The Fortune Teller's Wisdom

As everyone begins to panic over what looks like an approaching New Ice Age, someone asks the 'Fortune Teller' in Thornton Wilder's The Skin of Our Teeth what the future holds for them. She answers something like, 'Pshaw! Anyone can tell the future. The real trick is to tell the past.'

Privatizing some or all of Social Security is not an idea unique to the Bush administration. It's been tried before. As Wilder's Fortune Teller suggests, we should take a look at the past so we can learn from the experience of others.

Economics professor Paul Krugman wrote early this year in the The New York Times that the U.S. news media have done a terrible job providing readers with information "about how privatization has worked in other countries." He adds:

"Now my colleagues have even fewer excuses: there's an illuminating article on the British experience in The American Prospect, 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 American Prospect article begins by recounting how Margaret Thatcher's government sold the public on a privatization plan in much the same way President Bush is pitching privatization today in Pensacola. The result in Britain was such a disaster that British politicians across the political spectrum now are preparing to adopt a plan very much like our own Social Security system. They think what we now have is superior to the kind of privatization plan they are trying to abandon.

And they should know. In Great Britain --

"[S]ubstituting private savings accounts for a portion of state benefits has been a failure. 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. On average, fees and charges can reduce pension lump sums by up to 30 percent on retirement."

Here's a history of how the retirement safety net was shredded in Britain:

[I]n 1985, the Conservatives pushed through what would become the landmark legislation of social-security privatization. The new law curtailed some SERPS [Great Britain's 'State Earnings-Related Pension' system]; allowed employees the choice of either joining SERPS or setting up a personal pension scheme; and, crucially, allowed those choosing a personal pension to contract out of SERPS altogether. It was these last two elements, when combined, that led to one of the greatest financial scandals in recent memory and that, together, have undermined confidence in long-term savings in Britain.
* * *
It wasn’t until a July 1992...that the government got its first official warning that all was not well. * * * The warning came from David Clark, then deputy secretary for pensions, in a paper to the assembled group. A minister recalled to me, “The paper said that, in some sense, personal pensions have been a tremendous success, but there are a few time bombs ticking away there.”

Those "time bombs" included

• Start-up costs exceeded $9 billion but privatizing the naitonal pension system saved only $3.1 billion.
• What had been a £1.6-billion surplus in the pension fund had 'vanished'.
• It was discovered that 'a staggering percentage' of workers who had opted for the privatization plan were 'worse off in retirement as a result.'

Then the British equivalent of 'Wall Street' scandals began to surface. Investment insurance companies, handed the job of overseeing private pensions, were exposed as having 'over-sold' the pension benefits, over-charged for administrative fees, and under-performed on the investment of the accounts.

Over the next eight years, roughly 1.7 million people sought and received compensation that ultimately cost the insurance industry £12 billion. In addition, hundreds of millions were paid out in fines and penalties. It was the biggest financial scandal in the United Kingdom to date.

Today --

"[M]ost British occupational pension schemes [are] in deficit. Tens of thousands of workers "have lost all or part of their pensions... . Those who have lost out have discovered that they have nothing to fall back on except the basic state pension, which is now so miserly because of changes put in place during the first year of the Thatcher reign that those relying solely upon it for their retirement income are defined as destitute."

Indeed, it seems that the 'private' invesment companies have botched the job so badly that "many U.K. insurance companies, mindful of tough new rules against giving bad advice... [are] urging [customers] to consider abandoning their private savings and returning to the state pension system -- something hundreds of thousands of Britons have done already."