[Vision2020] Failure in British Privatizing Plan

[Nick Gier]

January 14, 2005, The New York Times
OP-ED COLUMNIST
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 issues.

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 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.

"Modern physics has taught us that the nature of any system cannot be 
discovered by dividing it into its component parts and studying each part 
by itself. . . .We must keep our attention fixed on the whole and on the 
interconnection between the parts. The same is true of our intellectual 
life. It is impossible to make a clear cut between science, religion, and 
art. The whole is never equal simply to the sum of its various parts." 
--Max Planck

Nicholas F. Gier
Professor Emeritus, Department of Philosophy, University of Idaho
1037 Colt Rd., Moscow, ID 83843
http://users.adelphia.net/~nickgier/home.htm
208-882-9212/FAX 885-8950
President, Idaho Federation of Teachers, AFL-CIO
http://users.adelphia.net/~nickgier/ift.htm

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