinguished Senior Fellow at Cato. FrumForum was unable to contact Mr. Piñera since he was traveling but he has lectured extensively about the pension reforms he implemented. Here is how he describes them:
10 percent of their pretax wage is deposited monthly into a personal account. Workers may voluntarily contribute up to an additional 10 percent a month in pretax wages. The invested amounts grow tax-free, and the workers pay tax on this money only when they withdraw it for retirement.
Upon retiring, workers may choose from three payout options: purchase a family annuity from a life insurance company, indexed to inflation; leave their funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a worker dies, the remaining funds form a part of his estate); or any combination of the previous two. In all cases, if the money exceeds the amount needed to provide a monthly benefit equal to 70 percent of the workers’ most recent wages, then the workers can withdraw the surplus as a lump sum.
Let me translate this for the Tea Party activists and Ayn Rand fans: the state says that 10% of your income must be put into an account that you had no say in setting up in the first place. You are allowed to put more into this private account if you so desire, but you are mandated to have this account. Upon retirement you can either keep your account and make withdrawals from it over time, or you must invest it with a private insurance company.
Make no mistake, this market works best if everyone participates and incentives were also created to get as many people to join as possible:
The Chilean PSA system includes both private and public sector employees. The only ones excluded are members of the police and armed forces, whose pension systems, as in other countries, are built into their pay and working conditions system. (In my opinion–but not yet theirs–they would also be better off with a PSA). All other employed workers must have a PSA. Self-employed workers may enter the system, if they wish, thus creating an incentive for informal workers to join the formal economy.
But surely, even if you are mandated to have this account, the private insurance companies you can purchase a plan from are given total free market flexibility to let the invisible hand work its magic? No! According to Piñera:
A worker chooses one of the private Pension Fund Administration companies (“Administradoras de Fondos de Pensiones,” AFPs) to manage his PSA. These companies can engage in no other activities and are subject to government regulation intended to guarantee a diversified and low-risk portfolio and to prevent theft or fraud. A separate government entity, a highly technical “AFP Superintendency,” provides oversight. Of course, there is free entry to the AFP industry.
Each AFP operates the equivalent of a mutual fund that invests in stocks and bonds. Investment decisions are made by the AFP. Government regulation sets only maximum percentage limits both for specific types of instruments and for the overall mix of the portfolio; and the spirit of the reform is that those regulations should be reduced constantly with the passage of time and as the AFP companies gain experience. There is no obligation whatsoever to invest in government or any other type of bonds. Legally, the AFP company and the mutual fund that it administers are two separate entities. Thus, should an AFP go under, the assets of the mutual fund–that is, the workers’ investments–are not affected.
This is the so called free market reforms that Tea Partiers and conservatives claim to be in favor of? What gives the federal government the right to coerce employers force me to put my own money into an account and use it to purchase a policy in a regulated marketplace? Haven’t the Chileans ever heard of the non-initiation of force?
In seriousness, the success of the Chilean model is worth emulating: Romneycare and Obamacare were onto something when they mandated that people would have to purchase insurance options in a regulated market. You avoid the pitfalls that come from an entirely single-payer system while still creating a system that is able to provide benefits for all citizens of the country. Piñera himself describes the free market benefits that come from coercing Chileans to be consumers of private social insurance:
Workers are free to change from one AFP company to another. For this reason there is competition among the companies to provide a higher return on investment, better customer service, or a lower commission. Each worker is given a PSA passbook and every three months receives a regular statement informing him how much money has been accumulated in his retirement account and how well his investment fund has performed. The account bears the worker’s name, is his property, and will be used to pay his old age pension (with a provision for survivors’ benefits).
To be sure, retirement insurance and health insurance are not the same. There could be sound economic arguments against this sort of mandate in health insurance - perhaps conservatives think it would be better to focus on cost cutting measures, perhaps they think it would only make sense to focus on catastrophic care. Maybe the more intellectually honest ones would want to make the argument that it is ok to ensure a right to a retirement account but that it would be a step too far to ensure a right to a minimum amount of healthcare. These would all be intellectually honest answers.
Instead, the movement has decided that mandates are evil and that the only way to rectify this is to convince Justice Anthony Kennedy that while Social Security is completely kosher, that a mandate to purchase private insurance is an unconstitutional abomination.
Some in the conservative movement think that the anti-Obamacare lawsuits are just the first steps in a long term plan to eventually overturn Wickard v. Filburn. Whether or not that is the true end goal, politicians and activists will be content to hold two completely contradictory ideas in their heads: mandating individuals to purchase private health insurance is an unconstitutional threat to the Republic, while a system that mandates individuals to purchase a plan from a private pension fund is a shining beacon of liberty that we should emulate.
And in case you forgot, Paul Ryan’s plan for Medicare also uses a similar architecture for regulated private insurance markets that the Chilean system, Romneycare, and Obamacare all use.