A Bloody Mess

A Bloody Mess

Before Democrats, Republicans, and the public begin the debate about how to "fix" Social Security, they may want to pay attention to Britain's state sponsored pension problems. The American Prospect points out Maggie Thatcher and the Conservatives followed a course similar to the current administration. First Thatcher slashed taxes then they bemoaned their state pension system was facing a monumental crisis and needed drastic reform. The reforms Thatcher pushed for and won are similar in substance to Bush's ownership obsession and private investment accounts. As the American Prospect points out, Britain's privatization push has resulted in a system on the verge of disaster. As a result, reformers are looking at America's Social Security system for ideas:

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.

As is often the case, privatization is as expensive or more so than a publicly subsidized system. Apparently, Britain's private pension approach is failing because the facial cost savings and benefits have been outweighed by costs, fees, and smaller returns.

Britain’s experiment with substituting private savings accounts for a portion of state bene?ts 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.

Like Britain's Labour and Tories, America's Democrats and Republicans seem intent of finding some compromise on Social Security reform without adequately considering the long term implications. At the outset Britain's attempt at reform was hardly noticed. According the American Prospect, Britain's past pension success, rivaling even more generous continental state pensions, depended on the right mix of an incredibly generous private pension system and modest, but secure state pension. By privatizing the pension system and agressively encouraging people to divert money from the state sponsored system to the private fund, Britain suddenly found themselves paying out more than they were receiving. As a result, benefits under the GMP (Guranteed Minimum Pension) had to be slashed. Those who invested in private funds found pay outs were less than touted when compared to their state pension benefits.

In May, when Britons get a chance to go to the polls its very likely pension reform will be a hot item. This seems appropriate and as the American Prospect points out ironic. At the same time Britain, America's closest, socially, and politically similar ally, focuses on reforming their state pension in a fashion similar to Social Security, Bush and Co. are pushing a solution that emulates Britain's failed system. Hopefully, our politicians will take the time and study the impact private retirement accounts will have on our retirement safety net.