Social Security's cheerleaders ridicule reformers who advocate Chilean-style private pensions. They note that Chile's plan was implemented in 1981 under dictator Augusto Pinochet. So what? The fact that You-Know-Who built the Autobahn in Germany in the 1930s was no reason to oppose President Dwight D. Eisenhower's Interstate Highway System in the 1950s.
This anti-Chilean rhetoric has bordered on racism. As the Oct. 11, 1997National Journal reported, Martin Corry - chief lobbyist of the AmericanAssociation of Retired Persons - attacked Chile's pension system, saying"With all due respect to the Chileans," contrasting America and Chile "islike comparing the Sistine Chapel to cave drawings."
Until privatization foes get a handle on their anti-Chilean bias, reformersalso should highlight the success privatization has enjoyed outside theemerging markets. The hidebound defenders of Franklin Roosevelt's handiworkcannot dismiss England's pension reforms as, for instance, the product ofan exotic people who "don't look like us."
Britain has a two-tiered retirement system. The Basic Pension programprovides modest, inflation-indexed benefits for everyone who has paid intothe plan. It offers single retirees approximately $5,350 annually and$8,550 for retired couples.
In 1978, the United Kingdom implemented the State Earnings Related PensionScheme (commonly known by its James Bondish acronym - SERPS). In additionto the Basic Pension, it pays retirees approximately 20 percent of theircareer-average eligible earnings. Annual benefits range from about $1,058to $8,020. Employees always could leave this plan for employer-supervisedOccupational Plans, provided such pensions were at least as generous asSERPS.
While they had to remain within the Basic Pension program, in 1986, PrimeMinister Margaret Thatcher freed English employees to open Personal Pensionplans if they lacked access to Occupational Plans.
According to official figures, 62 percent of eligible workers had opted outof SERPS as of March 1996. As Peter Lilley, a Conservative parliamentarianand former Social Security secretary, told the U.S. House Ways and MeansCommittee last Feb. 11: "Those who opt out of the state system receive arebate from their payroll tax sufficient to finance a private pension atleast equivalent to that which they would have been entitled to in SERPS."These tax rebates equal 4.6 percent of eligible earnings. They are paid,tax-free, directly into either Occupational Plans or Personal Pensions andmay not be spent elsewhere. These funds are invested in the privatesecurities markets.
Heritage Foundation researcher Robert Moffitt summarizes this plan'sresults: "British workers have enjoyed a 10 percent real return on theirpension investments over the last few years. And over the past two decades,the income of British retirees has increased by 60 percent - more than forany other segment of the British population."
Despite this rosy portrait, Britain's plan has suffered two blemishes.First, between 1988 and 1994, some unscrupulous pension marketers engagedin "misselling" - that is, persuading naive employees to shift their moneyfrom Occupational Plans into Personal Pensions. Since the latter lackedemployer contributions, many workers should have stayed in OccupationalPlans. Regulators decided that these salesmen gave poor advice and orderedthem to return the Occupational Plans to those they had hoodwinked.
Second, after former Labour MP and publisher Robert Maxwell mysteriouslydrowned near his yacht in 1991, investigators discovered some $715 millionmissing from his company's retirement plan. Fortunately, enough money wasrecovered to pay full pensions to his 30,000 former employees.
These problems aside, American Enterprise Institute scholar Carolyn Weaverdescribes the British system as a kind of pension-reform nirvana. "TheUnited Kingdom is now in the enviable position of having no seriouslong-term Social Security debt problem. Yet many workers are gainingcoverage under private pension arrangements that offer much higher returnsthan the government system. At the same time, a basic floor of protectionremains," she says.
The English system has accumulated some $1.32 trillion in private assets."This is slightly more than the size of the British economy," says Mr.Moffitt, "and larger than the private pension funds of all the otherEuropean countries combined."
Conservative Party leader William Hague recently called Europe's unfundedpension liabilities a "demographic time bomb." As London Daily Telegraphcorrespondent Nick Britten explains: "Half the populations of Italy andGermany will be of pensionable age by 2040, but with little provision madeby the respective governments, it would be left to the rest of the EU tofund their pensions."
Before dismissing such fiscal sloth as typically European policy, SocialSecurity's defenders should remember that America's own pension scheme isscheduled to crash beneath the weight of unfunded liabilities in 2034. Fornow, Washington politicians either can learn from Britain's successfulpension reform or line up behind the Italians and Germans for Englisheconomic aid 35 years hence.