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.