Fund touted success of privatized Social Security systems "all over the world" -- but evidence suggests otherwise

››› ››› ANDREW SEIFTER

On the March 2 edition of MSNBC's Hardball with Chris Matthews, Wall Street Journal columnist John Fund cited privatized Social Security systems in Britain, Poland and Chile as examples of why "we all lose" if the U.S. does not adopt President Bush's plan to allow workers to divert payroll taxes from Social Security into private accounts. Similarly, on both the February 27 edition of Fox News Sunday and the March 2 edition of Hannity & Colmes, Fox News hosts allowed Sen. John McCain (R-AZ) to assert -- without challenge -- that in addition to "England" and Chile, Sweden provides another useful example of why the U.S. should partially privatize Social Security.

In fact, the partially privatized systems in Britain, Poland, and Chile have yielded disappointing returns from the stock market combined with high administrative costs, and much of the population in these countries have chosen to opt out of the system. Moreover, the Swedish model is irrelevant to an assessment of Bush's proposal because Sweden uses private accounts to supplement its existing defined-benefit public pension system, rather than diverting taxes from that system to pay for the new accounts.

BRITAIN

Fund's own newspaper undermines his effort to tout Britain's partially privatized Social Security system as a model for the U.S. The Wall Street Journal reported on February 3 that Britain's privatized system "has been dogged by scandal, and many Britons now seek the security of state payouts." The Journal noted that after insurance salesmen deceptively persuaded many Britons to switch to private accounts by promising unrealistically high rates of return, these insurers were forced to "compensate customers who'd done worse by switching to private pensions. So far, payments have totaled £13 billion, about $24 billion at current exchange rates." As The New York Times similarly noted on February 12, the British plan "backfired when the value of those investments fell and insurance sales representatives were accused of selling products under false pretenses."

Other reports paint an equally bleak picture of the British model. A January 1999 report by the nonpartisan Congressional Budget Office (CBO) indicated that, because opting for a private account involves switching from a defined benefit pension plan to a defined contribution plan, younger and poorer workers whose contributions to such accounts tend to be smaller or less consistent faced substantially increased risk of having a private account that fails to deliver an adequate retirement income. The CBO report noted that "[b]ecause younger workers enter and leave the workforce more often than older workers, their contributions to personal pension plans tend to be more erratic and smaller," with "only half" of workers age 25 to 34 having "positive wages" during a three-year sample of the early 1990s, indicating that their contributions to their private pension funds were comparably small. The report continued: "[O]nly about 50 percent of participants in private pension plans made contributions beyond the government rebate to their accounts [i.e., the money normally devoted to the public pension system that the government refunds to taxpayers who opt out of this system and into a private pension plan], raising some concerns about the adequacy of retirement savings."

Further, the report noted that high administrative fees made private accounts particularly unattractive to poorer workers: "[P]eople with low earnings do not find personal pensions attractive because those pensions charge proportionately higher amounts for workers with low and unstable contributions."

Norma Cohen, property correspondent for Britain's Financial Times, noted in a report for the AARP that the British "learned the hard way that the costs of administering private accounts can affect returns and reduce the size of a retirement pot by up to 30 percent." Cohen similarly noted in the February 2005 edition of The American Prospect that "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." As a result, Cohen reported to AARP: "In 2004 alone, 500,000 people abandoned private pensions and moved back into the traditional government plan."

POLAND

Although the privatized Polish system was implemented only in 1999, early signs have not been promising. The Financial Times reported on June 25, 2001:

Two years into a landmark pension reform, many Poles who chose to contribute to private retirement funds have little to show for their nest eggs. Glitches in the computerisation of ZUS, the state social-security body, have meant that billions of zlotys [Polish currency] in pension savings failed to reach Poland's 21 private pension funds. Many funds have produced unimpressive returns, often lagging [behind] investments in government bonds, bank deposits and even inflation in some cases.

The net rate of return was actually negative during the program's first three years, according to a 2002 report by the Social Security Administration; workers are protected, however, because unlike Bush's proposal for private accounts in the U.S., in Poland the "government guarantees a minimum pension ... indexed for inflation and funded by general revenues." As SSA international expert Barbara E. Kritzer, who wrote the report, noted: "Polish pension funds' net rate of return (deducting administrative fees) for the first 2 years was between -8.95 percent and -13.76 percent. The situation improved somewhat in the third year, although a total net loss was recorded."

The report also noted: "In November 2001, ZUS's debt was reported as more than US$776 million."

Like the British system, Poland's privatized government pension system proved susceptibile to scandal and manipulation. As the New York Times reported on February 12:

In Poland, an army of sales agents, hired under a new private savings regime in 1999, defrauded the system by charging commissions on false accounts. Since some of the sales agents were paid a commission for every new account, they simply invented them. Other accounts were in the names of deceased people.

Similarly, The Wall Street Journal reported on February 3 that about 18 percent of all private pensions were "bogus 'dead accounts,'" according to Polish deputy minister for social insurance Agnieszka Chlon-Dominczak.

CHILE

As Media Matters for America has previously noted, Chile's system of private accounts has been less effective for poor and middle-class workers than the public pension system that preceded it. The New York Times reported on January 27 that middle-class workers have discovered that private accounts "are failing to deliver as much in benefits as they would have received if they had stayed in the old system," and many poor Chileans don't receive "even a minimum pension" or "remain outside the system altogether." According to a Chilean government official specializing in pensions, "If people really had freedom of choice, 90 percent of them would opt to go back to the old system," the Times noted.

SWEDEN

Like the Polish system, the Swedish system of government-run private accounts system was implemented in 1999 and has already shown signs of significant problems (see here and here).

More important, a comparison between that system and Bush's proposal, which McCain and others have drawn, is meaningless. While Bush's plan involves diverting a portion of existing Social Security payroll taxes into private accounts, Sweden financed its government-mandated private investment accounts with an additional tax. The New York Times explained the distinction in a February 12 article: "Unlike Mr. Bush's Social Security overhaul proposal, which would carve voluntary private accounts out of existing taxes, the Swedish system imposes a mandatory 2.5 percent saving on top of its basic benefit."

From the March 2 edition of MSNBC's Hardball with Chris Matthews:

FUND: Well, I say we -- we all lose, because these systems have been tried now in about 20 countries around the world with varying degrees of success. But, in general, they [private accounts] have helped those systems sustain themselves over time, because the pay-as-you-go system doesn't work. But, in the end, Chris --

MATTHEWS: You mean the Santiago effort has succeeded in Chile.

FUND: Well, Poland, Britain, you name the countries. They're all over the world --

MATTHEWS: Right.

FUND: -- that have moved to this system.

From the February 27 edition of Fox Broadcasting Company's Fox News Sunday:

McCAIN: I think the president has indicated that he would be flexible. But the fundamental issue of personal savings account -- look, that renowned conservative country Sweden has a personal savings account. So does Chile.

Look, this is a way -- this is what our grandfathers would have advised us to do, try to take some of our money and invest it ourselves, not in something like Enron but in -- like we do with federal employees and members of Congress, in one of five different groups. It's a good thing to do. Interest compounds. And I think it's an important thing that we should continue to support.

From the March 2 edition of Fox News' Hannity & Colmes:

McCAIN: I would remind you that countries like Sweden, Chile, England, others, all have personal savings accounts. And they have all been very successful.

Posted In
Economy, Social Security
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