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Saw this on www.aarp.com:
The president's bold new plan to partly privatize Social Security, which has many on Wall Street salivating, is not new at all. In fact, it looks remarkably similar to Britain's 25-year experiment with pension reform, which included substituting private investment accounts for a portion of government pension benefits. It is an experiment now regarded as a dismal failure.
In short, the British public-and government-lost money. They learned the hard way that the costs of administering private accounts can affect returns and reduce the size of a retirement pot by up to 30 percent.
Unusual for Britain, there is now an emerging consensus among labor and business, liberals and conservatives, that the government pension system-the United Kingdom's counterpart to Social Security-needs serious reform. Recommendations for an overhaul are expected after the elections in May.
One reason for the intense attention is that the U.K.'s traditionally generous system of employer-sponsored pensions is collapsing, exposing the weakness of the government pension system just as more retirees are being forced to rely on it.
So while the United States is looking at privatization, British experts are eyeing the more generous and simpler U.S. Social Security system.
David Willetts, a Conservative member of Parliament whose intellectual acumen has earned him the nickname "Two Brains," is one admirer of the American system. "I like the way they distinguish between Social Security and means-tested welfare," he says. "They have higher Social Security benefits to keep elderly people off welfare." (snip)
The National Association of Pension Funds, an employers' group, agrees. It's "actually cheaper for the state to carry the risk," says Chief Executive Christine Farnish, adding that in looking for a system that offers the best combination of modest guaranteed retirement benefits and low cost, the U.S. Social Security program seems the best model. "It doesn't have to make a profit, and it delivers efficiencies of scale that most companies would die for," she says.
The story of how Britain's retirement system reached its current crisis began 25 years ago, when Margaret Thatcher's Conservatives swept to power on a tide of national disgust at high unemployment, high taxes and poor services. Though her pension reforms were ideological, they were also pragmatic: tax cuts could not be delivered without some cuts in benefits. So the first reform, passed in 1979, was to link increases in state pension benefits to prices instead of wages, something the Bush administration is considering.
Ros Altmann, a Harvard-trained specialist in pension economics who is on the board of the London School of Economics, says that at the time neither the voting public nor most politicians understood the true implications of altering that link. But advocates for the change knew what they were doing: they were slowing the rate of growth in pension increases, because wages have historically risen by 1.5 to 2 percentage points ahead of inflation each year.
"Two percent doesn't sound like much," Altmann says. "But with the effects of compound interest, that amounts to nearly a 50 percent reduction in the value of benefits over 30 to 40 years."
Thatcher's second reform was based on ideology. The Thatcherites wanted a home-owning, share-owning nation, something similarly expressed by the Bush administration. The idea was to replace the so-called "nanny state," in which government looked out for people, with a state in which everyone would have to look out for themselves.
In 1986 the Thatcher government offered to let people divert part of their social security taxes into a personal investment account similar to a 401(k). For help in designing the plan, the government turned to the insurance industry, the main source of long-term investment products in Britain. By assigning this role to the industry that would benefit most, the government had in effect asked the fox to design the chicken coop.
(snip)
In 2004 alone, 500,000 people abandoned private pensions and moved back into the traditional government plan. Another 250,000 are expected to move back this year.
In dealing with its problems, the U.K. Pensions Commission has concluded that there are only four possible solutions: cut state retirement benefits, increase taxes, increase personal savings or delay retirement. Noting that there is no political support for the first choice, the commission determined that each of the three other choices, on its own, would be too painful and that only some combination could work.
According to U.K. Pension Commission Chairman Adair Turner, a vice president of Merrill Lynch in London and the former director general of the U.K.'s biggest business lobbying group: "There are no other choices."
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