Buying into Failure - NYT article

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http://www.nytimes.com/2004/12/17/opinion/17krugman.html?ex=1261026000 & en=91b997e7fd69b792 & ei=5090 & partner=rssuserland

December 17, 2004

OP-ED

COLUMNIST

 

Buying

Into Failure

By PAUL

KRUGMAN

 

 

 

 

 

 

 

 

 

 

s

the Bush administration tries to persuade America

to convert Social Security into a giant 401(k), we can learn a lot from other

countries that have already gone down that road.

Information

about other countries' experience with privatization isn't hard to find. For

example, the Century Foundation, at www.tcf.org, provides a wide range of

links.

Yet,

aside from giving the Cato Institute and other organizations promoting Social

Security privatization the space to present upbeat tales from Chile,

the U.S. news

media have provided their readers and viewers with little information about

international experience. In particular, the public hasn't been let in on two

open secrets:

Privatization

dissipates a large fraction of workers' contributions on fees to investment

companies.

It leaves

many retirees in poverty.

Decades

of conservative marketing have convinced Americans that government programs always

create bloated bureaucracies, while the private sector is always lean and

efficient. But when it comes to retirement security, the opposite is true. More

than 99 percent of Social Security's revenues go toward benefits, and less than

1 percent for overhead. In Chile's

system, management fees are around 20 times as high. And that's a typical

number for privatized systems.

These

fees cut sharply into the returns individuals can expect on their accounts. In Britain,

which has had a privatized system since the days of Margaret Thatcher, alarm

over the large fees charged by some investment companies eventually led

government regulators to impose a " charge cap. " Even so, fees

continue to take a large bite out of British retirement savings.

A

reasonable prediction for the real rate of return on personal accounts in the U.S.

is 4 percent or less. If we introduce a system with British-level management

fees, net returns to workers will be reduced by more than a quarter. Add in

deep cuts in guaranteed benefits and a big increase in risk, and we're looking

at a " reform " that hurts everyone except the investment industry.

Advocates

insist that a privatized U.S.

system can keep expenses much lower. It's true that costs will be low if

investments are restricted to low-overhead index funds - that is, if government

officials, not individuals, make the investment decisions. But if that's how

the system works, the suggestions that workers will have control over their own

money - two years ago, Cato renamed its Project on Social Security

Privatization by replacing " privatization " with " choice " -

are false advertising.

And if

there are rules restricting workers to low-expense investments, investment

industry lobbyists will try to get those rules overturned.

For the

record, I don't think giving financial corporations a huge windfall is the main

motive for privatization; it's mostly an ideological thing. But that windfall

is a major reason Wall Street wants privatization, and everyone else should be

very suspicious.

Then

there's the issue of poverty among the elderly.

Privatizers

who laud the Chilean system never mention that it has yet to deliver on its

promise to reduce government spending. More than 20 years after the system was

created, the government is still pouring in money. Why? Because, as a Federal

Reserve study puts it, the Chilean government must " provide subsidies for

workers failing to accumulate enough capital to provide a minimum

pension. " In other words, privatization would have condemned many retirees

to dire poverty, and the government stepped back in to save them.

The same

thing is happening in Britain.

Its Pensions Commission warns that those who think Mrs. Thatcher's

privatization solved the pension problem are living in a " fool's

paradise. " A lot of additional government spending will be required to

avoid the return of widespread poverty among the elderly - a problem that Britain,

like the U.S.,

thought it had solved.

Britain's

experience is directly relevant to the Bush administration's plans. If current

hints are an indication, the final plan will probably claim to save money in

the future by reducing guaranteed Social Security benefits. These savings will

be an illusion: 20 years from now, an American version of Britain's

commission will warn that big additional government spending is needed to avert

a looming surge in poverty among retirees.

So the

Bush administration wants to scrap a retirement system that works, and can be

made financially sound for generations to come with modest reforms. Instead, it

wants to buy into failure, emulating systems that, when tried elsewhere, have

neither saved money nor protected the elderly from poverty.

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