Public Employee Press

Part 2 in a series on the threats to secure retirement.
Social Security
Private plans fail abroad

By GREGORY N. HEIRES

President Bush claims his proposal to create individual investment accounts in Social Security will lead to a golden age for retirees.

But in other countries that have privatized their social security systems, seniors have wound up impoverished with governments left to foot the bill.

In Britain, where the conservative Thatcher government introduced private accounts two decades ago, hundreds of thousands have flocked back to the traditional pension system.

In Chile, where a dictatorship privatized social security in the 1970s, many retirees are finding that their savings don’t meet their needs. The government is being forced to make up for the shortfall. In the 1990s, Argentina plunged into an economic crisis as private accounts siphoned crucial revenue from the government, which defaulted on its international debt. The country’s economy has only recently begun to recover.

“We have seen very high administrative costs,” said Dean Baker, co-director of the Washington, D.C.-based Center for Economic and Policy Research, describing the record of individual accounts in Britain, Chile and Argentina. “You are increasing risk. And you are not generating enough return to get an adequate income,” he said.

Privatization by bayonet
As Bush pushes to privatize, he often cites the example of Chile under the Pinochet dictatorship, where security forces “disappeared” at least 9,000 people after a CIA-backed coup in 1973, according to human rights groups.

As the leader of a democracy, Bush faces a tough sell. But as the head of a military regime, Gen. Augusto Pinochet didn’t have to worry about public opinion when his government provided a windfall to the financial sector by privatizing the old pension system.

“This program was imposed at the point of a bayonet,” Juan Correa, an auditor and account holder told the Wall Street Journal. “And today, I have to pay management fees even if I lose money.” With fees as high as 20 percent, investment firms have prospered. But the same isn’t true for account holders. When the private pension fund system experienced a sharp decline in earnings in 1998, Pensions Undersecretary Patricio Tombolini called for workers to postpone retirement.

Today, according to a New York Times report, the government must continue to spend billions of dollars subsidizing a safety net for retirees because they didn’t contribute enough to earn the minimum monthly payment of $140, and 40 percent of the workforce do not have accounts because they work off the books.

In Britain, privatization introduced people who opted for private accounts to the ugly underbelly of capitalism as marketers grossly exaggerated the potential returns on investments. A government study concluded that many people would be worse off than under the traditional plan.

In the early 2000s, several British insurance companies — prompted by regulations against giving poor advice — admitted that private account returns might not be enough to retire on. They told clients to consider returning to the government social security system. Today, some analysts and politicians, including conservatives, are looking at the current U.S. system as a model for reform.

The Argentine case points to the risk in pulling the financial rug out from under the public retirement system. That concern has led Bush critics to question the high transition costs of his plan, which would divert up to $2 trillion from the Social Security funding stream into private accounts.

Deficits and indebtedness
In Argentina, the cost of privatizing forced the government to borrow money for public services and retirement benefits. Interest rates rose and government deficits and debts mushroomed.

“Argentina went bankrupt,” said Baker, describing what occurred after the country partially privatized social security in 1994. “They would have had a balanced budget that year if they had not privatized.”

With the troubled history of private accounts abroad, even some Republican politicians worry that Bush’s privatization scheme will add dangerously to ballooning deficit caused by the president’s war in Iraq and his massive tax giveaways to the rich.

So, if President Bush gets his way with private accounts, his legacy could be the starvation of popular government programs and the ruination of our retirement security.