Bush pension plan is doomed
2/19/2005THE other morning I was jolted out of bed when the words "people would have been better off putting their money under the mattress rather than putting it into a private pension scheme in many cases," blared from my radio. That will quickly snap a person out of sleep.
Also, "financial advisers are now urging many clients with private pensions to get rid of them ..." said the voice in National Public Radio's report about Britain's private retirement debacle. Britain's program seems to be what President Bush is using as a model to privatize Social Security.
The NPR report was about how Britain privatized its retirement pension plan about 20 years ago under British Prime Minister Margaret Thatcher. Now, with the British "deeply disillusioned by the whole experience," Britain wants to return to a state pension system - like the one we know as Social Security. Mr. Bush has also pointed to Chile's failed private pension program.
Doesn't George Bush have people to tell him these things? Why is he ignoring the bad results of private pension reform in other countries?
Some Republicans dislike the idea. Not even the nugget Mr. Bush tossed out the other day will make Democrats reconsider the issue. The son of "Read my lips: No new taxes," the President is willing to reconsider his previously unmovable position against raising taxes, saying he could be persuaded to increase the earnings threshold on wealthy citizens to pay to transform Social Security.
Yet what happened in Chile and Britain must not be ignored. Privatization, Paul Krugman of the New York Times wrote in December, "leaves many retirees in poverty."
He stated, "Privatizers who laud the Chilean system never mention that it has yet to deliver on its promise to reduce government spending. More than 20 years after the system was created, the government is still pouring in money. Why? Because, as a Federal Reserve study puts it, the Chilean goverment must 'provide subsidies for workers failing to accumulate enough capital to provide a minimum pension.' In other words, privatization would have condemned many retirees to dire poverty, and the government stepped back in to save them."
Then, in January Mr. Krugman wrote about a report on the issue by the Financial Times' pension reporter Norma Cohen, who was also quoted in the NPR report. The subject of her report should convince the administration to drop its doomed idea: "A bloody mess."
If you haven't read it, get it. Ms. Cohen emphasizes the similarities between the pension reform efforts by Ms. Thatcher and President Bush. "The Bush Administration's ... proposal looks suspiciously like the plan set in train during Thatcher's first term in 1979 and which has since led Britain to the brink of a crisis," she wrote in January.
She also stated, "... Considering that America is on the verge of copying Britain's mistake, most experts seek reform in the direction of a more generous, and simpler, basic state pension - one similar in design, in other words, to America's Social Security program."
That's strong stuff. And she issues more warnings.
"Britain's experiment with substituting private savings accounts for a portion of state benefits has been a failure," she wrote. "The costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn. On average, fees and charges can reduce pension lump sums by up to 30 percent on retirement. The nation's savings industry, which sells those private accounts, has already acknowledged this."
So, she continued, "Just as the United States prepares to funnel untold billions to its private sector for the management of private accounts, back in 2002, many U.K. insurance companies, mindful of tough new rules against giving bad advice, began to write to their customers urging them to consider abandoning their private savings and returning to the state pension system - something hundreds of thousands of Britons have done already."
What part of very bad idea does Mr. Bush not understand?