Learning By Example: Why “Privatization” Equals the Death of Social Security
Just as
I was planning to listen in on Tom Vilsack's “Condition of the State”
address, work gets in the way of tuning in to WOI Radio's live
coverage. There will be all types of important things to discuss
coming out of Des Moines, but there is also this continuing anti-Social
Security campaign of the past few weeks.
There has been considerable talk about “other countries trying 'privatization schemes' and today Atrios presents a pretty decent roundup
of various experiments that other nations have tried that are worth
studying. I've taken his lead and provided a few sources to
expand on this notion.
From the UK:
For
all the fanfare that surrounds the Bush administration’s efforts to
present a bold new idea on pension reform, the truth is that it is not
new at all. In fact, the proposal looks suspiciously like the plan set
in train during Thatcher’s first term in 1979 and which has since led
Britain to the brink of a crisis. Since then, the nation’s basic
pension, which is paid for out of tax receipts, has shrunk
dramatically. The United Kingdom has the stingiest state pension
program of any G8 nation, and there is growing consensus — even among
British conservatives — that reform is needed. And ironically enough,
considering that America is on the verge of copying Britain’s mistake,
most experts seek reform in the direction of a more generous, and
simpler, basic state pension — one similar in design, in other words,
to America’s Social Security program.
From Argentina:
In July of 1994, with the strong support of the World Bank, Argentina
partially privatized its Social Security system.[2] In December of last
year, Argentina finally removed its currency from its peg with the
dollar, and halted payments on its debt, after four years of recession.
These moves came in response to a situation that had clearly become
untenable. The nation was paying ever higher interest rates to finance
a debt that was continually growing, due to the country's extraordinary
interest burden.[3] By December it was clear that there was no way out
of this vicious circle without both a devaluation of the currency and
some reduction of the interest burden. Argentina is currently
negotiating with the IMF to allow for a resumption of normal credit
relations, but regardless of the outcome of these negotiations, it is
generally expected that Argentina will see a further large decline in
its GDP.
While the decision to peg its currency to the dollar would have created
problems in any case, the decision to privatize Social Security made
Argentina's situation more precarious. The reason is simple—Social
Security privatization deprived the government of a large amount of tax
revenue. Payroll taxes that had gone to the government to support the
old pay-as-you-go Social Security system were instead diverted to
private accounts. As a result, the government lost an amount of revenue
that has been estimated at 1.0 percent of annual GDP (the equivalent of
$100 billion a year in the United States) (International Monetary Fund,
1998, p 9).
In Sweden:
Sweden,
a country whose name is almost synonymous with “welfare state,” decided
in June to partially privatize its retirement pension system. The
country's leaders were finally forced to admit its cradle-to-grave
benefits system was just too expensive and had damaged the economy.
However, there is something else about Sweden to point out:
Under the new system, Swedish workers will set aside 18.5 percent of income for retirement.
Two
and a half percentage points of that will go into personal retirement
accounts where it will be invested by a professional fund manager
selected by the worker.
Even the
“non-private” portion of Sweden's Social Security system is a full 2%
higher than our FICA tax rate. (So, yes, Sweden has “private
accounts” and “higher taxes”.)
The one
case that has been touted as a “success” has been the improvement of
retirement conditions in Chile – but you also have to recall that the
old purely-public system was thoroughly gutted by the large scale
corruption of the Pinochet government. This is hardly an example
that would apply to the United States. (We would hope.)
So – why do we want to copy such obvious failure? Donald Luskin writes in the National Review
the answer: if there is to be salvation for “supply side” deficit
spending, the federal government will have to default on the Treasury
Bonds that have been purchased by the Social Security actuaries since
1983 (and before).
This is why Paul Krugman continuously mentions the spectre of the United States government going the way of Argentinia:
Just
ask the Argentines: their version of Social Security privatization was
also supposed to save money in the long run, but all it did was move
forward the date of their crisis.
A
responsible administration would reverse course on tax cuts and the
botched 2003 Medicare drug bill, both of which pose much greater
threats to the government's solvency than the modest financial
shortfall of the Social Security system. But Mr. Bush has declared his
tax cuts inviolable, and he says that his drug bill will actually save
money. (The Medicare trustees say it will cost $8 trillion.)
There's an iceberg in front of us, all right. And Mr. Bush wants us to steam right into it, full speed ahead.
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