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Newt Is Wrong

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Newt Gingrich is using Chile as the laboratory example for his proposal on Social Security reform. But his data about the Chilean experience is dead wrong and misleading.

Which South American country has been the most mentioned in the current season of Republican [residential debates? Surprisingly, the answer is not Venezuela or Brazil. It is Chile. Over and over again, two former candidates -- Herman Cain and Rick Perry -- and one debates star -- Newt Gingrich -- have mentioned Chile as a path to follow in the reform of the Social Security system.

On Monday's debate in South Carolina, the former Speaker goes further. He cited in detail the Chilean system as an example to promote the reform. "They have done it for 30 years. It is, as a historian, a fact-based model," he claimed. But this time, the historian was not accurate. Newt's explanation of the Chilean system was dead wrong on almost every count.

He said that the system is voluntary; it is mandatory. He said that the program is self-funding; but the government has to subsidize retirement payment. He said that the system reverses inequality; it does not.

"First of all, it's totally voluntary" the former Speaker said. The point is not true. Chilean workers do not have the option to choose. Since 1981, when the system was implemented under the dictatorship of General Augusto Pinochet, it is mandatory for any new worker who enters the labor force to put his or her money into personal retirement accounts, run by private for-profit companies, called the AFPs (Spanish for "Pension Fund Managers"). Ten percent of every worker's salary goes to the private account. An additional 2 percent of the salary goes to the AFPs, as "management charges."

The only exceptions are the armed forces and the police, who imposed the reform to the citizens during the dictatorship, but kept their own social security-style system for themselves.

"In 30 years they have never written a single check, because nobody has fallen below the minimum payment of Social Security," Gingrich continued. Again, the point is not true. A big percentage of the retirement accounts do not reach the minimum payment.

This situation forced a change of the system in 2008 (a reform of the reform) to assure public pension benefits for these workers.

According to the last official information, in November 2011, the AFPs paid 911.324 retirement checks. 447.446 of them (49 percent) were subsidized by the government. Additionally, the government had to "write checks" for 615.560 retired who are not covered by the system, because they were independent workers or had long periods of unemployment.

The government estimates that by 2025 only 40 to 50 percent of the retired will receive a private pension above the minimum of $227 per month. After the 2008 reform, a reinforced public system will pay for the rest.

More of Newt: "They (Chileans) now have 74 percent of the GDP in their savings fund." This time he was roughly right. To be accurate, there is $157 billion currently in retirement accounts, 70 percent of Chilean GDP. His point is true: the private account system creates an enormous pool of savings that, in the words of the creator of the system, former Labor Minister José Piñera, "has helped finance economic growth and spurred the development of liquid long-term domestic capital market."

From the Chilean example, Gingrich jumped into American future. Copy-pasting this system, he said, "you actually reduce wealth inequality in America by 50 percent over the next generation because everybody becomes a saver and an investor."

If Gingrich is using Chile as an example, this is an audacious statement. In the last 30 years Chilean economy has flourished, for sure, but the private accounts system has not reduced inequality. On the contrary, today Chile is one of the most unequal countries on earth, as is shown by its Gini Index (the measure of inequality, where 0 represents a country in which every person has the same income, and 1 represents a country in which one person has the 100 percent of the income).

After 30 years of private retirement accounts, Chile's Gini Index is 0.503, the worst of all members of OECD (30 years ago was between 0.52 and 0.54, according to different estimates). In the U.S.A., where inequality had grown in the last decades, the Gini Index is still better than in Chile: 0.468.

Gingrich is the best debater in the GOP field. As he said in the last debate at Thursday night, "I have grandiose thoughts." Sure. But, at least when it comes to Chile and the social security reform, his grandiose thoughts are greater than reality.