Lessons From Chile's Pension Reform

I thought this was interesting, and I love the “egg timer” technique:

We had dinner with a fellow who made a real change - Jose Pinera. As Chile's Labor Minister in the '80s, he completely changed the system of public pension financing and provided a model for the rest of the world.

We'll let Jose tell his story as he told it to us last night:

"I was one of the 'Chicago Boys.' That is, I studied under the great economists at the University of Chicago…and then I got my Ph.D. in economics at Harvard, which added a little bit of humanism to the hard-edged teaching in Chicago. So, they called me a 'Chicago Boy' and a 'Harvard Man,' which is the way I like to think of myself.

"Things fell apart in Chile during the Allende years. We had to rebuild the country afterwards. So, I went on TV and I said what I thought…about how to reform the pension system…or what you call Social Security.

"A little background. You see, almost all the world's pension systems came from the same source - Otto von Bismarck. He set up the first one in Prussia and it was later taken up in almost all the developed countries. We set it up in Chile in 1925. It wasn't set up in America until ten years later.

"Bismarck was very clever. He offered people a pension on what is called here in France a 'repartition basis.' That is, all the money goes into a pot…and you get from the pot whatever the politicians decide you can have. Bismarck offered people who retired at 65 a nice pension, for the time. Bismarck knew that the average life expectancy in Prussia at the time - this was the middle of the 19th century - was only 45 years old. So he knew he couldn't have to pay out many pension claims. But the average person didn't know how long he would live, so he could imagine himself living to a ripe old age and taking advantage of the public pension system.

"Bismarck also knew why he was doing it. He said he aimed to make the population 'docile' so they would 'serve the state,' more easily.

"Well, now, everyone is living much longer…and the politicians aren't as smart as Bismarck. They've promised greater and greater benefits, and even lowered the age when you can get them…so the pension systems are going broke. They're all going broke - you can count on it.

"Now, I'm going all over the world explaining this to governments and urging them to put my system in place…to make a radical change in the way public pensions are financed. Recently, I was in China, for example. You want to see a pension problem…look there. That policy of one family, one child is a catastrophe from a pension financing point of view. They're going to have hundreds of millions of old people, and very few young people to support them.

"Anyway, back in the '80s, I went on TV in Chile, with ideas about how to reform the pension system. I was just a young economist…only 29 years old. But the president of the country saw me on television and he said he wanted to talk to me. He called me in. I said I would be happy to explain to his people how to reform the pension system. But he said that if you were really going to reform it, you had to start at the top. So, he appointed me Minister of Labor.

"Then, I had to explain to the people what was wrong…and had to explain to them how to fix it. So, the first thing I needed to do was to win their confidence.

"I went on TV again. This time I took my mother's egg timer and I held it up and I said, 'I'm only going to talk for three minutes. Give me three minutes and I'll explain what's wrong with the pension system and what we're going to do with it.' And I told the cameraman to just cut me off after three minutes.

"This worked beautifully, because it made me look humble…I wasn't going to waste the people's time with a long, windy speech like Castro…I was just going to tell them something simple, fast.

"Of course, I couldn't explain everything in 3 minutes. But I told them that I had good news and bad news. The bad news was that the public pension system was broke. We had no money. But the good news was that I had an even better system.

"They called me the Minister of the Egg Timer…but they began to trust me. And then, I went back on TV…over and over…each time for only 3 minutes…and each time with my egg timer to keep me honest…and I laid out everything…why the system went broke…and what I was proposing to put in its place - a different system in which, instead of dumping all the money into a big pot that the government could do with as it pleased, each worker had his own personal pension account. It took some explaining. But I kept going…each time explaining more and more. I had to explain, for example, that the idea of the 'employer contribution' is a myth. The employer just looks at it as part of his labor cost. But once you call it an 'employer contribution,' the employee gets the idea that it's not really his money that finances the system and he feels he has no control over what he gets out of it anyway.

"My system is very simple. The worker makes exactly the same contribution as he did before. But it's his own money and he knows it. And he has some control over how it's invested. And if he dies, it goes to his family. He's an owner of it, not just a recipient of government handouts.

"So, when I had finished laying all of this out, over a 9-month period, I then admitted that I could be wrong. 'Maybe this won't work as well as I think it will,' I said. And I said I didn't want to force anyone to go with my system. So, we decided that anyone who wanted to stick with the old system - which is the system you still have in France…and America - could do so. Or, they had the option of getting into the new system with individual retirement accounts than they could manage themselves. Now, guess how many people went with the new system? We thought 51% would be a victory. Instead, 95% signed up for private retirement accounts.

"And here's something interesting. About a third of the population of Chile are leftists…socialists, communists, or Hillary Clinton liberals. Even these people - when it came to their own money - preferred to have it in their own retirement accounts, invested in stocks and bonds, rather than in some black hole in the government accounts.

"And the best thing about this is that it turns the whole country into capitalists. Even the leftists think twice before they vote for higher business taxes or more regulations. They worry how their retirement account will be affected. And that's why Chile is now the richest country in Latin America."

Source the Daily Reckoning (which I should add I generally find to be much too skeptical and libertarian, but now and then has items of interest).

Texas Tort Reform

Texas has enacted laws to reduce frivolous lawsuits, and the effects seem to be quite beneficial. The WSJ reports:

Over the past three years, some 7,000 M.D.s have flooded into Texas, many from Tennessee.

Why? Two words: Tort reform.

In 2003 and in 2005, Texas enacted a series of reforms to the state's civil justice system. They are stunning in their success. Texas Medical Liability Trust, one of the largest malpractice insurance companies in the state, has slashed its premiums by 35%, saving doctors some $217 million over four years. There is also a competitive malpractice insurance industry in Texas, with over 30 companies competing for business. This is driving rates down.

The result is an influx of doctors so great that recently the State Board of Medical Examiners couldn't process all the new medical-license applications quickly enough. The board faced a backlog of 3,000 applications. To handle the extra workload, the legislature rushed through an emergency appropriation last year.

Now many of the newly arriving doctors are heading to rural or underserved parts of the state. Four new anesthesiologists have headed to Beaumont, for example. Meanwhile, San Antonio has experienced a 52% growth in the number of new doctors.

Free Market Health Care FAQ

In response to questions generated from his NYT's letter to the editor, Paul Hsieh has prepared a valuable FAQ on Health Care in a Free Market.

Quick Hits

Stella posts a story indicating that less risk capital is being allocated to medical research due to regulatory risk. On a personal level, I too have decided to shy away from such investments for the same reason. Additionally I've recently cut back my medical insurance to a bare-bones disaster policy and am putting away the difference in premium in what I call my "medical tourism account". I'm pretty convinced that by the time I need real medical care (say 20 - 30 years down the road), I'll be seeking it in Singapore or Bangkok not in North America.

Paul has an encouraging post showing the effect FIRM is having in Colorado. Intellectual activism can produce results!

C. August posts on Yaron Brook's talk at the Ford Hall Forum (a video of a similar talk given here in Irvine is available on the ARI site). I found this portion of the Q&A interesting (if you had asked me the same question, my initial thought would have been that the public is less and less interested in ideas, but I like Yaron's take much better):

One other really interesting bit happened near the very end of the Q&A. An older gentleman stood up and said, basically "I've been coming to these talks for 30 years, and I'm saddened to see how few people there are in the hall tonight. What has happened?" It was a valid question, because I remember when the Forum was hosted at Northeastern in the mid-90's and there were many hundreds of people in attendance.

Dr. Brook laughed and said "Well, for one thing, I'm not Ayn Rand." The audience laughed, but then he went on. Again, to paraphrase, he said "Think about when she gave her lecture in 1969. She could fill a 1,500 person hall. People would travel across the country for the Ford Hall Forum, because if you wanted to hear an Objectivist speak, that was it. In contrast, look at where we are now. This is my third talk in the Boston area this week, and I'll give two more in the coming days. Universities across the country regularly host Objectivist speakers, and in California we have at least one lecture a month. We're planning a new center in Washington D.C." and he went on and on, describing the many opportunities people now have to hear these ideas. Dr. Brook is on TV many times a month, and is published in Forbes magazine regularly. The key, he said, is that we are laying the foundations for a philosophy of reason and individual rights to be considered as a viable and expected alternative to the widely held ideas of the day. "You won't be able to turn on a news program without those ideas being put forth."

Natural Disasters - Not Evidence of "Market Failure"

Thomas Bowden has been on a roll lately, here's his latest piece: How Governments Make Disasters More Disastrous. Some key excerpts:

The Katrina tragedy should have called into question the so-called safety net composed of government policies that actually encourage people to embrace risks they would otherwise shun--to build in defiance of historically obvious dangers, secure in the knowledge that innocent others will be forced to share the costs when the worst happens.

Without blaming the victims for having followed their own government's lead, it is time to question whether those policies should continue.

[...]

By gradual steps, this disaster safety net became part of the legal landscape, taken for granted by private investors and owners deciding to undertake new projects or rebuild storm-damaged areas. Relief programs--by minimizing, disguising, and shifting the real risks of defying natural hazards--became an active force distorting private decision-making and inviting even worse future tragedies.

Thus if a pre-Katrina Mississippian asked himself, "Should I build my house 10 feet above sea level, a quarter-mile from the Gulf Coast?" the answer came back: "Sure, why not? The government will look after me if disaster strikes."

[...]

But the solution is not more of the market distortions and perverse incentives that have lured so many people into harm's way. The solution is to replace the prevailing entitlement mentality with a free market in disaster prevention, insurance, and recovery.

In a free market--without tax-paid levees, government disaster relief, or subsidized insurance--anyone who contemplates building or buying property in a high-hazard area will need to face hard facts about the local history of natural disasters, the efficacy and cost of preventive measures, and the availability of insurance.

For example, the high price--or total unavailability--of private insurance will resound like a clanging alarm bell, signaling the market's objective view that a particular building plan is abnormally risky compared to less dangerous locales.

With their own lives and wealth at stake, people will have every incentive to evaluate risks objectively. And if hardy souls still choose to occupy and fortify New Orleans, or build on an earthquake fault, or live in a tornado alley, the risk and reward will be theirs alone. No longer will government make disasters more disastrous by pretending that citizens have a right to defy the forces of nature at others' expense.