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  • From: tvoivozhd <tvoivozd AT infionline.net>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] Social Security---no panaceas around the world
  • Date: Fri, 21 Jan 2005 08:55:49 -0500




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* 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>./

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