In an attempt to advance the Bush administration's plan to partially privatize Social Security, FOX News host Sean Hannity and nationally syndicated radio host and former Reagan administration official William J. Bennett made false and misleading claims about the purported success of privatized retirement systems in Galveston, Texas, and Chile. In fact, in each case, the privatized systems have provided lower retirement benefits for low- and middle-income workers than the guaranteed benefits in the systems that they replaced.

From the February 8 edition of FOX News' Hannity & Colmes:

BENNETT: People at all levels of the economy in Chile have profited from this plan.

[...]

HANNITY: The same demonization [of privatization] was used in Chile. Only 25 percent of the population got involved originally. Now 95 percent want the private accounts because they work.

[...]

HANNITY: I guess what's frustrating to me is that it seems that what people thought were good ideas, innovative ideas -- Galveston, Texas, let me give you this quick model, Bill [Bennett]. They opted out of the system of Social Security in 1982 because of a loophole. That person that makes $51,000 a year, that paid 6 percent in their private system is going to get nearly $4,000 a month. The average Social Security recipient will only get $1,500 a month.

In Chile, they get 10 percent across the board versus the 1 percent [the rate of return is assumed to be 3 percent, according to the 2003 Social Security Trustees report] in our government system. And yet there's a close-mindedness, even though a 25-year track record has been set with two separate examples.

Galveston and two other Texas counties opted out of the U.S. Social Security system in 1981 (which states and localities could do before the law was changed in 1983), creating a system of private annuities. But Hannity's claim that the “average Social Security recipient” would benefit from the system implemented in Galveston is contradicted by a 1999 Government Accounting Office (GAO) report entitled “Social Security Reform: Experience of the Alternate Plans in Texas,” which ran a simulation to compare what a worker would receive under the Galveston and current U.S. systems. According to the report, only higher-wage earners' benefits and initial disability benefits would increase under the Galveston plan, while all other groups would receive lower benefits than under the current U.S. system.

From the 1999 GAO report:

In general, we found that certain features of Social Security, such as the progressive benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and individuals with dependents. ... Many median-wage earners in our simulations, while initially receiving higher benefits under the Alternate Plans, would also have received larger benefits under Social Security after between 4 and 12 years after retirement, because Social Security benefits are indexed for inflation. The Alternate Plans provide larger benefits for higher-wage workers than Social Security would, but in some cases, such as when spousal benefits are involved, Social Security benefits could also eventually exceed those of the Alternate Plans. Even Social Security's cost-of-living adjustment feature would not lift higher earners' benefits beyond those of the Alternate Plan participants until very late in retirement. Survivor benefits often would be greater under Social Security than under the Alternate Plans, especially when a worker died at a relatively young age and had dependent children. With regard to disability benefits, all workers in our simulations would receive higher initial benefits under the Alternate Plans. ... Although the presence of dependents would narrow the difference somewhat between Social Security and the Alternate Plans in initial disability benefits, the Alternate Plans' initial disability benefits would still likely exceed those from Social Security because of the added value of the annuity.

And there are other major problems with the Galveston system. As Fairness and Accuracy in Reporting (FAIR) has noted, Galveston “contracted for a fixed-income annuity at an average annual rate of 8.6 percent. But there's no way the U.S. economy could live with interest rates that high over the long term; Galveston's example can't be generalized to the entire nation.” Further, as Brookings Institution senior fellow Henry Aaron noted in his testimony to the Senate Committee on the Budget on January 19, 1999, in addition to lowered benefits for most workers, the Galveston plan “exposes all workers to risks that no social insurance plan should countenance,” while failing to provide inflation protection or guaranteed annuities for spouses and benefits for divorced spouses. Aaron also noted that the Galveston system could not feasibly be translated to America as a whole: “Those who withdraw from Social Security run away from a burden that the nation cannot escape -- specifically, the obligation to pay off the unfunded liability -- leav[ing] that burden for those who remain under Social Security to pay.”

Similarly, Chile's system of private accounts has been less effective for poor and middle-class workers than the social security system that preceded it. While the Chilean program does earn “an average 10 percent annual return on investments” according to a January 27 New York Times report, Hannity's claim that such a return is received “across the board” is misleading, and Bennett's assertion that "[p]eople at all levels of the economy in Chile have profited from this plan" is false. As the Times article noted, “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.” Further, many poor Chileans' “contributions were not large enough to ensure even a minimum pension approaching $140 a month,” and others who “earned much of their income in the underground economy, are self-employed, or work only seasonally -- remain outside the system altogether.” As Ricardo Solari, Chile's minister of labor and social security, noted to the Times, "'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.'''

Further, Hannity's claim that “95 percent [of Chileans] want the private accounts because they work” contradicts the assessment of a Chilean “government official who specializes in pension issues.” As the Times reported:

''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.”