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January 14, 2005, <i>The New York Times<br>
</i>OP-ED COLUMNIST<br>
The British Evasion<br>
By PAUL KRUGMAN<br><br>
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.<br><br>
Even then, would we have a sustainable retirement system? Not bloody
likely.<br><br>
Pardon my Britishism, but Britain's 20-year experience with privatization
is a cautionary tale Americans should know about.<br><br>
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,
<a href="http://www.prospect.org/" eudora="autourl">www.prospect.org</a>,
by Norma Cohen, a senior corporate reporter at The Financial Times who
covers pension issues.<br><br>
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."<br><br>
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.<br><br>
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.<br><br>
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.<br><br>
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."<br><br>
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."<br><br>
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.<br><br>
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.<br><br>
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."<br><br>
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. <br>
<x-sigsep><p></x-sigsep>
<font size=2>"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<br><br>
</font>Nicholas F. Gier<br>
Professor Emeritus, Department of Philosophy, University of Idaho<br>
1037 Colt Rd., Moscow, ID 83843<br>
<a href="http://users.adelphia.net/~nickgier/home.htm" eudora="autourl">http://users.</a>adelphia<a href="http://users.adelphia.net/~nickgier/home.htm" eudora="autourl">.net/~nickgier/home.htm</a><br>
208-882-9212/FAX 885-8950<br>
President, Idaho Federation of Teachers, AFL-CIO<br>
<a href="http://users.adelphia.net/~nickgier/ift.htm" eudora="autourl">http://users.adelphia.net/~nickgier/ift.htm</a><br><br>
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