Homestead mailing list

[tvoivozhd <tvoivozd AT infionline.net>]

   SF Gate <http://www.sfgate.com>        www.sfgate.com
   <http://www.sfgate.com>        Return to regular view
   
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/a/2005/01/21/BUGLHATVQP1.DTL&type=printable>

   ------------------------------------------------------------------------
   * Social Security lessons
   
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/a/2005/01/21/BUGLHATVQP1.DTL>
   **
   *- David Lazarus <mailto:dlazarus AT sfchronicle.com>
   Friday, January 21, 2005

   Backers of President Bush's plan to partially privatize Social
   Security say skeptical Americans should look at the experience of
   other countries that have pursued similar approaches.

   That, it turns out, is a very good idea.

   In Wednesday's column, I quoted economists who questioned Bush's
   warning that Social Security will be "flat bust, bankrupt" without
   immediate reforms, including creation of private retirement accounts.

   Many readers agreed that while changes are needed to keep Social
   Security fully funded, it's unclear how private accounts would help
   the situation. Others challenged this perspective.

   "What you excluded were the numerous examples of countries (Chile
   being the prime example) that have successfully transitioned from
   what was essentially a defined-benefit system to a
   defined-contribution system, thereby removing a growing and
   unsustainable open-ended government liability," wrote San Francisco
   resident Michael Grandin.

   "We need to make some changes and stop fooling around," he said.
   "Have you got some bright, constructive ideas, or do you just want
   to shoot the missionaries in the back?"

   No, I'm happy to let the facts speak for themselves.

   The fascist dictatorship of Gen. Augusto Pinochet introduced private
   accounts as part of a reinvention of Chile's social security system
   in 1981, essentially creating a huge 401(k) plan.

   The new pension program was intended to relieve the government (and
   employers) of the burden of providing for citizens in their
   retirement. Instead, workers themselves pay for their pensions by
   investing money in state- approved funds.

   Since 1981, the Chilean funds have delivered average annual returns
   of 10. 3 percent, adjusted for inflation. Very impressive.

   However, Chile's system doesn't cover the country's millions of
   self- employed and low-income people who may drift from job to job.

   Moreover, about a quarter of all money invested in the private
   pension funds is lost to "administrative fees."

   On top of all that, Chile's system still requires federal subsidies
   -- 4 percent of the country's gross domestic product -- after nearly
   a quarter- century of privatization.

   Peter Diamond, a professor of economics at the Massachusetts
   Institute of Technology who studies overseas pension plans, said
   many of the original goals set for Chile's system have been
   accomplished.

   For example, privatized accounts have helped the country's financial
   markets develop and have fostered a new regulatory framework.

   Changes not required

   But Diamond said such changes are not required in the United States.
   Moreover, he observed that Chile was able to fund its costly
   transition to private accounts with government surpluses, whereas
   the Bush administration would be forced to borrow up to $2 trillion.

   "The new system has accomplished a lot of things in Chile compared
   to what's going on in countries comparable to Chile," Diamond said.
   "Essentially, all of that is irrelevant to the United States."

   He also pointed out that the relatively high rate of return for
   Chile's private funds is not a reflection of the merits of the new
   pension system. Rather, it reflects only that Chile's economy has
   been unusually robust for the past 20 years.

   "It doesn't mean we would have similar returns in this country,"
   Diamond said.

   About 40 nations allow workers to invest some or all of their
   retirement contributions in stocks and bonds or are considering such
   plans.

   Since Chile reformed its pension system with private accounts, a
   dozen other cash-strapped Latin American countries have followed suit.

   In a report last month, the World Bank called it "a major
   disappointment" that private accounts have failed to protect large
   segments of the regional population from old-age poverty.

   "I don't know anyone who's taken a serious look at individual
   accounts around the world and decided that they work," said Jason
   Furman, a senior fellow at the Center on Budget and Policy
   Priorities, a left-leaning Washington think tank.

   Not everyone sees things this way, of course. The libertarian Cato
   Institute, a leading champion of retirement accounts, says partial
   privatization is the best way "to restore Social Security to
   long-term and sustainable solvency."

   Mixed results noted

   Michael Tanner, who oversees the institute's Social Security
   studies, said that despite the "mixed results" of overseas programs,
   private accounts are clearly preferable to the existing system in
   the United States.

   Such accounts, he said, "would reduce Americans' reliance on
   government and give individuals greater ownership of wealth, as well
   as responsibility for and control over their own lives."

   But do people want such responsibility? MIT's Diamond said Sweden's
   experience is instructive on that score.

   In 1998, Sweden channeled a portion of workers' income into private
   accounts, much as Bush is proposing for the United States. As it
   happened, the system was started just as global financial markets
   were hitting a peak, leaving private accounts nowhere to go but down
   in value.

   Diamond said 95 percent of new workers entering Sweden's system now
   don't even bother trying to select a private fund that meets their
   individual needs. Instead, they end up in a default fund established
   by the government as a fallback.

   "That's the real zinger," Diamond said. "Sweden shows that most
   people don't want this kind of responsibility. They want the
   government to do it for them."

   Sweden's example also underlines the cyclical nature of investing.
   Some people may benefit from good timing. Others won't. But is that
   an extra risk most U.S. workers want for their retirement plans?

   Britain's disaster

   Britain introduced private retirement accounts almost 20 years ago.
   British workers subsequently lost so much money because of
   structural flaws and dubious investments that financial firms were
   forced to pay billions of dollars in compensation.

   Government officials in London are now exploring ways of salvaging
   the system by raising taxes or reducing benefits, or both.

   "Suppose we go through a long period of a protracted bear market,
   such as what Japan has experienced," said Richard Thaler, a
   University of Chicago economics professor who focuses on Social
   Security.

   "Would the government bail out the people who put their money in
   private accounts?" he asked. "Where would that money come from?"

   In the end, many experts conclude that private accounts abroad serve
   as a cautionary tale for the United States. Administrative costs are
   far higher than for the Social Security system, and the risk to
   retirees is significantly greater.

   The U.S. program clearly has its problems, and requires some serious
   fixes, but it's still better in many ways than virtually anything
   that other countries have come up with.

   "Privatization is not a magic bullet for Social Security," Thaler
   said. "We can learn something from each overseas example. None of
   them tells us that this is a panacea."

   /David Lazarus' column appears Wednesdays, Fridays and Sundays. He
   also can be seen regularly on KTVU's "Mornings on 2." Send tips or
   feedback to dlazarus AT sfchronicle.com
   <mailto:dlazarus AT sfchronicle.com>./

   Page C - 1
   URL:
   
http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/a/2005/01/21/BUGLHATVQP1.DTL


   ------------------------------------------------------------------------
   ©2005 San Francisco Chronicle
   <http://www.sfgate.com/chronicle/info/copyright/> | Feedback
   <http://www.sfgate.com/feedback/> | FAQ
   <http://www.sfgate.com/chronicle/faq.shtml>