Wednesday, January 12, 2005

A slight departure, but an outsiders view

I know that Social Security privatization has little to do with Evangelicalism or how religion and politics overlap, however as a US citizen, but a UK resident this story was incredibly interesting. It is written by the pensions reporter for the fiscally conservative Financial Times. It points out something that I've know through antecdotal evidence and news reports for about a year. The not-yet-proposed privatization of Social Security doesn't work nearly as well as our current system.

This is the lead paragraph
A conservative government sweeps to power for a second term. It views its victory as a mandate to slash the role of the state. In its first term, this policy objective was met by cutting taxes for the wealthy. Its top priority for its second term is tackling what it views as an enduring vestige of socialism: its system of social insurance for the elderly. Declaring the current program unaffordable in 50 years’ time, the administration proposes the privatization of a portion of old-age benefits. In exchange for giving up some future benefits, workers would get a tax rebate to put into an investment account to save for their own retirement.

George W. Bush’s America in 2005? Think again. The year was 1984, the nation was Britain, the government was that of Margaret Thatcher -- and the results have been a disaster that America is about to emulate.

The vice-principal at our school lost £10,000 ($18,000) when one of the approved private pension companies went bankrupt. He is just out that cash; never to get it back. Also, many companies here in charge of the privatized accounts have been losing money in the stock market for the last couple of years and retirees are having their benefits cuts even after they have retired.

Is it fair to call this plan a disaster? Well the finance guy at our school doesn't plan on getting much from his private account and instead invests in real estate to ensure his retirement. Maybe that is antecdotal. Here is the article again
This, then, is the situation in Britain today:

According to the Department for Work and Pensions, in 2004 alone, 500,000 people abandoned private pensions and moved back into the state system. Government actuaries expect another 250,000 to contract back in this year.

In 2004, the Association of British Insurers, the trade association representing the companies that sell the private accounts, made a collective decision not to risk any more allegations of mis-selling. It urged all of its member firms to warn those who had taken tax rebates to open private accounts that they might have made a bad choice. The advice was particularly aimed at older workers with fewer years until retirement.

Many insurance companies -- the sellers of the private accounts -- have been writing their customers urging them to contract back in to the state system.

And, of course, even the U.K. version of the U.S. Chamber of Commerce has endorsed the idea of raising taxes to increase benefit levels

There is a probable election in May and it seems both parties, Labour and Conservatives, are arguing for an increase in public funds to shore up the failing private accounts for the elderly. Again from the account,
And so, at the exact moment that America contemplates replicating this disaster, many in Britain -- some conservatives included -- are looking more and more kindly on American Social Security as a model for reform. The National Association of Pension Funds, a group of employers who sponsor the nation’s largest schemes, is urging government not to expect the private sector to shoulder the burden of keeping the nation’s elderly from poverty. Chief executive Christine Farnish notes that it’s “actually cheaper for the state to carry the risk,” adding that in looking for a system that offers the best combination of modest guaranteed retirement benefits delivered at low cost, the U.S. Social Security program seems the best model. “It doesn’t have to make a profit, and it delivers efficiencies of scale that most companies would die for,” she says.

Maybe out of the scope of my usual posts, but nonetheless I think my "expatness" does allow me to comment on this with some insight. What do you think? Should I keep in my usual vein? Should we privatize our social security?