A Little Something from Paul Krugman
Here’s an excerpt from one of Paul Krugman’s latest columns on Social Security (which I recommend you read quickly before they archive it):
Now my colleagues have even fewer excuses: there’s an illuminating article on the British experience in The American Prospect, www.prospect.org, by Norma Cohen, a senior corporate reporter at The Financial Times who covers pension issues.
Her verdict is summed up in her title: “A Bloody Mess.” Strong words, but her conclusions match those expressed more discreetly in a recent report by Britain’s Pensions Commission, which warns that at least 75 percent of those with private investment accounts will not have enough savings to provide “adequate pensions.”
The details of British privatization differ from the likely Bush administration plan because the starting point was different. But there are basic similarities. Guaranteed benefits were cut; workers were expected to make up for these benefit cuts by earning high returns on their private accounts.
The selling of privatization also bore a striking resemblance to President Bush’s crisis-mongering. Britain had a retirement system that was working quite well, but conservative politicians issued grim warnings about the distant future, insisting that privatization was the only answer.
The main difference from the current U.S. situation was that Britain was better prepared for the transition. Britain’s system was backed by extensive assets, so the government didn’t have to engage in a four-decade borrowing spree to finance the creation of private accounts. And the Thatcher government hadn’t already driven the budget deep into deficit before privatization even began.
Even so, it all went wrong. “Britain’s experiment with substituting private savings accounts for a portion of state benefits has been a failure,” Ms. Cohen writes. “A shorthand explanation for 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.”
Many Britons were sold badly designed retirement plans on false pretenses. Companies guilty of “mis-selling” were eventually forced to pay about $20 billion in compensation. Fraud aside, the fees paid to financial managers have been a major problem: “Reductions in yield resulting from providers’ charges,” the Pensions Commission says, “can absorb 20-30 percent of an individual’s pension savings.”
American privatizers extol the virtues of personal choice, and often accuse skeptics of being elitists who believe that the government makes better choices than individuals. Yet when one brings up Britain’s experience, their story suddenly changes: they promise to hold costs down by tightly restricting the investments individuals can make, and by carefully regulating the money managers. So much for trusting the people.
Meanwhile, there is a growing consensus in Britain that privatization must be partly reversed. The Confederation of British Industry – the equivalent of the U.S. Chamber of Commerce – has called for an increase in guaranteed benefits to retirees, even if taxes have to be raised to pay for that increase. And the chief executive of Britain’s National Association of Pension Funds speaks with admiration about a foreign system that “delivers efficiencies of scale that most companies would die for.”
The foreign country that, in the view of well-informed Britons, does it right is the United States. The system that delivers efficiencies to die for is Social Security.
Don’t get into that cocky mindset that “oh, that was Britain, we’ll be able to pull it off because we’re the Good Ol’ U.S. of A.” We’re no better. In fact, we’d probably fuck it up even worse, given our current economic situation. And just because we believe we can fly, that doesn’t mean we can. It just means we’re delusional.
Are any of you who are in support of privatization really that confident in your ability to play the stock market? When was the last time you’ve done any investing? In fact, when was the last time you even looked at stocks? I’ve seen people in their late teens and early twenties– even people who typically don’t buy into neo-conservative bullshit– giddy with the hope of investing in the stock market and somehow magically making millions of dollars for their retirement. Anyone with that level of confidence in the stock market is just completely oblivious to the stock market. You don’t know what the fuck you’re doing. Hell, there are people who do know what they’re doing who have lost fortunes playing the stock market. It’s a gamble, especially if you don’t have a firm understanding of how the game works. And being able to count cards still doesn’t guarantee you’ll win big.
That’s why the government will be limiting your choice, as mentioned in Krugman’s column. Which ultimately means that you’ll have essentially the same level of participation in the system that you currently do, but with the added bonus of paying investment fees.