Personal retirement accounts are not unproven.(Be not afraid: Social Security reform is no radical idea)

While I was Chile's Secretary of Labor and Social Security, from 1978 to 1980, we converted our national pension system to one based on ownership, choice, and personal responsibility--just as George Bush proposes to change America's today.

The Chilean retirement system was originally based on the nineteenth century Prussian pay-as-you-go model--the same principle that guides the current U.S. program. Such a system of simple transfers from the young to the old, with no savings accumulation, is not only hostage to demographic trends, it also has a fatal flaw: It destroys the link between individual contributions and benefits, between personal effort and reward.

Chile's Social Security Reform Act of 1980 allowed workers to opt out of the government-run pension system, and instead contribute to a personal retirement account. Neither these workers nor their employers pay a payroll tax. Instead, 10 percent of their pre-tax wage is deposited monthly into a personal account. Workers may voluntarily contribute up to an additional 10 percent per month in pre-tax wages. The invested funds grow tax free.

Workers may choose any one of several competing private companies to manage their accounts. Those companies can engage in no other activities, and are subject to strict supervision by a government agency. Older workers have to own mutual funds concentrated in safe bonds, while young workers can have most of their funds in faster growing but more volatile stocks. The law encourages a diversified portfolio.

Each worker receives a statement from the manager every three months, and can track his retirement capital at any moment. Because these personal retirement accounts are tied to the workers, not the employers, workers can take their accounts with them when they move to other jobs, keeping the labor market flexible.

Upon retiring, workers may choose from three payout options: Purchase a family annuity from a life insurance company that will pay a monthly benefit for life, indexed to inflation. Leave your funds in the personal account and make monthly withdrawals, subject to limits based on life expectancy (if a worker dies, the remaining funds form a part of his estate). Do a combination of the ...