Bush’s Little Secret: Private Pensions Fail

Touting the benefits of the Republican plan to privatize Social Security, politicians and pundits assure us that these schemes already have succeeded in other countries, from Britain and Sweden to Poland and Chile. That argument tends to be most persuasive among those who know the least about the examples cited.

Appearing recently on Fox News Channel, Senator John McCain mentioned foreign experiments with privatization, although he observed the official Republican speech code in calling the accounts “personal” rather than “private.”

“I would remind you that countries like Sweden, Chile, England, others, all have personal savings accounts,” he explained. “And they have all been very successful.”

Now the Arizona Republican, war hero and best-selling author is still among the nation’s most admired public figures. Nobody thinks he would knowingly mislead the American people about an issue as momentous as Social Security. But when he claims that all those other experiments were “very successful,” he simply doesn’t know what he’s talking about.

Perhaps somebody in the Senator’s office skimmed a right-wing think-tank report and passed along this dubious bit of tripe as the boss hustled off to the Fox studio. Before he ventures out again to promote the Bush plan, Mr. McCain ought to devote further study to the unappetizing results of those British, Swedish, Polish and Chilean programs.

On closer inspection, he might realize that Sweden, Poland and Chile all differ significantly from the United States in important ways.

In 1999, the Swedish government raised taxes to place an additional 2.5 percent of employee salaries into mandatory state-run pension accounts. That “personal” account is designed to add to existing retirement benefits-which for most of the population include significant employer pensions as well as the traditional state benefit. Press accounts suggest that the Swedes are not enthralled with their enhanced “choices,” with the great majority allowing the state to choose their investment funds.

Around the same time, the Poles legislated a private pension system. Their plan immediately fell prey to crooked salesmen who charged huge commissions on phony accounts. Financial performance has been unimpressive at best, with returns lagging behind inflation or actually turning negative (like those American 401(k) statements after the 2001 crash). The only reason the Poles haven’t stormed the parliament with pitchforks is that their system guarantees a minimum, inflation-protected benefit anyway.

The experiment in Chile has been running longer, and performed somewhat better for upper-income investors thanks to that underdeveloped nation’s enormous, rapid growth. However, most working- and middle-class Chileans would have fared better under their former system, which resembled ours, with many of the poorest now left destitute in old age. According to The New York Times, the vast majority wishes to return to the old retirement system junked three decades ago by dictator Augusto Pinochet, but it’s too late.

That leaves the example of the mother country, whose political and economic arrangements most closely resemble our own. Almost 20 years ago, the government of Prime Minister Margaret Thatcher brought drastic change to the British retirement system, featuring private accounts. As part of this “reform,” the Tories linked future raises in traditional retirement benefits to inflation rather than wages. The Bush administration has suggested the same change, which will have the same result: a sharp drop in benefits.

After two decades of scandal, mismanagement and bad planning, the verdict in the United Kingdom is nearly unanimous. Their privatization has failed, the elderly are suffering, and analysts from left to right agree that our Social Security system is more efficient, more generous and more socially sustainable than theirs.

So the chairman of the Confederation of British Industry has called for tax increases to fund increased retirement benefits, and the brightest Tory M.P. has expressed his admiration for the existing U.S. system. British workers are quickly abandoning their privatized accounts to return to the state system-on the advice of their chastened insurance agents. (For a thorough survey of Lady Thatcher’s disaster, read A Bloody Mess by Financial Times correspondent Norma Cohen in the February issue of The American Prospect magazine. That means you, Senator McCain.)

While comparisons between the Bush privatization scheme and those overseas foreign systems are illusory and false, the urge to look abroad might still prove educational. If conservatives truly think we should learn from those foreign retirement experiments, maybe we should also examine the progressive social and economic policies in countries like Sweden and Britain-such as universal health care, free or subsidized child care, and free or cheap higher education. Why should we imitate their failures and ignore their successes?

Bush’s Little Secret: Private Pensions Fail