[Mb-hair] Very Interesting Article - Michael
michael at michaelbutler.com
Fri Jan 14 10:52:23 PST 2005
January 14, 2005
The British Evasion
By PAUL KRUGMAN
We 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 bloody likely.
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, 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
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
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 savings."
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.
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