e must end Social Security as we know it, the
Bush administration says, to meet the fiscal burden of paying
benefits to the baby boomers. But the most likely privatization
scheme would actually increase the budget deficit until 2050. By
then the youngest surviving baby boomer will be 86 years old.
Even then, would we have a sustainable retirement system? Not
Pardon my Britishism, but Britain's 20-year experience with
privatization is a cautionary tale Americans should know about.
The U.S. news media have provided readers and viewers with little
information about how privatization has worked in other countries.
Now my colleagues have even fewer excuses: there's an illuminating article on the British experience in The
American Prospect, http://www.prospect.org/, by Norma Cohen, a senior
corporate reporter at The Financial Times who covers pension
Her verdict is summed up in her title: "A Bloody Mess." Strong
words, but her conclusions match those expressed more discreetly in
a recent report by Britain's Pensions Commission, which warns that
at least 75 percent of those with private investment accounts will
not have enough savings to provide "adequate pensions."
The details of British privatization differ from the likely Bush
administration plan because the starting point was different. But
there are basic similarities. Guaranteed benefits were cut; workers
were expected to make up for these benefit cuts by earning high
returns on their private accounts.
The selling of privatization also bore a striking resemblance to
President Bush's crisis-mongering. Britain had a retirement system
that was working quite well, but conservative politicians issued
grim warnings about the distant future, insisting that privatization
was the only answer.
The main difference from the current U.S. situation was that
Britain was better prepared for the transition. Britain's system was
backed by extensive assets, so the government didn't have to engage
in a four-decade borrowing spree to finance the creation of private
accounts. And the Thatcher government hadn't already driven the
budget deep into deficit before privatization even began.
Even so, it all went wrong. "Britain's experiment with
substituting private savings accounts for a portion of state
benefits has been a failure," Ms. Cohen writes. "A shorthand
explanation for what has gone wrong is that the costs and risks of
running private investment accounts outweigh the value of the
returns they are likely to earn."
Many Britons were sold badly designed retirement plans on false
pretenses. Companies guilty of "mis-selling" were eventually forced
to pay about $20 billion in compensation. Fraud aside, the fees paid
to financial managers have been a major problem: "Reductions in
yield resulting from providers' charges," the Pensions Commission
says, "can absorb 20-30 percent of an individual's pension
American privatizers extol the virtues of personal choice, and
often accuse skeptics of being elitists who believe that the
government makes better choices than individuals. Yet when one
brings up Britain's experience, their story suddenly changes: they
promise to hold costs down by tightly restricting the investments
individuals can make, and by carefully regulating the money
managers. So much for trusting the people.
Never mind; their promises aren't credible. Even if the initial
legislation tightly regulated investments by private accounts, it
would immediately be followed by intense lobbying to loosen the
rules. This lobbying would come both from the usual ideologues and
from financial companies eager for fees. In fact, the lobbying has
already started: the financial services industry has contributed
lavishly to next week's inaugural celebrations.
Meanwhile, there is a growing consensus in Britain that
privatization must be partly reversed. The Confederation of British
Industry - the equivalent of the U.S. Chamber of Commerce - has
called for an increase in guaranteed benefits to retirees, even if
taxes have to be raised to pay for that increase. And the chief
executive of Britain's National Association of Pension Funds speaks
with admiration about a foreign system that "delivers efficiencies
of scale that most companies would die for."
The foreign country that, in the view of well-informed Britons,
does it right is the United States. The system that delivers
efficiencies to die for is Social Security.