Social Security has precedent

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Private accounts have been part of the government retirement systems of several foreign countries for years, giving proponents of President Bush's Social Security reform plan real-world examples to suggest it can work in the United States, too.

Mr. Bush often has pointed to Chile, which incorporated private accounts into the government-run retirement system 24 years ago.

"Chile was the first country in the Western Hemisphere to start a [government-run] social security program, and it was the first to privatize [its] social security program," said John Goodman, president of the conservative National Center for Policy Analysis. "It led the way on both counts, and Chile's program is very successful."

Retired workers have seen a rate of return of 10 percent from their private accounts, much greater than the 1 percent to 3 percent return they expected from the government.

The private pension funds, which once were voluntary but now are mandatory in Chile, are invested in stocks and government bonds -- an influx of capital that has helped give Chile the fastest-growing economy in Latin America over the past two decades.

The Chilean model is hardly perfect, though, and the White House emphasizes only the positives of the program. For instance, many rural Chileans work in the underground economy, so they don't participate in the system. And, although the Chilean government does guarantee a minimum retirement income if the private accounts experience a poor return, it is less than half of what the government-run system would have paid.

What really hurt the Chilean plan was the "enormously large" transition costs, pegged at 4 percent of the country's gross domestic product, said Christian Weller of the liberal Center for American Progress.

High administrative costs also have cut into the amount that retired Chileans can draw down for retirement. A recent World Bank study estimated that some recently retired workers have surrendered nearly 25 percent of their nest eggs to fund managers.

Mr. Bush's advisers, however, have said that the costs of managing the accounts could be kept much lower than those in the Chilean system.

Meanwhile, Mr. Bush will do his best this week to convince Americans that the risks of not incorporating private accounts into Social Security -- which will begin running a deficit in 2018 and go bankrupt in 2042 -- are greater than the status quo.

After giving Social Security reform a major push in tonight's State of the Union address, Mr. Bush will embark on a five-state tour to drum up support.

Bush supporters have complained that the president has let Democrats define the debate, and said they have watched the White House do nothing while influential Republicans -- such as House Ways and Means Chairman Bill Thomas of California -- criticize using private accounts.

Democrats are pleased with their early political maneuvering.

"I know what some of them have said publicly, and that is they have some serious concerns about Social Security and how we are defining the debate, not the Republicans, and that has to be changed," House Minority Leader Nancy Pelosi said last week. "And I like that characterization. It's amusing to me that the president said they should take the political risk -- says he, who's never going to run again, to the Republicans -- to go along with him on Social Security."

Senate Minority Leader Harry Reid, Nevada Democrat, held a press event Friday that was styled like an official Senate hearing. The Democrats-only event concluded that Mr. Bush's plan would lead to dramatic cuts in benefits to future retirees.

"These cuts would harm all seniors, even those who choose not to participate in privatized accounts," Mr. Reid said.

The public, however, seems to have warmed to Mr. Bush's idea. A Zogby/Cato Institute poll released last week showed that a majority -- 51 percent -- want to give private savings accounts a try.

Mr. Weller, however, points to Britain's experience with private retirement accounts as a cautionary tale. Britain allowed workers great freedom of investment, and millions lost most of their retirement income and now have to lean on the government for support.

"When things go wrong, the government will have to step in," he said.