Let's Try Real Social Security Reform By Colin McNickle: PITTSBURGH TRIBUNE-REVIEW Despite steadfast denials from just about everybody buckled to the Beltway, many of the wags with whom I regularly converse insist the appetite will be bigger than the belly in the 109th Congress to do anything substantive about Social Security. President Bush says reforming this long-running exercise in Rooseveltian socialism is one of his top priorities. And among the GOP leadership, the commitment to reform borders on the magniloquent. That said, Social Security reform is something not to be believed until seen. There's lots of talking going on. But even if the president can marshal his party to act, why is this administration, and why are other Republicans, monkeying around with such a small bit of solder in such a gaping crack in the radiator? The Bush plan would allow for 2 percent of an employee's 6.2 percent share of the 12.4 percent Social Security tax (the employer pays the other half) to be invested in a personal retirement account. The so-called PRAs are not unlike a 401(k), which, over the long haul, performs solidly. The remaining 10.4 percent still would be paid into Social Security, the world's largest legal pyramid scheme. As such scams go, they usually implode -- this one to begin collapsing in 2018 when Social Security begins to take in less than it must pay. A competing Republican proposal -- put forth by Sen. Lindsey Graham, R-S.C. -- would allow a 4 percent employee PRA. But it would raise the cap on the inflation-adjusted limit on the maximum taxable wage (now set at $87,900 annually) to $150,000. That, to help cover transition costs. No matter what you call it or how you couch it, it's a tax hike. Late word from Washington is that the administration's final plan might be something between the president's 2 percent plan and Mr. Graham's 4 percent solution. It's not enough. Such a radically broken program needs a radical fix. Actually, it's just good economic sense: the Chilean retirement program. Chile faced the same demographic/fiscal time bomb in 1981 that the United States faces today -- fewer and fewer workers paying retirement benefits for more and more workers. Its solution? A 100 percent privately funded system that today features 95 percent employee participation, $55 billion in pension assets; $65 billion if the value of ancillary annuities (explained below) are factored in, and an average real rate of return (that's above the rate of inflation) of 10.1 percent per year for 24 years, Jose Pinera tells me from Santiago. Mr. Pinera is Chile's former secretary of labor and social security and the highly respected president of the International Center for Pension Reform. He also co-chairs the Cato Institute's Project on Social Security Reform. Oh, by the way, Stephen Moore, president of The Club for Growth, reminds (in the current issue of National Review) that the U.S. Social Security program offers most groups of today's young workers "on average a 1.5 percent rate of return on the dollars 'contributed.'" The return is negative for young black men, Mr. Moore notes. What a deal, eh? L. Jacobo Rodriguez, who once studied such matters for Cato (he now works in the investment industry in Los Angeles) laid out the Chilean system in testimony before Congress three years ago. "Every month workers deposit 10 percent of the first $22,000 of earned income into their own individual pension savings accounts, which are managed by the specialized pension fund administration of their choice. Those companies invest workers' savings in a portfolio of bonds and stocks, subject to government regulations on the specific types of instruments and the overall mix of the portfolio," he said. Contributions are tax-deductible. Portfolios are diversified, low risk and owned by the workers, not the government. They have the option of contributing an additional 10 percent of their wages each month. Upon retirement, Chileans have two options. They can either buy annuities from insurance companies with a lifetime payout indexed to inflation or keep the money in the account and make programmed withdrawals. No matter the option chosen, payouts are designed to, generally, equal 70 percent of a worker's final salary. If there's not enough money in a respective workers' retirement fund, Mr. Rodriguez notes there's a government safety net that kicks in -- once the money in the individual retirement account has been depleted. But because of the new system's "efficiency," -- i.e., freed-up money begets investment that beget profits that beget increased tax receipts -- he says the cost of the latter (paid for through general government revenues), has been "very close to zero." Sounds great. But what about those nasty transition costs? Even the token Bush administration system would have hardly token cash transition costs estimated to be about $3 trillion. The Chilean system is more expansive. And if fewer people are paying into the old government system -- and in Chile those entering the work force enter the new system only -- where's the money come from to pay for those grandfathered to receive old-system benefits? Some of the old pension obligations are offset by the value of state-owned assets, Jose Pinera says. A fraction of the difference between the new, lower pension obligation and the payroll tax was used as something of a "transition tax" that neither reduced employee net income nor increased the cost of labor to the employer. About 40 percent of the transition debt was paid through government-issued bonds. But reductions in wasteful government spending also helped. And, as previously noted, increased tax receipts from the economic growth sparked by the privatized retirement accounts helped, too, Pinera added. Chilean pensions "today do not depend on the government's ability to tax future generations of workers, nor are they the source of election-time demagoguery," Jacobo Rodriguez says. "To the contrary, pensions depend on a workers' own efforts and thereby afford workers satisfaction and dignity." Sounds like the American dream to me -- personal retirement security. If President Bush really wants to leave his mark domestically and remove the tarnish from his oft-questioned conservative pedigree, he'll scrap his clearly inferior Social Security "reform" plan and push for a bold Chilean-style program. The only thing we have to lose is FDR's legacy of patrician collectivism that has done serious harm to the Founders' republic. Colin McNickle is the Trib's editorial page editor. Ring him at (412) 320-7836. E-mail him at: cmcnickle@tribweb.com.