Social Security Systems of Chile and United States

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.
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.
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izing 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.
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