<html><body>The Global Experience of Pension Reform May 11, 2005 Unedited transcript prepared from a tape recording. <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="15%">11:45 a.m.</TD> <TD vAlign=top align=left width="85%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="15%"> </TD> <TD vAlign=top align=left width="18%"> </TD> <TD vAlign=top align=left width="67%"> </TD></TR> <TR> <TD vAlign=top align=left width="15%">Noon</TD> <TD vAlign=top align=left width="18%">Luncheon</TD> <TD vAlign=top align=left width="67%"> </TD></TR> <TR> <TD vAlign=top align=left width="15%">12:30 p.m.</TD> <TD vAlign=top align=left width="18%">Discussants:</TD> <TD vAlign=top align=left width="67%">Estelle James, Consultant</TD></TR> <TR> <TD vAlign=top align=left width="15%"> </TD> <TD vAlign=top align=left width="18%"> </TD> <TD vAlign=top align=left width="67%">Jose Pinera, Cato Institute </TD></TR> <TR> <TD vAlign=top align=left width="15%"> </TD> <TD vAlign=top align=left width="18%"> </TD> <TD vAlign=top align=left width="67%">Phillip L. Swagel, AEI</TD></TR> <TR> <TD vAlign=top align=left width="15%"> </TD> <TD vAlign=top align=left width="18%">Moderator:</TD> <TD vAlign=top align=left width="67%">Kevin A. Hassett, AEI</TD></TR> <TR> <TD vAlign=top align=left width="15%"> </TD> <TD vAlign=top align=left width="18%"> </TD> <TD vAlign=top align=left width="67%"> </TD></TR> <TR> <TD vAlign=top align=left width="15%">2:00</TD> <TD vAlign=top align=left width="85%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> Proceedings: MR. HASSETT:  [in progress] to welcome you to our event, The Global Experience of Pension Reform.  We're very pleased to have a distinguished panel to talk about the global experience of pension reform. To hear some opponents of private accounts talk, you'd think it was some kind of radical idea that nobody had ever tried before, but in fact there are many countries now that have tried it, and I guess from the point of view of people on different sides of the debate, that might be a good or bad thing since we have evidence about what happens when you do it. Then, you know, maybe it's going to help one side or the other; but that depends on what the evidence is.  And so what we've done is we've gathered some of the leading experts in the world on these issues, about how the global experience of private accounts has been going, and we're going to talk about that here, and also we'll have plenty of time for your questions. The first speaker will be Jose Pinera, who's a distinguished senior fellow and co-chairman of the Project on Social Security Choice at CATO, and he's also I think better-known throughout the world as the secretary of labor and Social Security in Chile, who was the architect of that country's successful privatization of the pension system. He's perhaps maybe even the father of privatized Social Security in some sense, and Jose will go first and speak for 20 minutes and I will be quite rigorous in my application of the 20-minute time limit, and that's not just a warning for you, Jose, it's a warning for everybody, and after Jose, we've got Estelle James, who's currently a consultant to The World Bank, USAID, and other organizations, and previously she was lead economist at The World Bank and director of the pension flagship course at The World Bank Institute. When I asked my friend, Ken Smitters, to list the people who he thinks know the most about the experience of private accounts in different countries, the very first name that came up was Estelle's, and he mentioned some of the great work that she had done reviewing those issues. And then finally, our third speaker will be Phil Swagel, who's a resident scholar here at AEI, and before joining AEI, he was chief of staff at the White House Council of Economic Advisors during the period when the president decided that he wanted to pursue private accounts, and so one might guess that Phil is privy to lots of information about why they might have decided that and what the reasons were and what evidence they based their decisions on, and Phil is going to go last, and instead of getting only 20 minutes, he's going to have home field disadvantage, Phil's only going to get ten, and then we're going to go to a question-and-answer period from the floor. And so with that, we'll now hand it off to Jose.  Thank you. MR. PINERA:  Thank you very much for this invitation to the American Enterprise Institute.  Thank you very much for every one of you for being here. On May 1st, only ten days ago, we celebrated in Chile 24 years of success of our system of personal retirement accounts. Now, as you know, May 1st, all over the world, is generally celebrated as a day of class struggle and class confrontation.  That's why I decided to make May 1st, 1981, the day when Chilean workers had the option to begin creating for themselves financial wealth for their retirement, or for that of their families.  So May 1st, in Chile today, is a day of workers' liberation from poverty, in a way, because these personal accounts have made each one of them an owner, is more capitalist.  That is something extraordinarily important. Now just a correction, Kevin.  I have never privatized the Social Security system of any country.  What I have given the Chilean workers is an option of whether to stay in the pay-as-you-go system, and if they wanted to stay there they could.  Or whether they wanted to opt out with their payroll tax, and instead, save the payroll tax in a personal retirement account. Now if only 10 percent of the Chilean workers had followed my idea, the system had not been privatized at all, because it will be 10 percent private and 90 percent government. It's only because 95 percent of Chilean workers decided that they better will own their own retirement account rather than have a system that is dependent on demographics and political decisions, and length of life according to what government officials [inaudible] and so on, they decided to have a personal account. So it's a--you may say semantic but it's not, because in a way the end result was privatization, is true, but it was privatization from below.  There was privatization because the workers themselves, individually, with a free choice, decided that they wanted a private personal account.  It was not the decision of a secretary or of a president or of even any individual person. Now the result in Chile, as I said, has been very successful for the workers.  The main object of the reform, the economy and society.  Let me explain why.  For the workers it's very clear.  The worker cares about two things.  First, whether he or she will be able to save for retirement in a safe system. My experience explaining this idea all over the country, in television, in radio, meeting almost every trade union, visiting them, being very receptive to their anxieties about life, and so on, I do remember that the first question they made me always was not which will be the rate of return on the personal accounts.  The first question was Will this money be safe?  Will this money be there when I am sixty-five? And only after I have answered that question to their satisfaction, of course we could begin discussing whether the system, the market basically, will give them four, five, six, seven percent, something that nobody exactly can predict.  We can basically projection, make protection, but economists differ about these kind of things. So the first point, and where I put all my emphasis, was to have a very honest system, a very transparent system, a very clear system, a very simple system, because when workers understand the system, they can express their opinions and their vote, eventually, against or in favor of the system. But if they don't understand it, then they cannot be vigilantes of the system, and I believe in the citizens being the ultimate guarantors of a system like this. That way I created such a simple system, as you probably all know, but let me summarize it in one line.  It's a system in which I offer every worker to opt out from the government system with the full payroll tax, 10 percent of wages for the old age pension, and instead put it in a personal retirement account. I generated the story that I went on television with savings account, my mother gave each of us six children saving account when we were six years old, and told us that for every peso saved by us she will put another peso as long as we saved the money, until eighteen or whatever, and we were going to buy or use it in a good way. That's why we are, I always say on Chilean television, that the real mind behind the system is my mother of course.  It's not a Chicago boy or a Harvard Ph.D.  It's just a common sense model idea, that if you save in a safe way you will have monies.  It's as simple as that. So every Chilean citizen has a little passbook and they have there the 10 percent every month, they look the money.  We say in Spanish, la plata....--the money where my eyes can see, something that again is common sense, and when they are 65, they have a huge capital vis-a-vis wages, accumulated because of compound interest over 40-45 years, whatever the rate of return.  Of course with a higher rate, a higher capital. And then at that moment they can buy an annuity or keep the ownership of the money [inaudible] that is inheritance.  So it's so simple as that.  Is a system of saving for retirement.  What I always say is a common sense system. I believe that the mistake of pay-as-you-go Social Security, done not by FDR, incidentally, but by Chancellor von Bismarck in 19th Century Prussia, was to create a fine benefit system, with the best of intentions, as you know these mistakes are done, but regrettably, life is not a defined benefit proposition. Life is a defined contribution proposition.  We work hard, we put all our energy, but we don't know the result.  The result depends on so many variables out of our control. So life is a defined contribution proposition and we should of course still behave well and probably will get good results.  But we may not. To pretend to belittle gods and define benefits for everyone in a population is an extremely difficult proposition.  I do believe a government can do that for a special group of people.  I am very much in favor of helping the very poor, the very disabled, the very vulnerable, the very left behind, the very humble; whatever you want. But if you want to create a system in which you promise a benefit to all the workers of the country, even the millionaires, and you promise that benefit without knowing exactly the future of fertility rates, expectancy of life, and so much exogenous variables, you are creating a time bomb. Now that time bomb explodes before or after in each county, that is a completely different discussion, and I never bash the old systems.  It is not my way of explaining. I basically say it's a much more common sense proposition to save for retirement. So the system was safe.  There's been 24 years, never a fraud, never a scandal of inside, whatever.  Imagine.  In Latin America.  Or in Europe.  Or even in the U.S.  You have Enron, and so on.  Twenty-four years of safety, 24 years in which nobody can say that the system has not been safe, and that's why-because we took a lot of provision--I can explain you later, all the guarantees. I believe in the private sector but I am not naive.  There are thieves in the private sector as there are thieves in the government, and everywhere.  You have to be very serious, actually, about this.  So we created a system, very safe.  We separated the private pension managers from the mutual fund.  The mutual fund is a different legal and economic entity.  The money cannot be touched by the private sector, et cetera, et cetera, et cetera, et cetera. So the system has been safe.  Number one. Number two.  Can the system deliver a good rate of return?  Well, I didn't know at that time.  I explained the system with a 4 percent real rate of return.  I told workers, even with the 4 percent you will be much better than with the old system.  But I don't know whether it would be four.  It could be three; it could be two; or it could be five.  I don't know. I don't know the future.  A lot of my colleagues, economists know the future.  I do not know the future.  So I am a prudent man vis-a-vis the future. Well, the good news is that this system together with other coherent reform that we did in free trade, we were just discussing it, we have gone toward free trade and we are very proud of having signed an agreement with the United States of America, the first South American country to have done it, and it will be beneficial to both countries. And workers are fully supporting the free trade agreement, as I was explaining, because they know that the free trade agreement will raise GNP, raising GNP, corporate profit will go up, corporate profit will go as stock prices will go up and they will benefit.  When you have a nation of workers who own a fraction of the country, any policy that is good for the country also lifts up all the workers. They don't say Bill Gates will get subcontracting and we'll have another billion.  They say we will all go up, also Bill Gates of course.  But we are all in the same boat once we are all invested in the country.  So the real rate of return has been 10 percent, above inflation for 24 years on average, an extraordinary rate that I would never think it will go on in the future.  But it has been 24 years, so we at least celebrate that. I'm not saying will be for the future.  I'm saying has been for the past.  And because you have to pay a commission for this, the commission has been around, let's say, one percent of the assets managed.  Today, according to Salvador Valdez, is 6.65 percent of assets managed, and going down with economy of scale.  Of course it was much higher at the very beginning. So today's .65, you may discuss forever, whether that is high or low, I don't know, but I will pay .65 to someone who manages my money and give me 10 percent a year.  Then I subtract .65 or one and I get 9 percent.  So that whole discussion, again, is completely false. Another thing is what can we do in order to have those commissions even lower? Well, I would like that my capuccino to cost lower at Starbucks but I don't say that they are bad because they cost $3 or $3.50 and I choose to buy it. So 9 percent net return, 10 percent growth, safe for 24 years.  How can anyone say this has not been a blessing for Chilean workers? Now some people say, yes, but some people are not in the system.  Well, that is a completely different discussion.  Given to the fact that in our country we have informal workers, given the stage of development as we were discussing with the state, given the fact that there are a lot of people who have never contributed to the system, neither to the pay-as-you-go nor to the new one. Of course there are some people who not in the system, it is a very important problem, but it has to be addressed in a different forum, because this system was replacing a pay-as-you-go accounts and there are more workers as a proportion of the workforce, in the system of personal accounts, employed workers than there were in the earlier one. Now the non-employed workers in Chile were not in the pay-as-you-go, and we didn't make them into the new system either because we cannot police.  We will have to create a pension police and go in the informal markers [?], if you have been Latin America, and if someone doesn't have a pension card, go to jail.  It doesn't work in Latin America. So I know that in the U.S. you have a compulsory offer for [inaudible] employees.  So that's completely different discussion.  You cannot say that a Mercedes Benz is not a good car because some people don't know how to drive.  That is a completely different discussion.  You should teach them how to drive, so that one day they may have a Mercedes Benz. But how can you say the Mercedes Benz is not good because some people don't know how to drive?  It's two plus two is five. So that discussion that was in a World Bank book is completely incredible, is nonlinear thinking.  Now that's been very good for the economy because in our country, you see, we didn't have capital markets.  We didn't have long-term savings.  Now we have a huge capital market.  The funds have accumulated resources equivalent to around 70 percent of GNP and that money is invested in the country mostly, 70 percent of the country thought it was abroad because we like portfolio edification for the workers. The capital market has had an explosion.  Today, in Chile, you can issue mortgages for 25 years.  The young people in Chile can buy houses at 25 years paying 6 percent real rate, or five.  Never before possible.  So you can give homes to the people.  There has been a famous article circulated, now we are building all our roads by the private sector, charging tolls, and those roads are financed by basically the pension funds.  And there is famous billboarding on the roads of Santiago, that it says, Your savings are financing this highway and this highway will finance your retirement. Because the private operator issues 30-year-bonds bought by the pension funds on a very discriminating basis.  The traffic is very predictable between the two largest cities.  I have five minutes, yes? So a huge improvement in the capital market.  Also a huge improvement in the labor market.  The payroll tax is a tax on hiring labor.  If people see that's a tax, that increases unemployment.  We have eliminated the payroll tax.  Payroll tax in Chile is zero. So when we ended this period of structural reforms and Chile doubled its rate of growth to 7 [?] percent, the unemployment rate in 2000 was 5 percent, U.S. levels. So to give employment--now it has gone up now because the latest government has introduced some distortions in the labor market, again, regrettably.  But this reform then eliminates distortions in the labor market, creates savings,  improved the allocation of life savings.  The end result is that Chile has been able to double its rate of growth for 15 years. When a country doubles its rate of growth to 7 percent a year, it's GNP doubles in ten years, and multiply by four and twenty, and that is the real economic and social revolution of my country, and that has made even possible a very stable democratic transition and government. So it has been all benefits, really, and we are very proud in Chile.  The system can survive in three center-left governments after the one in which we did it and because it's been so successful, those three governments have not only dismantled, they have even improved, because of course no reform is perfect the day of the creation.  It will be completely arrogant to think that one has discovered the perfect solution, though it was a very good solution, but it can always be improved with experience, with time, with technology, with choice, with maturity of the workers.  So we have introduced multifunds, and some other. So today, this reform is a completely bipartisan issue in Chile.  The current president of Chile, my friend, President Lagos, is a former socialist, Social Democrat, a sort of Tony Blair, Social Democrat, and he's very proud of the system, and he tells me that if he goes abroad, the first thing a president asks him after the Chilean wine and the Chilean salmon and the Chilean sea bass, is about the Chilean pension system. So he's quite happy then having a conversation in which he can tell Putin or Berlusconi or even Bush that maybe Chile has a better pension system than them. So it's good for him, good for the country, good for civic friendship.  So I'm very happy and, later on, maybe in the question and answer, we can, I can comment on other countries. As you know, I have dedicated my life to share this experience abroad.  Twenty countries have partially or totally, incompletely or not, followed Chile. I have been in almost every one of them, meeting the president, the ministers, the technical.  But I am not responsible for them because of course I don't write the law and sometimes they do things that you don't want, and of course that's life. So we can go and then analyze some of them, Poland, I am very proud of that one.  Sweden, I am very proud of that one.  Mexico, just was with Fox in Las Pinos; very proud of that one.  Not proud of Argentina who left open the possibility of the government using the money of the pension fund for their own purpose.  So we can discuss that. But I am not of course responsible for that, even though I can comment.  I am totally responsible for the Chilean system, and I am very proud of the Chilean workers, of the Chilean entrepreneurs, of the Chilean congressmen after, that have kept the reform, and of this reform, and if we can share an experience around the world, why not?  It doesn't mean that you have to take it all, it doesn't mean that you have to copy, but I believe that ideas are universal, I believe that you Americans have given us the ideas of limited democracy, individual rights, and so on, and maybe we can help you a little with personal accounts. Thank you very much. MR. HASSETT:  Thank you very much, Jose, and my goodness, you are punctual.  A moderator loves a speaker who brings his own clock. With that, I'll hand it of to Estelle for twenty minutes. MR. PINERA:  I come from the continent of Fidel Castro who speaks for hour.  So I have to make sure I will be punctual. MS. JAMES:  Well, I'm in a very disadvantageous position here because I'm following Jose Pinera.  It's a very tough act to follow.  Jose is a super salesman of pension reform around the world.  I'm not a super salesman but I will report to you about what's going on around the world, what their experiences have been, and what design features we can learn, what lessons we can learn from other countries. So that's my goal here, and let me just start by reminding us all, getting us all on the same page about why we're even thinking about moving to a Social Security system with individual accounts.  This is just a repetition of what we already know but it's good to have it out there. If we prefund, we can make the system more sustainable, less sensitive to demographic change.  We can earn an investment return that helps to finance the benefits and therefore requires the lower payroll tax in the future. We can avoid passing a large debt to our children and grandchildren and prefunding can be used to increase national saving and therefore productivity and growth, which is ultimately the source of greater security for old age and for workers. So that's kind of the reason for prefunding.  Now when you prefund, you have to decide who's going to manage the funds, and the two basic ways to go are public management or private management, and at the moment, the debate here in this country really isn't focusing on this issue but I imagine we'll get to that at some point. Theoretically, we could, you know, some people have said we could grow the trust fund and have public management diversified investments of the trust fund. Well, if you look at what happens right now, we have public management of funds, the trust fund has a cash surplus, the Treasury takes the cash surplus and uses it, and it gives the trust funds IOUs in exchange. The IOUs are government bonds, they're not tradeable, and they're not reported as publicly-held debt.  So it's a very nontransparent kind of borrowing which is likely to lead government to borrow more than it would have otherwise today, and this becomes a taxpayer problem tomorrow, and we have a little evidence of that.  Kent has written about that kind of phenomenon and some other people have too. So that's one major reason for not simply letting the government manage the funds.  Now you might say the government could take the fund and invest it in the stock market to avoid enlarging government deficits. But this poses a whole other set of issues including conflict of interest between the government as a regulator, on the one hand, and the government as an investor, on the other hand.  Government may not want to prosecute Microsoft if 10 percent of the portfolio is in Microsoft. It also opens the door to political lobbying over what industries do we invest in, what sectors do we invest in, even if it's passive investment, benchmarked to what? which indices? which kinds of activities are going to be funded by this money?  And should we exclude companies that produce abortion pills or companies that pollute the environment, or don't employ union labor? You can immediately think of a whole series of political pressure that would arise, if the government invested the funds in the stock market. If we look at the evidence in other countries, we see that public funds get a lower rate of return than privately-managed pension funds and they're subject to political manipulation and misallocated capital. So, I mean, those are the major reasons for not going the route of public management of the fund.  It's important to realize that, you know, some people have suggested we should do piecemeal reforms and gradually cut benefits or raise taxes in order to solve the solvency problem. But if we do that, presumably we wouldn't wait until 2041, we would start now, and if we started now, basically, we'd be putting more money into the trust fund and we would encounter this series of problems with public management of the funds. So that's the basic reason, as I see it, for looking for some other way to manage the funds and the logical way is private management through individual accounts. Now of course private management also entails potential problems and we've heard about all of these problems, they are real issues that we have to think about.  They may have high administrative costs that use up the returns, so pensions aren't as high as they could be. There's financial market risk.  At the payout stage, workers may take out their money and spend it down too quickly, and then they would be poor in very old age, and of course there's the transition cost problem. So I'm going to talk mainly about how other countries have solved these problems, and how we can learn from other countries how these problems could be solved here, and I would just emphasize that the "devil is in the details."  You really have to get down into the details to find out how systems work and what you can do to make them work well. Just to survey very quickly what's out there in the world, about 30 countries have now adopted multipillar systems with a privately-managed account as an important part of their total  Social Security system. The range of contributions and the mix, the public/private mix of benefits in these countries is very wide, ranges from 12.5 percent of wages in Chile, and I'm including here the administrative fees and the fees for disability and survivor's insurance as well as the 10 percent contribution to the accounts. And, on the other hand, 2.5 percent in Sweden.  So there's a pretty wide range of contribution rates. In Chile, most of the benefit comes from the accounts, except for the minimum pension guarantee, and I would just say that the minimum pension guarantee, as it's developed in Chile, will probably play a larger role than many people anticipated at the start and that many people realize now, and probably because of the growth in the level of the minimum pension guarantee, by the time many people reach their mid eighties, most of them will be getting some portion of their benefit from the government, from the minimum pension guarantee. So it's not quite correct to say that Chile just has an individual account system.  It has a safety net as well that will apply to many people. Now, in Sweden, on the other hand, the pay-as-you go system gets 16 percentage points of the payroll tax, in addition to government subsidy for a minimum pension guarantee that underlies their whole scheme. So you can see it's a very different approach.  The interesting thing is that in Sweden, the individual account gets only 14 percent of the total payroll contribution, but it's expected, and the government hopes that it will provide 30 percent of the total benefit, because, actually, the rate of return on the notional defined contribution plan, which is the public system, is very low, and the government is counting on the account to keep replacement rates at politically acceptable levels. If you look at a range of industrialized countries like Australia, Switzerland, Netherlands, I'll talk about them in a minute--but they also have a privately managed, funded component to their system, and the contribution rate in those countries ranges between 9 and 14 percent, quite large, and as you'll see in a minute, these are employer-sponsored plans, were DB, they're in the process of transitioning to DC, and the contribution rate is pretty high because of that DB background. The private benefit provides about 50 percent of the total benefit in these countries and then we have all of Eastern and Central Europe that is using this system and there's a lot of variation in that region, which I can talk about later on, if you're interested. But in any event, the basic idea is that diversification between the public and private benefits, pay as you go, and the funded components, diversifies and therefore reduces risk but different countries have chosen different mixtures. Now if it's private, who chooses the investment managers?  Latin America, Eastern and Central Europe, workers choose the management.  There's a direct relationship between the pension funds and the workers.  We call this the retail market because there's no big intermediary.  It's worker and pension fund sign up with each other.  This gives a maximum of choice but it may lead to high administrative costs. If you look at other industrialized countries, Switzerland, Netherlands, Denmark, Australia, Hong Kong recently, in these countries, the employers play a large role in choosing the investment managers.  These are countries that really start with employer-sponsored plans on a voluntary basis. But as in the U.S., the employer-sponsored plans on a voluntary basis did not cover the entire labor force.  In fact only covered about 50 percent.  And at some point within the lat two decades, the government's decided this isn't good, we should get everyone covered and they made these plans mandatory. Now when they became mandatory, we began to see a switch to D.C., partly because they were mandatory, but also partly for all the reasons that we're seeing that switch in the U.S. and as the switch to DC occurs, workers I believe, inevitably, will demand greater control over the investment choice because they're bearing the risk and they're getting the return. So they can't leave that investment management in the hands of the employer, and that's what we see happening, particularly we can see it in Australia, more slowly in Switzerland.  The Netherlands is now thinking about what to do. So that's sort of the trend in those countries . A third method for managing the funds is what we see here in the thrift savings plan in the U.S.  We also see this in Bolivia, in Kosovo, where I'm a trustee of their new pension fund, and in Panama.  There's a competitive bidding process for fund managers.  So you basically aggregate the small accounts, you take it out to the market where you have greater bargaining power because of the aggregation.  You deal in the institutional market and you get lower costs. You also get more limited choice, you also get greater danger of political manipulation.  But that's a third way that fund management is being carried out. Now moving on to the question of how to keep administrative costs low, this is really an extremely important issue, and I didn't realize, when I first got into this game, how important it is. But basically if your expense ratio is one percent of assets annually, this decreases the final pension by 20 percent.  So it's a substantial amount.  Now, obviously, managing funds costs money.  So you can't expect that to happen for nothing.  But the goal in a mandatory system should be to get as much for your money as possible and to keep that cost as low as possible, subject to the quality that you want to get out of it. Chile has been criticized for its administrative costs and in fact its costs were high in the first few years, and in fact in every system, administrative costs are going to be high as a percentage of assets in the first few years because you have start-up costs on the one hand and you have no assets on the other hand. But if you look at the Chilean experience, the administrative costs have come way down through time.  They're now 1.2 percent of assets, and if you project, if the current fee structure remains in place and you project what the average, full career worker will pay over his entire working life, it's about .7 percent of assets, which as you know is far less than the average U.S. mutual fund. So, you know, that's a kind of basis for comparison.  Now if you look at other newer systems that are still closer to their start-up phase, costs are higher as a percentage of assets. But if you look at the large employer-run plans, or the plans that operate in the institutional market, that using a competitive bidding process, costs are much lower there. In the thrift savings plan, they're less than 1/10th of one percent of assets.  In the large employer-run plans in the U.S. and in the other countries I've mentioned, they're 3- to 5/10ths of one percent.  So it's a substantial difference, and if we could get to those lower numbers, which I believe we can, that would be a better way to go. MR. HASSETT:  [inaudible]. MS. JAMES:  I'll run as fast as I can and I'll skip over a lot of these things.  As I've already suggested, I think we could keep costs low by using the institutional market, by using a competitive bidding process.  I think this was not a good option in Chile at that point.  So this is not a criticism of what Chile did or didn't do.  But for the United States, I think this would be a good way to do it.  In fact it is part of a plan.  Choose a small number of asset managers through a competitive bidding process and you're going to keep costs very low.  You also increase the danger of political manipulation and regulatory capture but that's another thing we can talk about later on. Passive indexing was not an option in Chile 25 years ago, but it is clearly an option here.  Collecting contributions through the tax system, centralizing record keeping and communication costs--very important to realize that this is the major cost item, record keeping and communications cost, and the object really has to be to keep that under control. This tends to be fixed per account, whether you have $200 or $200,000 in your account, and the number I've been using as a likely target number per account is $20 per account.  So using that number, and that's based on some data from the U.S., administrative costs would be less than 30 basis points, once the average account size exceeds $7,000, and that's what I think we can aim for here. This shows the thrift savings plan experience which is very consistent with that $20 number and with the drop in expense ratio as average account size increases. How do countries reduce risk?  Well, they use portfolio restrictions, to a large extent.  They require diversification by limiting the concentration and different kinds of assets, companies, sectors, et cetera.  Most countries don't have enough international diversification.  This includes Chile, especially until recently, when international diversification was not permitted originally.  Now 30 percent is permitted. I think 30 percent is probably not enough.  Countries limit investment in particularly risky assets.  It's not always clear which are the risky assets.  Derivatives.  Are they risky or do you use them for hedging?  Well, not easy to define.  Life cycle funds.  Chile has just introduced the idea of life cycle funds, that as you approach retirement, the percentage you can invest in stocks is limited and the default becomes a lower percentage of stock. The idea is to reduce the volatility and the date of retirement risk that you'd be subject to otherwise. I think it's good to remember that if you have too much choice, workers can make mistakes.  Some workers will do very well; some workers will make bad mistakes as we know from the U.K. experience. So I think carefully structured choice is the best.  Keep it simple, get the concept of risk return tradeoffs across to workers and gradually convert to bonds.  Don't subject workers to having to make a total conversion on one particular date. In terms of risk, every country that has an individual account system also has some kind of minimum pension. This can be a minimum pension guarantee.  It can be a flat benefit that everyone gets.  It can be a means-tested benefit.  There are different ways of setting up that minimum pension but every single one of those 30 countries has something, and I think that's something we should consider here. When you have a minimum pension guarantee, which is different from a flat benefit, you introduce moral hazard problems related to work decisions.  Do people stop working once they're eligible, and contributing once they're eligible for the guarantee? Do they invest in a risky way?  Do they take money out and spend it quickly instead of annuitizing? Well, regulations can prevent some of that and also tying the size of the guarantee to the number of contributory months or years is another way of reducing the moral hazard problem with guarantees. In fact guarantees play a very large role.  I won't talk about that now but if you want to come back and talk about it, there's a whole slew of different approaches to guarantees, public and private guarantees that we can discuss. Okay.  Well, how to handle payouts.  Let me just say this is something I've worked on quite a bit and the country that we have a lot of experience for is Chile, because it actually has people in the payout stage.  Two-thirds of people have annuitized in Chile.  In Chile, people have a choice between gradual withdrawals and annuitization and two-thirds of them have chosen to annuitize.  Also in Chile, married must purchase joint annuities, annuities must be price-indexed, and there are a whole slew of regulations.  There's a government guarantee--75 percent of the value of the annuity. The private insurance market was developed from nothing to a multi-billion dollar industry.  So people have demanded the guarantees and the industry has responded, but regulation plays a very important role. I'm just going to say about the transition, that I think it's very important that it should not be completely debt-financed, because if it's debt-financed, you don't accomplish your goal, increasing national saving. Probably a lot of countries have used a lot of debt but we should remember that if we want to increase national saving, we need to address this issue of a strategy for financing the transition. So my concluding thought here.  I think both in theory and looking at the experience of these countries, some mixture of a pay-as-you-go public benefit and a funded account gives you a system that's most diversified, most sustainable, protects the workers and also is good for the economy. But the devil is in the details and I've listed a whole bunch of the details that I think would be possible grounds for a political compromise in the U.S. along these lines and we can talk about some of that later, if you're interested. I do think, ultimately, you know, some of the things are--the competitive bidding process, a minimum pension, annuitization up to a reasonable threshold, the possibility of a partial add-on matched by a progressive carve-out, a strategy for covering the transition financing gap.  There's an important tradeoff between ownership and choice, on the one hand, versus political insulation, well, and political insulation, that goes on one side, versus costs and risk on the other hand, that we really have to face up to and discuss. And also I think we have to make a value judgment about reducing benefits in the long run versus putting more money into the system.  Regardless of how we come down on that, if we put more money into the system we get better value if we put it into the accounts, and if we set up the system correctly. MR. HASSETT:  Estelle, thank you very much for your excellent presentation.  Now I'll turn it over to Phil, and if I'm feeling happy, I won't doc Estelle's extra couple of minutes from your ten. MR. SWAGEL:  No.  I have Jose's magic block.  So we've just heard about the successes from the international experience.  I took my mandate to go out and read the criticisms since I've spent some time doing that, and I have to admit that I'm still going to count on everyone out in the audience to be more critical than I am. On problems with accounts, as Estelle said, the U.K. is always pointed to as the poster child for problems with accounts, and my perspective is that that's correct, is that the U.K. is the poster child, but there's a sense in which it's also a poster child for how much we've learned. I'll just quickly go through some of the criticisms and some of the problems noted in the U.K.  You know, the issues of consumer protection and financial advice.  And again, I agree with Estelle, there's an irony in that the TSP-Leg [?] system that, at least initially, we'll have in the U.S., there's an irony that there is a lack of control.  So there is that tradeoff between safety and control, and things will get done right, and things that we've learned from the U.K. experience include things like getting the default values right. I mean, the accounts will be voluntary, so the default will not be to have an account.  You have to opt into it.  The default will be to have a life cycle fund at some point which obviously provides people with a lot of protection, is an interesting question.  Will there be a sort of later-in-life opt-out? and I don't think we know that yet.  But you can imagine, you know, someone saying, okay, look, I'm two years before I retire, I get it, I understand, you know, I double promise that I'm not gonna come back and, you know, sort of claim a minimum guarantee.  But, you know, I don't think we know that yet. And then obviously financial education and the sort of high-pressure sales jobs that people complained about in the U.K.  You know, the small number of options in the centralized system really reduce the scope for that in the U.S. The second criticism based on the U.K. experience is the nature of the choice.  Is the choice to go into an account irrevocable? and in the U.K. it's not.  You can go back and forth, and people tend to actually switch.  When you switch jobs, people then kind of take it as another chance to think about this. My understanding of the system here, you know, both from the inside and the outside, is that a bond fund will be an option in the same way it is in the TSP system, and there's a sense in which that can replicate within an account system the worth of guaranteed benefit in the traditional system.  Obviously there's one wrinkle and that's that the calculation of what's known as the off-set rate becomes crucial in that regard. And the offset rate is essentially what makes the choice of an account a wash from the perspective of the traditional system, that right, you divert some of your contributions now into your account and then later, down the road, you don't get some of your traditional benefit and the offset rate is what, over time, makes those two things equal. And I can say, you know, with great confidence, that the intention of the administration is clearly not--to have that a complete wash, that the word voluntary in the accounts really is the key word and there's no intention to monkey around with the offset rate, to have it, you know, sort of nudge people in one direction or the other. And, if anything, my sense is that the calculations, or the assumptions by the SSA actuaries are too optimistic on the take-up rate.  It's basically no matter what you assume about accounts-- [Start tape side 1B.] MR. SWAGEL [continuing]: --and maybe, over time, that will be the case, and it's interesting to hear that in Chile that it's, you know, it is quite a large number.  But it's hard to imagine, at first, that it's going to be two-thirds, which is basically what the actuaries have assumed, and that obviously drives a lot of the decisions on the transition financing. There is one irony, and it is sort of an ironic diversion, that during the presidential campaign, or that the Kerry campaign sent around numbers--this is late in the campaign during the swing through Florida, about 2 trillion dollars in transition costs, and of course those were derived using an assumption of a 100 percent participation in accounts. So it's kind of ironic that, you know, these accounts are so terrible but everyone's going to voluntarily offer them.  But, you know, it does hit on this important question. I'll say a bit more about the offset rates since that's such an important issue and there's work being done on that now. Another criticism in the U.K. is the issue of annuitization, inheritability, and there's a sense in which I think that criticism is a, "yeah, uh-huh, but what's your point?" You know, if you're required to annuitize, to get your combination of benefits from traditional, in the account above the poverty line, obviously that reduces the amount that's left over to be inherited, and that's true, and there's a tradeoff there between the usual, you know, risk and security. I think it's probably a reasonable decision not to allow people to entirely opt out of the, you know, of the old-age insurance aspect of the system.  that's a debatable point.  And then administrative costs.  I mean, Estelle obviously has talked a lot about that. There's an interesting paper by Omendorf, Liebman and Wilcox, in a volume about economic policy during the '90s, and they talk about fiscal policy and Social Security policy, and a working paper version of that is available to the NBR, and I think on Jeff Frankel's website at the Kennedy School. And they talk a lot about the efforts during the second term in the Clinton administration to think about accounts and how they can be done, and they have a great quote from Larry Summers about, you know, we don't want to send out the Postal Service when people have gotten used to Federal Express.  And they talk a lot about how the cost of the system really drove, you know, drove this, and, you know, based on that quote, Larry Summers said look, until you guys can show me that we can do this at a low cost, you know, we're not going to go to the president with it. You know, I'm not a wild-eyed futurist on this.  I'm always kind a skeptical of technology-based arguments.  But I suspect that the costs have gone down since '96 or so, and even some of the criticisms based on administrative costs from around 2001, when, you know, during the first term of this administration, when, you know, Social Security was up, you know, front and center, even those criticisms seem remarkedly dated about administrative costs, and it's just amazing, for all of us, how much people are accustomed to conducting routine financial business on line. You know, obviously this doesn't extend all the way down the income distribution, certainly for current workers, or especially for current retirees, but I suspect it's going to be pretty darn near universal for future workers and future retirees, and obviously those are the people who will have meaningful account balances. I imagine that the generation that now is, you know, playing Gameboys and X-boxes and Playstations will feel entirely comfortable doing their business on the net.  So I'm sure that the U.S. implementation of accounts will run into problems and run into difficulties. But I'm pretty confident they're going to be unforeseen ones, and rather than repeating the mistakes of others.  So I don't put too much stock into the criticisms based on the failings of other countries because I don't see any of those failings as unavoidable mistakes, as deep structural problems with accounts.  It'd be interesting to hear, you know, other views on that. Let me close with a short discussion of two issues that are outstanding, and then I'll stop. One is the offset rate, and again, the Social Security calculations assume a 3 percent real return on government bonds, and about 30 basis points of administrative overhead, and the administration hasn't said where those 30 basis points will fit in. In a sense, what if the 3 percent real return is right, and you invest entirely in bonds?  Well, if you also have to pay the overhead cost, well, then you're out 30 basis points.  Senator Graham's Social Security plan would have the government side eat those 30 basis points and the offset rate would be 2.7 percent. But even with that, you know, who knows what the right offset rate is, and there's recent work by Bob Schiller, looking at life cycle funds, and illustrates how important the offset rate is, though that actually wasn't the intended point of his work. Looking at the government bond returns from 1871 to 2004, Professor Schiller found a real return of about 1.2 percent on government bonds, and so that's the figure he uses in calculating their return on the bond portion of these life cycle accounts, but he sticks with the offset rate at 3 percent.  He hard-codes that.  You know, to me, the logic of the offset rate suggests that you'd want the same return, you know, on the bond side, you know, asset return as on the offset rate.  Not doing that, you know, Schiller shows that a lot of people do worse with life cycle funded accounts that the traditional Social Security benefit. If you just put a 1.2 percent offset rate instead of 3 percent, you just match the offset rate with the return, you reverse that result.  But it illustrates the difficulty.  One solution would be to use a market-based offset rate instead, use market interest rates to determine the offset rate in every year. Here's a sense in which this is like the administration's pension proposal.  The advantage that the--you know, you don't have to depend on past performance.  The disadvantage, that your traditional benefit changes in every year and, you know, it's not clear that people will like that.  I think, you know, people's interest rate on their credit card changes and interest rate on your checking account, et cetera, changes.  So I think people could handle that but, you know, it's not clear.  We're waiting to hear more. I'll just close, on the stock market side, Estelle listed some of the issues.  You know, I have three more to list and then I'll stop.  You know, would the stock market lose information if an increasing part of assets were passively managed? You know, this isn't as much an issue in Norway or Canada as it is in the U.S.  How would the government vote the shares? and if we didn't vote, what would happen to shares that matter for quorum requirements.  There's certain decisions where there has to be a certain number of shares to even take action, and what would you do about shares that aren't voted? So these are, you know, the details, and again, I agree with Estelle--the details matter, and some of the international experience isn't as helpful there to the U.S. MR. HASSETT:  Thanks a lot, Phil.  I'd like to start with a couple of questions for our panelists.  The first, Jose, of the countries--and we're not timing your answers now but I might cut you off if you get out of hand. Among the countries that have done this for a long enough period that we actually can fairly evaluate how things have gone, are there any where the folks who decided not to participate in the personal account side are better off than the people who didn't? MR. PINERA:  By definition, you can answer that question only after 40 years or 45 years of working on the personal account system.  So those other countries, except Chile, has only been 10 years, 11 years, so how can you compare 10 years of personal accounts versus the old system. Second, that comparison is pears and apples because the government system is fine politically.  You see, you can increase the benefits of the people who stayed in the old system, for example, the Chilean government has done that. Since only 5 percent have stayed in the old system, it's very inexpensive to increase their benefits afterwards, and with little bulge here and there. MR. HASSETT:  [inaudible] the source, I think that paragon of accuracy, Paul Krugman, somehow claims that the Chilean system was really bad for the people who had participated in accounts and really good for the people who stayed in the old system.  Is that the source of his factor?  Did he just make the assertion without facts altogether? MR. PINERA:  No.  I don't know about--no, I don't-- MR. HASSETT:  Do you know, Estelle? MS. JAMES:  You know, there have been a number of newspaper articles about Chile recently, and they make those claims, and of course they make those claims without giving you a lot of relevant data like how many years did people contribute and what did they contribute and so forth. But I do believe that the point Jose made is very relevant.  When you just have a few left-overs from the old system, you can maintain a generous benefit level and the Chilean government was undoubtedly able to maintain a more generous benefit level for the people who remained in the old system than it could have if everyone were in the old system.  And there's no way that it, you know, would have broken the bank otherwise. So it may indeed be that for certain specifications of individuals, they would have done better under the current rules in the old system but that's the result of a political decision about how much you're going to pay those people, and you could not have paid everyone. MR. PINERA:  Let me add that nobody has done better in the old system than in the new one, keeping the rules of the old system as they were at the moment of the choice.  No; no.  Nobody.  Of course you cannot beat 10 percent real returns; not even Chilean politicians can do it. MS. JAMES:  Right. MR. HASSETT:  Okay.  With that, we'll now turn to the audience for questions.  Please raise your hand, wait for the microphone, state your name and make your statement in the form of a question.  Right here would be the first question. QUESTION:  Julie Kosterlitz with National Journal.  Do other countries have the offset system with this notional account like the U.S. is thinking about, and, if so, how do they handle their offset rates?  It sounds like a almost intractable problem with--as Phillip Swagel mentioned, and trying to tie it to market rates does raise all the problems that you mentioned of it changing constantly. I don't know how much of a technological feat that would be as well, to keep track of the records, but it seems like a big problem. And then just a quick question for Estelle James, which is if the whole point of this is to boost national savings and borrowing the transition cost defeats that purpose, where do you set the break-even point on this being possible? It just strikes me that with all the other risks and details that you mentioned, there's a pretty high threshold to meet, to say that you're getting something positive out of this, and if that positive is going to be boosting national savings, how do you gauge when you've done that? MS. JAMES:  Let's see.  Your first question was about the offset rate.  I don't know of any country that's used this kind of mechanism.  Countries obviously--you know, the more typical thing is you, in Chile, for example, you went into the new system, you got a recognition bond for your service in the old system, but there was no kind of year by year decision and offset rate for what you took out in that year, and in fact I think the offset rate concept has some problems in it because every year people may be comparing the offset rate with what they earn that way and if somehow the stock market didn't do well in the first four years of the system, it could become very politically unpopular and unstable. So I don't know of any country that's done this, and although I was on the commission that recommended this, as I've thought about a lot of the difficulties inherent in that, I see some real problems with it. On your second question, you know-- MR. HASSETT:  [inaudible] about the question on the first one because I'm a little confused, just about, there are so many countries out there.  if you have, say, a payroll tax of 10 percent in some country, and we're going to say we're going to let you take 5 percent of that and stick it in a personal account, then we have to make some adjustment to your ultimate benefit. MS. JAMES:  Right. MR. HASSETT:  Everybody must do that; right? MS. JAMES:  Right. MR. HASSETT:  So then the only question is do they actually do it explicitly with a formula that has an interest rate in it?  Is that what you're saying? MS. JAMES:  Yeah; that's what I'm saying.  That they don't do it that way. MR. HASSETT:  But everybody does reduce your benefits by a commensurate amount-- MS. JAMES:  But it reduces it in some way. MR. HASSETT:  Your traditional benefit. MS. JAMES:  In some way, you know, whether it's a commensurate amount or--how you define the commensurate amount is another matter. MR. SWAGEL:  [inaudible] what is the offset rate is how much to reduce. MS. JAMES:  That's right. MR. SWAGEL:  And in some senses, I think it's, the commitment is to get that number right, as close to right as possible. MS. JAMES:  You could say in advance, the offset rate is that it's transparent, how it's being reduced.  In many countries it's not transparent.  Also in many--which gives it, in the short run, a political advantage, but, you know, in the long run, when people catch on, they may be unhappy. In some countries, the switch has been mandatory, so then, you know, the traditional benefit just gets drawn down for everyone, and you don't call it an offset.  I'm just trying to think of methods that other countries use. In Argentina, you could switch and, again, you gave up your--I think a typical way is if it was voluntary, you gave up your old pension but you got compensation for the money you had put into it in the past, and after that, you were in the new system.  The new system may--you know, usually combined a funded account with a continuation of the public benefit.  But it was a different system and that's kind of the more typical way that it happened. MR. HASSETT:  This is for both of you.  You've been so involved in the politics of these things, too.  Has it generally been the case, that people have decided to do this at times where they are feeling that the long-run balance is unsustainable?  Because one thing that you can do is you can say, well, the personal account is something people like, so that if I, you know, cut their contribution to the old system by 50 percent and cut the benefit in the old system by 70 percent, then I can restore balance in the system-- MS. JAMES:  Right, because of the risk premium. MR. HASSETT:  --and the people will still be happy because they like the personal account so much. And so has it generally been the case, that as people move towards personal accounts, that the benefit reduction has been bigger than the reduction in contribution to the old system? MR. PINERA:  Let me explain to you what in Chile is again very clear and very simple.  You have some promised benefits in the old system.  So if you moved to the new system completely, we calculated to then the present value of the accrued benefit under the old system.  That present value is a given amount, we issue a Treasury bill called the recognition bond, with a 4 percent real rate of interest, a zero coupon bond because the government does not have the money. It's an unfunded system but the government would have to begin paying benefit at sixty-five.  So the government pays the recognition bond at sixty-five. So we didn't play this game that you seem to like so much of cutting benefits here, and cutting there, cheating the people here so they are not able to see it, or maybe cheating them over there.  Why don't you do the right thing?  Why don't you simply give the people the accrued benefits in a recognition bond, you cut the umbilical cord, the person moves to a new system, has the recognition bond, has said goodbye to the government, no politician had ever changed a Treasury bill that is tradable in the market, incidentally. If you reach your retirement, and then you accumulate in the personal account.  MS. JAMES:  That's the typical way that it's been done; yes. MR. SWAGEL:  So it's been a balance. [Simultaneous conversation.] MR. PINERA:  So that is very clean, very simple, very honest. MS. JAMES:  It's been a new system and an old system rather than--the way we're doing it is people will still partly stay in the old system but they'll have the account added on, and the way it's been defined in most other countries, when they make it voluntary, is there's the old system and there's the new system.  The new system has two parts, some kind of public benefit, and the private account, and you're either staying in the whole old system or you're choosing a whole new system. And then you get some kind of recognition-- MR. HASSETT:  So the answer to my question is that you both believe that the reforms that have been enacted have been neutral, fiscally, in the long run. MS. JAMES:  Oh, you can't say that.  I mean, that's a complicated thing to-- MR. HASSETT:  No.  I mean, in terms of like when they set them up, ex ante, they didn't jimmy around the benefits and the contributions in order to improve the fiscal balance-- MS. JAMES:  Of course they jimmied it around. [Simultaneous conversation.] MR. PINERA:  Each country's different, Kevin. MR. HASSETT:  Okay.  Well, I asked you the question and you answered with Chile-- MR. PINERA:  You can reach a conclusion for 20 countries. MR. HASSETT:  You gave me Chile's-- MR. PINERA:  This thing of averaging countries doesn't work. MR. HASSETT:  I don't want to average countries.  You can say twelve of them did and eight of them didn't.  MS. JAMES:  You know, to figure out--first of all, most of these countries, many of these countries in Latin America and Eastern and Central Europe, the old system was insolvent, the benefits that were promised were completely unsustainable.   I mean, the replacement rates could have ranged from 70 to 110 percent.  You know that's not going to be sustainable. So part of the object had to be to draw that down, and they used different ways of doing it, some of them more transparent, some of them less transparent.  As I mentioned in the case of Sweden, which is, you know, generally a country of better governance, I think a lot of people didn't realize what the new system was going to yield them because it was a new concept, a notional D.C. system.  They didn't really understand how the benefit would eventually come out of there. But the people who figured it know that they're going to be drawing the benefit way down relative to what people had grown to expect, and that's why the government is hoping that the account will make up the difference.  Will it make it all up?  I don't think so.  But it wasn't voluntary there; it was mandatory. MR. HASSETT:  If folks could hold their hands up, I'll assign numbers, and then we won't have to keep doing--so I'll go one, two, three, and then I'll ask again.  Rudy, you go first. QUESTION:  Rudy Penner from The Urban Institute.  Estelle, you noted that the minimum guarantee will become more important in Chile as time goes on and I assume that'll be true in a lot of countries.  It does seem to me to be a disadvantage here, that the government's taking on what could be a very large contingent liability.  It must be devilishly difficult to forecast in the long run. MS. JAMES:  It's especially difficult because it depends partly on future political decisions.  I mean, the reason that I think it's going to become more important and costlier than Jose may have thought initially, is that the level of the minimum pension guarantee which initially was just price indexed by de facto political decision, has gone up with wages, over time. You may think that's good, you may think it's bad, depending on where, you know, where you think the floor should be.  But the fact is the minimum guarantee has been going up an average of 2 percent a year, not regularly, but on average, and while an annuity remains constant in real purchasing power since it's price index and the gradual withdrawal formula goes down as you age over your retirement period. Well, you know, if there's one line going up and another line remaining stable or going down, you know they'll eventually intersect and my calculations indicate they'll intersect somewhere in the eighties for most people.  That's why I think, you know, the cost will be greater than what was anticipated, and I would just fault Chile here in two ways. First of all, I haven't come across evidence of long run, like 40, 70 year simulations of what the minimum pension guarantee might end up costing under different assumptions.  So I think it's essential to cost out that contingent liability under different possible assumptions, and secondly, there is a basic flaw, I think, unless you intentionally want this--and I don't know that they intentionally wanted this to happen--you have to set your payout rules to be consistent with your safety net rules. So if you want a rising safety net, you could also require that the annuity should be an escalating annuity, you know, that it start lower and it goes up, and you could have a different formula for program withdrawals.  Again, it's a matter of detail design issues and coordinating the different parts of your system, so you're not left with a big contingent guarantee. MR. PINERA:  May I clarify two points.  I like Estelle's explanation but Estelle, we didn't anticipate anything about the minimum pension guarantee because it's not--the level is not a structural feature of the system. A structural feature of the system is that we created a minimum pension guarantee, and above that, the personal account system.  The level--it's a political decision, it's a value decision.  So how would you project value decisions in the next 50 years?  You can do whatever you want in a computer spreadsheet but it doesn't have any meaning. So the Chilean government, a Social Democrat government, has decided to double the real value of the minimum pension guarantee.  They have no quarrel, that is not a part of the system.  If the voters want to double that and double the value-added tax, it's perfect.  It has nothing to do with the system.  Is neutral.  Design of the system is just that a country may want to have a high minimum pension guarantee. Now what is true is the second point, that if you do that, then you have to fine-tune the payout, so that there will be no problem, the long-run scenario. MS. JAMES:  To do the long-run simulation. MR. PINERA:  But that has nothing to do with the initial design of the system; zero.  The initial design of the system has a minimum pension guarantee because we believe the very poor, the very unlucky should have a minimum level of income and they should not starve in the streets--period.  And you should pay for that in a responsible way, with one tax.  The other tax, we can debate it forever.  But you should have a minimum pension guarantee.  Then at the level it was initially, it would apply to basically the people who lived in poverty. So if 20 percent of people in Chile lived in poverty, probably 20 percent will have the minimum pension guarantee.  But 80 percent, we have all pension benefits from a system of personal retirement accounts.  If you multiply by two the minimum pension guarantee, more people will get it, and if you multiply by three, even more. So you can do all the exercise there.  Put the number of times you multiply and you can have the contingent liability.  The point in Chile is that it's very clear that you have to increase a tax, and that's why we have budget surplus in Chile, 2 percent of GNP this year.  So even with that, we have a budget surplus of 2 percent of GNP that you will like here in America.  So it's not such a big problem.  You see, if your government decides that the poor should have a higher safety net and there are the taxes on the other side, and there is the economic growth, and et cetera, and et cetera, that can finance that, that is a value decision I fully respect. MS. JAMES:  The other structural flaw in the minimum pension guarantee is that it doesn't increase with years worked and years of contribution.  So there's an on-off switch at 20 years of work.  If you work 19 years, you get no guarantee.  If you work 20 years, you get the full guarantee.  And I think that's a structural problem because it ends up going not just to people who have low wage rates but also to people who chose to work 20 years and contribute 20 years rather than 40 years.  If you contributed 40 years, it would be much less likely that you would qualify for the minimum pension guarantee. So,  you know, one way around this structural problem is to have--it's a form of a moral hazard problem and you could make the minimum guarantee a function of years or months contributed, as in Mexico, where a flat amount per day worked is contributed to the account of every worker to make it less likely that they would ever become eligible for the minimum pension guarantee in Mexico. MR. HASSETT:  Let's go on to question number two, over here. QUESTION:  This is Sue Simon at Capital Inside Group.  Actually, I have two questions but you can ignore one, if you prefer.  First, I just needed more information about the U.K. experiences, the poster child.  I don't really know what they started with and what they've changed, and do they like it better?  Is it working better?  Are people happier?  And the other one was to discuss maybe the retirement age debate, if it's going on in several of the countries that we've talked about today. Are they finding people are retiring too early?  Are they debating moving it up to 68 or 67, or any of that?  And I'd be interested in what's happening globally on that.  Thank you. MR. HASSETT:  [inaudible]. MR. SWAGEL:  The U.K., maybe that's the one that we should ignore, and I should just say, in 2001, there was a series of congressional hearings, you know, about Social Security reform.  They were dealing with all different topics, and a number of them were the U.K., you know, sort of the, in some sense, the demagoging of that time was, you know, on this issue, and so, you know, you can, I say, go to the, you know, Ways and Means Committee Web site and Senate Finance Web site, and go back to their hearing archive from the first half of 01, you know, obviously pre September, and you'll see the written submissions. They're very good, they're very well written, and they're very--I mean, they're sort of, not quite quaint, but they're almost like, well, okay, it's sort of not--they're very dated, I guess is what I'm saying. MS. JAMES:  I've also written something on the U.K., so if you give me your card, I'll send you by e-mail. MR. PINERA:  Can I comment on the second question because it's very interesting.  In a defined contribution system like the one we have, the meaning of retirement age changes completely, except for the safety net. That is, in Chile, you have to retire at 65, as before.  If you want to be eligible for the safety net.  And again, whether that age should be there or not is a value decision.  I may say physical worker in Chile should not work longer, even if life expectancy increase, and if that means a little more money on the contingent liability, we should all pay a little more tax so that the man in the mine doesn't have to work until sixty-eight. So to me, for the safety net is basically a value decision.  Do we want woman or do we want workers to work until seventy, when their physical strength has gone down, and so on?  But it's not extremely important because--and here comes the beautiful thing. For the 80 percent, or whatever, that will not be on the safety net in Chile if good rate of return go on and if the government does not go on increasing the minimum pension guarantee forever, of course.  But let's say, to say a number, the retirement age really is when they choose to retire, because let's suppose they reach sixty-five.  In Chile, they can go on working.  Sixty-eight, seventy-five.  Ninety.  I once was giving a conference with Strom Thurmond there, and without noticing, said there is one senator in America who is a 100 years, keeps working, and he said I am the man. But in Chile, I introduce it, and I like very much, because I believe, incidentally, that the retirement age is a very important element for human happiness, and I am totally against the idea that 535 politicians in the U.S. or 125 in Chile should decide when you retire. To me, it is much more important to choose my retirement age than to choose my car or my brand of whatever. So I will never give that to the government.  I will decide it myself.  Now since we don't want people to retire with a starving level of benefit, we put a number, I put 70 percent in the lower region of less wages, the government again making a little demagoguery, has lowered it to 50 percent.  Okay.  It's debatable.  But today, in Chile, if you can buy an annuity giving you 50 percent of your last wages, you retire whenever you want.  So some people--and I have seen people at 40 planning to retire at fifty-six.  Why?  Because they want to retire at 56 and they want to go with their grandchildren or they want to write poetry.  But they have to save more.  To write poetry at 56, you must save not 10 but maybe 13.2.  So all the software of the private pension manager have this system where every one is calculating how much money are they having, how much money they have to put, in order to decide when they retire, and the retirement age has ceased to be a huge political debate.  Still relevant for the safety net, I must say so, but the safety net is not the overall system.  It has ceased to be because you choose the retirement age. And there is another enormous beauty of a system of personal retirement account.  You cannot do it in a pay-as-you-go system, because, of course, everyone would like to retire at fifty as the French truck drivers were always stopping in Paris, you see, because they want to retire at fifty, paid by someone else.  Here you retire whenever you want, pay with your own savings.  Why not? And incidentally, retiring in Chile means that you begin to have access to your annuity.  You can go on working. MS. JAMES:  That's really a very important point, that in Chile, there's a distinction between retirement in the sense of taking your pension and retirement in the sense of stopping work.  What we would like is that people would continue working more cause then they're contributing to the economy, and in fact research I've done indicates that the labor force participation rate of older men has gone up substantially over the past 20 years.  It's very striking.  It was going way down in the 20 years preceding the reform and it's been going way up in Chile.  It's been going way up since, and especially among people receiving pensions, because you can take your pension and continue working. And once people meet this minimum threshold, they do take their pensions, the majority of people in Chile have taken their pensions under the age of sixty, and way below the, quote, normal retirement age, but because of the high rate of return that, you know, that enabled them to meet this threshold.  But many more of them continue working than used to be the case. Of course retirement age is a big issue around the world and it's too low in many countries and the incentives, in most countries, continues to keep it low, although countries are trying to change those rules and incentives and the retirement age. MR. HASSETT:  Let's go to question three now; back there. QUESTION:  I'm Joe Anderson from Capital Research Associates, and a question for Jose.  What, in brief, is the system and the source of financing for the system of disability insurance and survivor's insurance, and the source of financing for the minimum benefit for workers with low wage histories? MR. PINERA:  Oh, those are two different questions.  The financing of the minimum pension guarantees is our tax revenues.  Second, we also fully privatize disability and survivor insurance in Chile, something that nobody's proposing in the U.S., so it's off of the table and it should be.  You can do one reform at a time, I believe, and it will be very complicated to mix both. But if you want to know where, in Chile, Estelle put the number there--there is 10 percent of wage going to the old-age personal account system and every private pension manager has to take a group insurance for disability and survival for all the workers in the group, and every year, there has to be an open bidding process, you read of them in the newspapers, in which 20 insurance companies bid in order to provide group disability and survivor insurance to a group of people that they know their age profile, and everything. And there is a bidding process.  The raid [?] began [inaudible] around 2 percent of wages, and it has gone down to .7 percent of wages.  To a third.  Disability premium has gone down to a third of what it was initially.  Why?  Because we set up--because the key here is who decides disability. In most countries it is a government official.  Now a government official, with all due respect to government officials, my father was one for 40 years, but their full incentive is to say yes, why should you say no to--except see, if you are a complicated person.  But generally, if someone comes to you and says look, I have this problem, this back pain, whatever, and I would like a disability benefit, it's more serious in the U.S. But I am saying in my country, generally say yes, and then you tell your wife at night that you have given a lot of disability pensions, that you are a hero of the revolution, and of course paid by the rest.  In Italy is a whole fraud.  In France or Latin America, disability's a fraud, except I don't know anything about the U.S. on this; maybe not. So in Chile, how is decided?  You have the pension manager who represents the worker who claims a disability in a table, and in front of him there are two persons representing the insurance company, who, in principle, doesn't want to pay the disability.  So if the man doesn't have a hand, the issue is settled in one second and he is granted a disability payment for life. But if the man says that he has back pain, the discussion goes a little longer, because it may not be a disability.  If the foreperson representing the conflicting interests agree, they grant the disability.  If they disagree and there is a countervailing force, you call up two independent doctors, dean of schools that are in a list, who decide. So every one who deserves a disability is getting a disability in Chile.  Otherwise, it would be on TV, on nighttime, you see, the lady who needs disability and cannot get it from the system.  It will be horrible.  So everyone who--but regrettably in human life, people want to get, every one of us wants to get a benefit paid by someone else, and those benefits in the case of Chile are not granted, so that the premium to all the workers go down and therefore the take-home pay goes up. So it has worked extremely well also, the disability system, because it is a decision that is fair, you give it when it has to be given, but it's very difficult to commit fraud. We also have a transitory disability, because some people may become able again, and insurance companies sometime trains the person and hires doctors in order to get the person to be again a worker, because they have an incentive, because in that way they will not pay. So they are much more complexity.  But it's working very well in intelligent government, private sector partnership with the right incentives.  I believe that is all about incentives. MS. JAMES:  Another reason why the costs have gone down in Chile is that the individual accounts are doing double duty basically in insuring old age and insuring disability. So this premium, this group policy that Jose talked about, the insurance companies agree to put additional money into the individual's account, so the individual then has enough money to purchase an annuity that provides 70 percent of their last few years wages, which is the disability benefit that's written into the law. As the account size has gone up, the top-up that the insurance companies have to put in has gone down because the account is already providing a lot of the resources for that, and that's part of the reason for that large decline. MR.      :  [Off-mike.] MR. PINERA:  Survival goes with the disability.  It pays the same thing.  It's the same policy, the same concept, but there is no discussion.  Even though there was one guy who said he was dead and he was not.  But generally, there is no discussion. MR.      :  [Off-mike.] MR. PINERA:  No.  There was one or two cases but [audio blip.] MS. JAMES:  During the working career it's-- MR. PINERA:  You are better not dead. MS. JAMES:  --covered out of that policy, but after the worker retires, survivor's insurance is provided via that joint annuity that's required by the government. MR. HASSETT:  Sorry.  We don't have any more time for questions. I'd like to thank the panelists and if you do have more questions, come up and ask them directly.  Thank you very much.</body></html>