social security "crisis" - debt - medical care

George Akerlof, 2001 Nobel Prize laureate in economics:

I think this is the worst government the US has ever had in its more than 200 years of history. It has engaged in extraordinarily irresponsible policies not only in foreign and economic but also in social and environmental policy. This is not normal government policy. Now is the time for people to engage in civil disobedience.

Laffer Curve –( SUPPLY SIDERS – TRICKLE DOWN) In the late 1970’s Republicans make key political “discovery” – Laffer (crank economist) claims you can cut tax rates and get more money! 15% of your income will produce more revenue than 30%!!

If Tax receipts will rise if there are lower rates – we can keep on spending and give $ back to taxpayers - Carter had preached sacrifice and discipline – Reagan says “FREE LUNCH

This “discovery” makes politicians very happy – Especially Ronald Reagan whose mind is unique.

Reagan believed fervently in a “Star Wars” missile defense system – for which his only “evidence” of effectiveness was movies. Reagan in 1940 played a secret agent protecting the newly invented “super-weapon” “inertia projector” which will paralyze and destroy enemy planes which will “not only make the United States invincible in war, but, in doing so, promises to become the greatest force for world peace ever discovered.” In Alfred Hitchcock’s Torn Curtain (1966) Paul Newman played an agent who declares “We will produce a defensive weapon that will make all nuclear weapons obsolete, and thereby abolish the terror of nuclear warfare.” Reagan’s Star Wars speeches borrowed liberally from the movies. A weapons system costing many 10’s of $Billions had much more in common with movie marketing than weapons that are tested. Gorbachev told us we were welcome to waste our money – but the idea was too stirring politically-poetically to discard. Gorbachev also asked Reagan what we would when we lost our favorite enemy. It was unveiled with no serious consultation with anyone serious in the Pentagon. It has consumed billions of dollars altho all serious scientists believe countermeasures would be much simpler and cheaper. As a device for spending many times more than an enemy its efficiency is unparalleled. It’s so good politically that Republicans insist on deployment BEFORE successful tests.

The Laffer curve was just as politico-poetically useful. It meant Reagan could give huge tax cuts to the rich while spending huge amounts on elaborate weapons systems and claim no deficits would result. The appearance of huge deficits has had no effect on the true believers – including the editorial page editor of the Wall Street journal.

David Stockton – his budget director – described trying to explain why this was “VOODOO ECONOMICS” as Bush41 correctly claimed. Reagan’s mind proved absolutely impervious or impermiable to logic or evidence. Stockman talked about a boy so sure he will get a horse for Christmas that when he instead finds a pile of manure in the stall he starts digging to uncover the horse. Reagan never bothered to dig – his faith in the horse was total.

Republicans become PRO_TAX_CUT! Two-free-lunch politics! We can keep spending and you can have lots of your money back if you’re rich. “It’s your money” and the kids will handle the debt – and they don’t vote or pay attention.

Laffer was always used to cut progressive taxes – never those that hit the poor. The abused upper classes were rescued.

SOCIAL SECURITY CRISIS? If the basic rate of growth of our economy for the next 50 years is the same as that for the last 50 years –about 3% - Social security has no long term problem paying benefits (abbreviate this as guess “OK ”. If, as in the Social Security trustees “pessimistic” guess “DRAT” rate of growth is about 1.9%, Social Security has about $4Trillion (“4T”) deficit over 50 years. Demographics – the increase in the ratio of old people to workers - is a minor manageable problem. We could get rid of the huge tax cuts for the rich which are much bigger than SSECY (DRAT” scenario) deficit. Or a 1% annual wealth tax on wealth over $10 million.

The BUSH43 propaganda relies on growth prediction “DRAT” to claim CRISIS crisis – THEN SWITCHES to growth prediction OK to claim STOCK MARKET SOARS

Medicaid and medicare are much bigger problems – 250% bigger short term – 760% bigger ($28T) over 75years no matter what the economic growth. Republicans love our health care system – Cadillac care at the top – 45 million uncovered at the bottom.

But the mainly private U.S. health care system spends far more (15% of GDP and heading for 20%) than the mainly public health care systems of other advanced countries (9 or 10%), but gets worse results. In 2001, we spent $4,887 on health care per capita, compared with $2,792 in Canada and $2,561 in France. Yet the U.S. does worse than either country by any measure of health care success you care to name - life expectancy, infant mortality, whatever. (At its best, U.S. health care is the best in the world. But the ranks of Americans who can't afford the best, and may have no insurance at all, are large and growing.)

The “privatization” option of Social Security or “Private accounts” will BORROW money from the BOND market (another $5 trillion debt for the first 20 years of private accounts according to Concord Coalition- for young to pay interest on for the rest of your life) and invest it in stocks and hope that the Stock market outperforms the bond market by a huge margin. Enough to pay transaction costs AND outperform the Bond market by over 3%.

HOWEVER: When debt levels get very high – whether an individual’s credit cards or a nation’s debts – interest rates go up. The bond market goes up with high interest rates, the stock market goes down. The stock market is already over-priced historically at a 24:1 Price:earnings ratio compared to a 14:1 historical norm. The bet is already made at 24:14 odds against – not even considering our huge and rapidly rising debt.

The Medicare Drug benefit passed last year added another $8 trillion to our long term obligations (30 years). The original projections were grossly underestimated. Canadians pay about 1/3 as much for drugs as we do but the Republicans forbid using market leverage forces to get lower prices.

Bush43 economics - Census Bureau - 2001 through 2004, poverty increased, income stagnated and the ranks of the uninsured grew, while the United States spent some $400 billion on tax cuts, which mainly benefited wealthy families. Since Bush43 came to power, 4.3 million people have fallen below the poverty line, set at $18,660 for a family of four in 2003, bringing the total number of people living in poverty in 2003 to 35.9 million, or 12.5 percent of the American population.

The poor will always suffer most from recession and job losses. But one sure way to stem the slide into poverty is by bolstering state programs that directly benefit the poor, like job training, health care and child care. The administration devoted only 3 percent of its stimulus spending to aid for state governments. Congress and the administration have also done nothing to enhance the Temporary Assistance for Needy Families program. As a result, while the number of children living in poverty increased by 11 percent over the past three years, the number of children receiving welfare declined by 10 percent over the same period. Adding to the gloom, median family income - $44,853 in 2000 - fell by $1,535 during the administration's first three years, while the number of Americans without health insurance, according to the Census Bureau, grew by 5.2 million, to 45 million in 2003. The president and Congress have largely ignored this problem, while leaving little room to address it later by ballooning the deficit with tax cuts.

When Clinton left office projections were for a surplus over $5 trillion over the next decade.

Bush Tax cuts (if extended as promised by Bush and the Republican Congress) are projected to create a deficit of $4.5 trillion (not including war spending. $5.7T Concord Coalition estimate counts all the stuff Bush leaves out – wars, probable tax cuts etc) over next decade. This $10T reversal means Bush43 has added about $100,000 to the debt of every American household (100 million households)

In the face of a capital bubble (too much capacity – not enuf demand) Bush gave huge tax cuts to the capital formation classes (rich) – inflating the bubble further – cutting labor market participation about 10%. His “stimulus package which should have given quick short term boost. Instead it put only 8 cents of each dollar into the economy – only items added by Democrats. 92% of the cuts added to long term structural deficits – no immediate impact with no immediate bang – which we see now while we should be running a surplus.

The “Era of ownership” does not mention that the young own huge debt.

US is soaking up 80%of the world’s savings to finance our debt – which kids will pay

Former Fed Chairman Paul Volker sees a 75% chance of a serious problem with our debt levels in the next 5 years. It could be slow decline – or a very messy stampeed like Argentina – serious pain. There has been no rise in interest rates yet – because of low demand for private investment. (would you invest in a country whose educ sys is declining, infrastructure gets “D-“ with a future with almost nothing left for investment in research and educ compared to China India?)

The 1983 Social Security adjustment asked workers – thru regressive payroll taxes - to put in an increased chunk which the government would set aside. Reagan instead spent “TRUST” fund from workers on tax cuts for the rich and defense spending. Clinton raised taxes slightly and was setting Trust fund aside as promised. Bush43 is using it to disguise the size of his real deficits. Bush43/Greenspan say we don’t have enuf $ for benefits for the poor and the rich cannot be asked to give their much larger tax cuts back. Bush43’s Christ sez “as you do for the rich you do for me- and if there is not enuf left for the poor – tough beans.”

If America has approx 100 million households each has lost approx $100,000 net worth. Young wage earning families (like yours’) will be paying interest on $100 grand for the rest of their lives.

If the USA held these deficits in 1950 Corporate taxes would have paid 26.5% of the load. Estate and capital gains and interest taxes another big chunk – ?40%?ballpark?. - payroll taxes (regressive) would pay 6.9%.

After the Reagan-Bush43 tax revolution Corporate taxes would have paid a third as much - 9.1% of the deficit - payroll taxes (poor labor) 5 times as much 35.5%.

Clinton helped the ratios (corporate share up 10% - payroll share down 12.4% (Wealth &Democracy pg149).

the Bush43 SSECY commission recommended change in indexing - from “standard of living” to “inflation.” The current plan Boomers (who vote) will get about 36% of earlier earnings in benefits. People in their 20’s would get 27% of earlier earnings after this “small” adjustment has 40 years to compound. Babies born now will get about 20% of earlier earnings – fulfilling a long term goal of the anti-new-dealers.

The dollar has fallen 43% compared to the EURO under Bush43 (Nov 2001 vs Nov 2004) while consumer confidence for the top 1% is the highest on record.

In 1950 Corporate taxes would have paid 26.5% of the total taxt load. Estate, capital gains, interest taxes would have paid big chunk – 40% ballpark - payroll taxes (regressive) would pay 6.9%.

After the Reagan-Bush43 tax base revolution Corporate taxes would have paid a third as much - 9.1% of the load - payroll taxes (labor) have 5 times the share of the load - 35.5%. All these debts will soak workers from now on because republicans can block return to pro-middle-class tax policy. It took the perfect political storm to create the greatest generation – WWII and the Depression - to make America worker-friendly and world-friendly. We’re back to our individualist – nationalist Social-Darwinist norm.

Clinton moved the ratios in the right direction (corporate share up 10% - payroll share down 12.4% (WD149).

Clinton was collecting 20% GDP and spending just under 20%. Bush43 has relieved the most progressive 3% of total load – the progressive parts like the “DEATH-HOLOCAUST” or is it the “ESTATE-UNEARNED” tax? Bush43 spends 20% of GDP every year, and collects 17% in taxes. Benefits for the rich are balanced by debts for young workers on the other side of the ledger.

The Muslim-Christian idea of the obligations of the rich to the community is overturned – it’s “Facist” in Norquist-Bush43 rhetoric. But if Bush43 runs a few businesses into the ground family friend (Saudis and other favor-seekers) bail him out – and Arlington Texas taxpayers pay to build a stadium to make his tiny baseball investment blossom into 10’s of millions. If the rich get their Social Darwinist “due” that’s cool. The morally deficient poor would be corrupted by even a tiny fraction of the help a Bush gets.

Bush43 has reversed the Clinton adjustments and changed fundamental tax structures beyond Reagan’s – or even Gilded Age - dreams. Now the effective average rate on corporate dividends and capital gains is down to 10% - the rate on wages and salaries is about 23% (Institute Taxation and Econ Policy). Bush 43 promises try to get capital taxes to zero - to continually move more of the tax load from progressive to regressive.

Bush43 tax commission “revenue neutral” – keep running deficits –

Since Reagan the US has the hugest gap between rich and poor in the industrialized world. Ratio CEO 1000 worker 1 – Japan 40:1. Bush43 in increasing the ratios - wage earners will be radically more in hock – responsible for higher and higher proportion of debt.

The share of the economy (GDP) going to wages and salaries has fallen 8% under Bush43, the share to corporate profits has gone up 29% (CenterBudgetPolicyPriorities).

Bush took office following a cyclical economic peak – but in all other 3 year periods following cyclical peaks, wages averaged 8.7% growth – Bush43 saw 3/10% wage growth (1/29 normal ratio). Corporate profits usually see about 12.3% growth in other similar periods. Bush43 saw Corporate profits get more than three times the normal share - 40.4% of our economic growth has gone to corporate profits (CBPP).

Wages and Salaries have climbed rapidly for those with high salaries – fallen rapidly for those in bottom quintiles. Child poverty is up millions, infant mortality up first time in 40 or 50 years, etc.

The dollar was worth 43% more compared to the EURO when Bush started (Nov 2001 vs Nov 2004). The World knows how well our economy looks – altho consumer confidence for the top 1% is the highest on record.

Cuts in Bush43 budget – veterans healthcare (1% increase with many amputees etc coming in – 1/3 on waiting lists. Center for Disease control – when bird flu is seen as possible pandemic – medicare – Medicaid – cut health care for more of the poor “What you do for the least of these you do for me”?

BUSH43 cannot take open questions – “town meetings” have loyalty oath required

Bush Marketing Beats His Plan

By Allan Sloan Tuesday, February 8, 2005

You've got to give President Bush an A-plus for the way he marketed the Social Security proposals in his State of the Union address last week.

"If you've got children in their twenties, as some of us do, the idea of Social Security collapsing before they retire does not seem like a small matter," he said -- a sentiment with which even a skeptic like me, who has twenty- and thirty-something kids, totally agrees. You can't argue with Bush's stated goals of making Social Security financially sound to allow Americans a secure retirement. But the centerpiece of his proposals -- allowing workers the option to divert up to 4 percent of payroll taxes into private accounts -- doesn't do anything to fix Social Security's financial woes. Instead, it's a fiendishly clever device that serves the political goal of remaking the nation's most popular social program so that it's "a better deal" for younger workers. There was a twinkle in Bush's eye when he said that, a clever allusion to the New Deal of Franklin Delano Roosevelt, father of Social Security. You could almost hear the Democrats gnashing their teeth.

In their current incarnation, you'd almost certainly want to sign up for these accounts if you were younger than 55. Yes, you'd have to accept a smaller guaranteed benefit. But you'd come out ahead if your account produced an annual return -- cash income and price gains -- of more than 3 percent above inflation. That's not a slam-dunk, but it ought to be attainable because you would have a choice among a handful of high-grade, very-low-cost, very diversified mutual funds. But there's a catch. You would own the account, sort of, but you wouldn't control it. And you'd have to fork over the aforementioned 3 percent return -- by taking a smaller benefit -- when you cash in your account.

Bush, brilliantly, is marketing these accounts as empowering people who'd have no other assets. But I don't think things would work out well for these folks. There would be strict limitations on the accounts -- you couldn't take money out of them before you retire or even borrow against them. And the odds of low-income people being able to leave a significant account to their heirs -- one of Bush's major selling points -- strike me as remote.

Here's why. When it's retirement time, low-income people would probably have to convert most or all of their private accounts into annuities to have enough money to live on or to meet requirements that their guaranteed benefits plus annuity income would exceed certain levels. If you had to convert your entire account into an annuity, there would be nothing left for your heirs when you died. Higher-paid people, by definition, would have bigger private Social Security accounts and less need for annuity income than lower-income people would. This gives them a far greater chance of having something left to hand down to their heirs and gives lower-paid people less chance. Not to be snotty, but we higher-income types hardly need additional breaks. We've already got plenty.

Staying power matters big-time, too -- and higher-income people have more of it than lower-income people do. Although stocks tend to rise over the long term, you'd have to cash in some or all of your retirement account to buy an annuity when you retire. That puts you at the mercy of events. Consider the following, produced at my request by the Center on Budget and Policy Priorities. Say you retired in March 2000, with a private account that held $100,000 of stock in a Standard & Poor's 500-stock index fund. (Index funds match the performance of a benchmark; they don't try to beat the market.) Your inflation-adjusted annuity would have been $7,558 a year -- about $630 a month -- by the center's calculation. But if you had had the same number of shares in your account and instead retired in October 2002, your account would have had less than $60,000 in it. Your annuity: $3,352 a year, or $279 a month. The combination of lower values and lower interest rates is a double whammy. You see the problem? You can get much less -- or much more -- than someone who has saved at the same rate as you but retired a little earlier or later.

If you've got financial staying power, you could wait for better days or buy the smallest annuity the government will permit. If you don't have staying power, you have to take what the market gives you. Higher-paid people thus have a big advantage. The guaranteed Social Security benefit, by contrast, is tilted toward lower-income people, with a benefit of about 56 percent of Social Security-covered wages for a minimum-wage earner, 30 percent for folks like me who have reached the Social Security maximum every year. You're swapping benefits skewed toward lower-income people for investment opportunities skewed toward higher-income people.

I'm in favor of private accounts constructed along the lines that Bush suggested. But the accounts ought to be in addition to the basic benefit, not a replacement for about half of it. Democrats are crazy to oppose private accounts. They really do empower you. The current generation is used to investing and is understandably skeptical about government promises. This isn't the 1930s, when only a handful of people bought stocks and many of them came to regret it. It's the aughts, guys, get with it. FDR's been dead for 60 years. The world has changed.

If the president really wants to fix Social Security rather than pick a political fight -- and the Democrats feel the same -- it wouldn't be difficult. They'd compromise by putting more money into the system by raising wage taxes a tad, taking less out by increasing the retirement age and trimming benefit formulas and setting up private accounts funded by wage earners, not by government borrowings. Put a few willing negotiators in a room and a deal's done in a month. I won't hold my breath, though.

Bush has marketed the pants off the Democrats by setting the terms of debate. Do you want to pay higher taxes or lower taxes? Clearly, lower. Do you want to pay estate tax or not? Do you want private accounts, or don't you? He has done a fabulous job of showing the goodies -- and of hiding the costs. People, naturally, have opted for the goodies. The Bushies are in full sales mode, including sticking recordings on Social Security's phone lines preaching that the system has to change. In the name of empowering my kids, he's asking them to pay full freight for my retirement and for trillions in new borrowings, while forking over the same wage taxes for lower benefits. If he can sell this one, the Marketing Hall of Fame should start planning his induction ceremony.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.

Graham Says GOP Erred By Focusing on Accounts

By Mike Allen

Washington Post Staff Writer
Wednesday, March 9, 2005; Page A08

Sen. Lindsey O. Graham (R-S.C.), who has spent weeks attempting to recruit Democratic support for a plan to restructure Social Security, said yesterday that Republicans "made a strategic mistake" by initially focusing on a proposal to create individual investment accounts.

The accounts, the centerpiece of President Bush's proposal, would benefit young and poorer workers by letting them use compound interest to help make up for any benefit reductions, Graham said. But he said the accounts, by themselves, will not fix the solvency problem Social Security faces as baby boomers begin to retire.

"We've now got this huge fight over a sideshow," Graham said during a meeting with Washington Post reporters and editors. "It's always been a sideshow, but we sold it as the main event. [Critics are] attacking it as the undoing of Social Security. That's what frustrates me -- that we're off in a ditch over a sideshow, and there's plenty of blame to go around."

The House will take its first formal step toward a Social Security bill today when Ways and Means Committee Chairman Bill Thomas (R-Calif.) holds a hearing about the future of the benefits system. The session will feature testimony from Comptroller General David M. Walker, who heads the Government Accountability Office, and two trustees of the Social Security system, Thomas R. Saving and John L. Palmer.

Graham's comments echoed those of Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), who said last week that he wants to encourage Democrats to participate in the debate by first focusing on solvency questions and later taking up the issue of individual accounts.

Graham, who is advancing an alternative to Bush's plan, suggested the same tack. "Let's have a conversation along these lines: Let's make a commitment to permanently find solvency, and see where we go," he said. "Set the accounts aside for a moment. Let's see if we can find solvency."

The senator said that various proposals for creating investment accounts could be structured to "blunt the blow" of changes to scheduled benefits. Graham said one way to turn around opposition to Bush's proposal would be to shield lower-income people against market downturns so that they will continue to receive a guaranteed benefit.

Graham acknowledged an "anxiety level" among people 55 and older, even though Bush has said repeatedly that his proposal for restructuring Social Security would not affect them.

"They're very skeptical of any politician who says anything about this deal," Graham said. "We take the money out of the system. We run the government with it. They don't understand the details. There are a lot of people out there near retirement that are nervous as they can be."

Treasury Secretary John W. Snow, speaking later at a Capitol Hill news conference to promote administration-backed proposals to encourage savings, suggested that the White House would rather not have personal accounts on the back burner.

"We have to deal with solvency -- the solvency issue is critical," Snow said. "But the administration is saying that the solvency issue, if it's going to be dealt with in a way that's fair to younger people, has to make available to them this opportunity to build a nest egg through the personal accounts."

Snow said he expects momentum to build as Bush and administration officials continue to campaign for the approach over the next two months. Asked if the legislation can get done this year, Snow replied, "Oh, absolutely. Social Security legislation will move through the Congress this year." As to additional specifics out of the White House, Snow said, "We've offered a lot. The president's put a lot on the table."

Snow met at lunchtime with Rep. Mike Pence (Ind.), chairman of the Republican Study Committee. The committee, a coalition of House conservatives, is pushing for larger personal accounts than the White House has discussed, and is insisting that a Social Security package include no tax increase, no increase in the retirement age and no new entitlement spending.

At the White House, Bush met with a small group of senior Republican senators for about 40 minutes and talked about the importance of completing work on Social Security this year.

couching the Social Security debate largely as a matter of personal rather than collective interest, Bush is redefining the program's very essence. The president's drive to divert a portion of payroll taxes from traditional Social Security benefits to personal accounts for every worker is a departure from the origins of the program and the way people talked about it then.

Listen to the way President Franklin D. Roosevelt talked about Social Security when he signed it into law in 1935, during the Great Depression: "We have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age," he said. Roosevelt's target was the rate of poverty, not a rate of return.

Measured by that standard, it's been a smashing success. Poverty among the elderly started dropping as soon as the first monthly Social Security benefits began, and declined even faster after benefits improved in the 1960s. Between 1960 and 1995, the official poverty rate of those 65 and older fell from 35 percent to 10 percent, according to a study published in May 2004 by the National Bureau of Economic Research, a steeper decline than for any other age group. "While poverty was once far more prevalent among the elderly than among other age groups, today's elderly have a poverty rate similar to that of working-age adults and much lower than that of children," the NBER study said.

The study's authors, economics professors Gary Engelhardt and Jonathan Gruber, said the decline could be attributed entirely to increases in Social Security payments.

In taking on poverty, Roosevelt's rhetoric also changed our notion of the government's role and individual responsibility. The Social Security Act of 1935 "reversed historic assumptions about the nature of social responsibility," historian William E. Leuchtenburg wrote in his book, "Franklin D. Roosevelt and the New Deal."

As the counsel for the National Association of Manufacturers put it at that time, perhaps not approvingly, "The concept that the function of government was to prevent exploitation by virtue of superior power has been replaced by the concept that it is the duty of government to provide security against all the major hazards of life -- against unemployment, accident, illness, old age, and death."

But Social Security was never generous enough to protect people from every hazard or hardship. And Roosevelt never intended it that way. "The Act does not offer anyone, either individually or collectively, an easy life -- nor was it ever intended so to do," he said on the third anniversary of signing the legislation. "None of the sums of money paid out to individuals in assistance or in insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold; and that is the kind of protection Americans want."

To a surprising degree, that's still the protection that Social Security provides. By some estimates, without Social Security benefits an additional 11 million senior citizens would fall below the poverty line.

"If you think of it as the floor, you think of it very differently than if you think of it as a second tier or frosting to your retirement savings," says Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office. Reischauer argues that if Social Security benefits were more generous, then diverting some of the money into more risky stock market investments might be a good idea. But if people are relying on it as their sole or principle means of support, then it might be more prudent to keep all their savings in the Social Security trust fund, which invests only in rock-solid government bonds and notes.

Bush, of course, is not proposing to tear up Social Security. He would trim, not eliminate, the traditional program while carving out revenues for individual accounts. Bush justifies the multi-trillion-dollar cost of using Social Security funds to create personal accounts by saying that over the long-run, the government would save trillions more because it would shed some of the obligations it pays under Social Security now.

But would the government really be relieved of its basic obligation?

Chile's Retirees Find Shortfall in Private Plan

By LARRY ROHTER

Published: January 27, 2005

SANTIAGO, Chile - Nearly 25 years ago, Chile embarked on a sweeping experiment that has since been emulated, in one way or another, in a score of other countries. Rather than finance pensions through a system to which workers, employers and the government all contributed, millions of people began to pay 10 percent of their salaries to private investment accounts that they controlled.

Under the Chilean program - which President Bush has cited as a model for his plans to overhaul Social Security - the promise was that such investments, by helping to spur economic growth and generating higher returns, would deliver monthly pension benefits larger than what the traditional system could offer.

But now that the first generation of workers to depend on the new system is beginning to retire, Chileans are finding that it is falling far short of what was originally advertised under the authoritarian government of Gen. Augusto Pinochet.

For all the program's success in economic terms, the government continues to direct billions of dollars to a safety net for those whose contributions were not large enough to ensure even a minimum pension approaching $140 a month. Many others - because they earned much of their income in the underground economy, are self-employed, or work only seasonally - remain outside the system altogether. Combined, those groups constitute roughly half the Chilean labor force. Only half of workers are captured by the system.

Even many middle-class workers who contributed regularly are finding that their private accounts - burdened with hidden fees that may have soaked up as much as a third of their original investment - are failing to deliver as much in benefits as they would have received if they had stayed in the old system.

Dagoberto Sáez, for example, is a 66-year-old laboratory technician here who plans, because of a recent heart attack, to retire in March. He earns just under $950 a month; his pension fund has told him that his nearly 24 years of contributions will finance a 20-year annuity paying only $315 a month.

"Colleagues and friends with the same pay grade who stayed in the old system, people who work right alongside me," he said, "are retiring with pensions of almost $700 a month - good until they die. I have a salary that allows me to live with dignity, and all of a sudden I am going to be plunged into poverty, all because I made the mistake of believing the promises they made to us back in 1981."

With many Chileans finding themselves in a situation much like that of Mr. Sáez, people are still looking to the government, not private pension funds, to ensure a secure retirement.

"It is evident the system requires reform," the minister of labor and social security, Ricardo Scolari, said in an interview here. Chile's current approach based on private pension funds has "important strengths," he said, but "it is absolutely impossible to think that a system of this nature is going to resolve the income needs of Chileans when they reach old age."

In formulating proposals in the United States for individual accounts, advocates of partial privatization of Social Security have sought to overcome some of the problems in Chile. They have suggested, for example, setting low limits on the fees that fund managers will be allowed to charge and continuing to provide a major part of retirement income through the traditional system of guaranteed payments.

The program in Chile differs from the voluntary model that President Bush is considering. Participation here has been not voluntary for people entering the labor force since 1981.

On the other hand, Chile was careful before it started its private system to accumulate several years of budget surpluses, in contrast to the recent large deficits in the United States.

The Chilean example also makes clear that introducing private accounts does not solve a lot of the problems faced in the United States, Europe and Japan, where pay-as-you-go systems remain the principal means of government retirement support.

Over all, Chile has spent more than $66 billion on benefits since privatization was introduced. Despite initial projections that the system would be self-sustaining by now, spending on pensions makes up more than a quarter of the national budget, nearly as much as the spending on education and health combined.

Faced with the likelihood of the gap remaining as it is or, as Mr. Scolari said, "perhaps even widening," the Chilean government is contemplating a new round of pension changes. Suggestions that have been floated include many also under consideration in the United States and Europe, like reducing benefits or setting a higher retirement age.

The problems have emerged despite what all here agree is the main strength of the privatized system: an average 10 percent annual return on investments. Those results have been achieved by the pension funds largely through the purchase of stocks and corporate and government bonds - investments that helped fuel an economic expansion giving Chile the highest growth rate in Latin America over the last 20 years.

"The great success of the system is its high profit rate, more than double what was initially projected," said Guillermo Arthur Errázuriz, executive director of the Association of Pension Fund Administrators. "In total, workers have set aside nearly $61 billion, which is invested in the sectors of the economy that show the most potential."

Among the admirers of the privatized system here is Mr. Bush, who on a visit in November called Chile "a great example" for other countries. On other occasions, he has suggested that the United States could "take some lessons from Chile, particularly when it comes to how to run our pension plans."

The main architect of the Chilean system is José Piñera, who was labor and social security minister from 1978 to 1980 during the Pinochet dictatorship. Mr. Piñera is now chairman of the International Center for Pension Reform, co-chairman of the Cato Institute's Project on Social Security Choice, and he has been a board member of several Chilean corporations.

Mr. Piñera declined repeated requests to be interviewed for this article. In an article on the Op-Ed page of The New York Times last month, though, he extolled the Chilean system as one based on ownership, choice and responsibility and one that is widely popular because it gives workers a stake in the economy.

Among other achievements emphasized here by advocates of the privatized funds are the creation of a modern capital market, cheaper credit for companies that formerly could turn only to banks when they wanted to expand, and a brake on deficit spending by the government.

Critics respond that the privatized system has been less successful in ensuring a dignified retirement for the elderly.

"What we have is a system that is good for Chile but bad for most Chileans," said a government official who specializes in pension issues and who spoke on condition of anonymity, fearing retaliation from corporate interests. "If people really had freedom of choice, 90 percent of them would opt to go back to the old system."

Among the complaints most often heard here is that contributors are forced to pay exorbitant commissions to the pension funds. Exactly how much goes to such fees is a subject of debate, but a recent World Bank study calculated that a quarter to a third of all contributions paid by a person retiring in 2000 would have gone to pay such charges.

But most Chileans are unaware of how much they are paying to the funds because the lengthy quarterly financial balance sheet they receive "is not comprehensible," according to Guillermo Larraín, director of the Superintendency of Pension Funds, a government agency. "It needs to be replaced by a simple and transparent financial statement," he said, so workers can determine which fund charges the lowest fees.

In recent years, the number of pension funds has been winnowed to 6 from a high of 22 in the early 1990's. They have enjoyed record earnings, so much so that foreign banks and insurance companies are investing in the industry. While the pension fund association puts the average annual return on assets just under 30 percent, government figures show profits of 50 percent in 2000, with some independent studies suggesting the funds did that well over the five-year period ended in 2003.

Proponents of the system justify the high returns as an appropriate reward for the risk they undertake. But a recent World Bank report, "Keeping the Promise of Social Security in Latin America," minimized that, noting that through the 1990's, only three large companies accounted for half of all shares traded on the Santiago stock exchange and that pension funds tend to follow a herd instinct and invest in the safest choices on the market.

Government officials like Mr. Larraín and Mr. Scolari acknowledge that "commissions are high and need to come down." They say that "more competition is needed" to foster lower fees. But existing regulations frustrate the creation of new funds - something that seems just fine to pension funds that have become a powerful political and economic force.

"The dynamic of the market," Mr. Larraín said, "is one of consolidation and concentration."

Some other problems of the Chilean system stem from factors that do not apply with the same force in the United States and other advanced economies. Nearly half of Chilean workers, for example, are employed off the books in the so-called informal sector, while many others are hired as independent contractors, who are not required to contribute to a pension account and do not do so regularly because they cannot afford it.

By the government's own calculations, only about half the work force contributes to a pension fund. "We are aware there is a big hole and that we need to take corrective measures," Mr. Larraín said.

Because many of the claims initially made on behalf of the privatized system proved exaggerated or inaccurate, the transition period has turned out to be longer and more expensive than anticipated. The annual cost to the government, still the guarantor of last resort, has remained steady at 5 to 6 percent of the nation's economic output. (By comparison, in 2003, Social Security outlays in the United States totaled 4.2 percent of the gross domestic product.)

Chile spends about $2 billion a year to pay retirees from its armed forces, according to Mr. Scolari. The military imposed privatization on the rest of the country, but was careful to preserve its own advantages and exclude fellow soldiers from the system. Despite calls that the military be forced to give up its exemption, no civilian government has been prepared to pursue that.

Proponents of the privatized system argue that those costs will diminish in coming years, as those still receiving benefits from the old system gradually die off. But critics disagree, pointing to the large numbers of younger Chileans in the work force who either do not participate or whose contributions will fall short of the amount required for a minimum pension.

For those remaining in the government's original pay-as-you-go system, the maximum retirement benefit is now about $1,250 a month. The National Center for Alternative Development Studies, a research institute here, calculates that to get that same amount from a private pension fund, workers would have to contribute more than $250,000 over their careers, a target that has been reached by fewer than 500 of the private system's 7 million past and present contributors.

This leaves many Chileans in a situation that has led to the coining of a phrase: "pension damage." There is now even an Association of People With Pension Damage, 157,000 members and growing, that consists of Chileans, mostly former government employees, who find that their pensions, based on contributions to the private system, are significantly less than if they had remained in the old system.

"They come to us in desperation," said Yasmir Fariña, the group's president, "because those who stayed in the government system are often retiring with monthly pensions twice as large as everyone else's."

Correction: February 9, 2005, Wednesday:

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