Privatization Abroad

An article in the WSJ recently reviewed the partially privatized pension plans in other countries. CJR Daily did an excellent summary:

The first thing we learn from the Journal story by Bob Davis and Matt Moffett is that this is not a new idea; Singapore embarked on the privatization of its equivalent of Social Security 50 years ago, and since then 20 nations have followed suit, including Britain, Sweden, Argentina and Chile.

The Journal takes us on a tour of seven of those nations and their wildly varying experiences with private accounts. A few highlights:

-- Sweden turned to private accounts in 1991 after projections showed the system in place would eventually require a payroll tax of a staggering 36 percent. The country chose to maximize choice, but over time Swedish workers fled from so much freedom. At the start, two-thirds of Swedes patched together their own private accounts from a vast array of choices. But many got clobbered by an errant stock market, and by 2003, only eight percent of young Swedes were choosing to design their own portfolios. The government "wanted people to take control of their retirement, but people don't seem to be interested," says Annika Sunden, a Swedish pension expert..

-- In Bolivia, which adopted private accounts eight years ago, crippling transition costs have led to a doubling of the government's budget deficit, and the system has not been able to pay promised benefits..

-- In Singapore, an extremely discretionary program allows workers to disperse their contributions among three accounts, an "ordinary" account, used for housing and education; a medical account for hospital costs, and a third account for old age and disabilities. As a result, fully ninety percent of Singapore citizens own their own homes -- but payroll taxes eat up 33percent of paychecks. In addition, many of the elderly contributed so much of their withheld pay to housing and medical accounts that they find themselves with little money in their retirement accounts -- "asset-rich but cash-poor" at retirement..

-- In Britain, a social security overhaul in the late 1980s was so thoroughly botched that today "a lot of people look longingly at [America's] Social Security system," says Stephen Yeo, a pension consultant. Late last year, the Association of British Insurers mailed six million copies of a brochure with a photo of a smiling young woman on the cover -- and an advisory inside informing older people it had become "very unlikely" that the personal pensions they had chosen would match the modest payouts from a basic state pension..

-- In Chile, assets in private pension accounts amount to $54 billion, equal to almost two-thirds of annual gross domestic product. Plus, since the system was imposed "at the point of a bayonet" by dictator Gen. Augusto Pinochet in 1981, investors have benefited from high interest rates and a robust stock market. From 1981 through 1995, funds returned an average of nearly 13 percent a year. But since then, annual returns have dwindled to about 6.5 percent, and investment management fees of as much as 20 percent have "taken some of the glitter" off the rose. Furthermore, despite the program's relative success, there's widespread evasion; only 60 percent of workers contribute, and many who do underreport wages to avoid taxes.

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