NYTimes.com > Opinion

The British EvasionBy PAUL KRUGMAN
(also available on pkarchive.org)

Published: January 14, 2005

We must end Social Security as we know it, the Bush
administration says, to meet the fiscal burden of paying
benefits to the baby boomers. But the most likely
privatization scheme would actually increase the budget
deficit until 2050. By then the youngest surviving baby
boomer will be 86 years old. 

Even then, would we have a sustainable retirement system?
Not bloody likely. 

Pardon my Britishism, but Britain's 20-year experience with
privatization is a cautionary tale Americans should know
about. 

The U.S. news media have provided readers and viewers with
little information about how privatization has worked in
other countries. 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. 

Never mind; their promises aren't credible. Even if the
initial legislation tightly regulated investments by
private accounts, it would immediately be followed by
intense lobbying to loosen the rules. This lobbying would
come both from the usual ideologues and from financial
companies eager for fees. In fact, the lobbying has already
started: the financial services industry has contributed
lavishly to next week's inaugural celebrations. 

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.