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, 1997 National Journal reported, Martin Corry — chief lobbyist of the American Association of Retired Persons — attacked Chile’s pension system, saying “With all due respect to the Chileans,” contrasting America and Chile “is like comparing the Sistine Chapel to cave drawings.”
Until privatization foes get a handle on their anti‐Chilean bias, reformers also should highlight the success privatization has enjoyed outside the emerging markets. The hidebound defenders of Franklin Roosevelt’s handiwork cannot dismiss England’s pension reforms as, for instance, the product of an exotic people who “don’t look like us.”
Britain has a two‐tiered retirement system. The Basic Pension program provides modest, inflation‐indexed benefits for everyone who has paid into the 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 Pension Scheme (commonly known by its James Bondish acronym — SERPS). In addition to the Basic Pension, it pays retirees approximately 20 percent of their career‐average eligible earnings. Annual benefits range from about $1,058 to $8,020. Employees always could leave this plan for employer‐supervised Occupational Plans, provided such pensions were at least as generous as SERPS.
While they had to remain within the Basic Pension program, in 1986, Prime Minister Margaret Thatcher freed English employees to open Personal Pension plans if they lacked access to Occupational Plans.
According to official figures, 62 percent of eligible workers had opted out of SERPS as of March 1996. As Peter Lilley, a Conservative parliamentarian and former Social Security secretary, told the U.S. House Ways and Means Committee last Feb. 11: “Those who opt out of the state system receive a rebate from their payroll tax sufficient to finance a private pension at least 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 and may not be spent elsewhere. These funds are invested in the private securities markets.
Heritage Foundation researcher Robert Moffitt summarizes this plan’s results: “British workers have enjoyed a 10 percent real return on their pension investments over the last few years. And over the past two decades, the income of British retirees has increased by 60 percent — more than for any 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 engaged in “misselling” — that is, persuading naive employees to shift their money from Occupational Plans into Personal Pensions. Since the latter lacked employer contributions, many workers should have stayed in Occupational Plans. Regulators decided that these salesmen gave poor advice and ordered them to return the Occupational Plans to those they had hoodwinked.
Second, after former Labour MP and publisher Robert Maxwell mysteriously drowned near his yacht in 1991, investigators discovered some $715 million missing from his company’s retirement plan. Fortunately, enough money was recovered to pay full pensions to his 30,000 former employees.
These problems aside, American Enterprise Institute scholar Carolyn Weaver describes the British system as a kind of pension‐reform nirvana. “The United Kingdom is now in the enviable position of having no serious long‐term Social Security debt problem. Yet many workers are gaining coverage under private pension arrangements that offer much higher returns than the government system. At the same time, a basic floor of protection remains,” 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 other European countries combined.”
Conservative Party leader William Hague recently called Europe’s unfunded pension liabilities a “demographic time bomb.” As London Daily Telegraph correspondent Nick Britten explains: “Half the populations of Italy and Germany will be of pensionable age by 2040, but with little provision made by the respective governments, it would be left to the rest of the EU to fund their pensions.”
Before dismissing such fiscal sloth as typically European policy, Social Security’s defenders should remember that America’s own pension scheme is scheduled to crash beneath the weight of unfunded liabilities in 2034. For now, Washington politicians either can learn from Britain’s successful pension reform or line up behind the Italians and Germans for English economic aid 35 years hence.