MORE ABOUT SOCIAL SECURITY REFORM
PRIVATE ACCOUNTS
Both proponents and opponents of Social Security reform emphasize lessons learned from other countries with private accounts. Argentina and Bolivia demonstrate the heavy cost of the transition to private accounts, Sweden and Poland the advantages of limiting investment options, and Singapore, workers' eagerness to tap accounts before retirement. Much of the discussion, however, focuses on Chile and Great Britain.
Chile: In Chile workers invest a minimum 10% of their incomes directly into private retirement accounts. An additional 2.3% tax is taken from workers' wages to cover the administrative and service fees. Employers do not make matching deposits. Workers may chose to invest in any of six management companies that offer five kinds of accounts with varying risk levels.
The program's initial success, due in large part to a booming stock market in the eighties and nineties, led to an increase in pension benefits (about 12.7% a year), a boost to the economy, and a decrease in unemployment. Now Chile 's returns are more modest, about 6.5%, and the management costs amount to more than 20% of the deposits. Participation is not universal; only about 60% of Chilean workers participate.
Great Britain: In 1988, contending that the baby-boomer retirement might exhaust the state pension system, the Tory government allowed workers to opt out of the supplementary state pension plan (which is in addition to a modest basic state pension) and invest in private accounts. Similarly, it permitted employees to opt out of company pensions.
Public response -- fueled by massive "mis-selling" by insurance companies -- was overwhelming; by 1991 more than 4 million people had signed up for private accounts. The British government had not adequately anticipated transitional costs, however. Between 1988 and 1993 it paid out over £9 billion to people who had opted out of the system, saving only £3.1 billion in operating costs. More money was lost in taxes because of diversion to private accounts than the government would have paid out in entitlements and the £1.6 billion surplus in the National Insurance Fund disappeared.
Many workers were left worse off than if they had not opted out. Because private investments required upfront charges and commissions and annual administrative fees, there was often little on which investment returns could accumulate in private accounts. Approximately 65,000 workers lost either all or a portion of their pensions and the British government has recently begun to increase payroll taxes in order to supplement these benefit losses. There has been a loss of public confidence in the system which will be difficult to turn around. In 2004, 500,000 people moved back into the traditional government plan and another 250,000 are expected to do the same this year.
Private Accounts and Widows, Spouses and the Disabled
The current discussion about private accounts focuses on Social Security as a retirement benefit. However, 50% of Social Security beneficiaries under the current system receive all or part of their benefits as a widow or widower, spouse or child of a worker, or as a disabled worker. Over eighty percent of these beneficiaries are women and children.
Plans to reform the system are centered on benefiting retirees through workers' private accounts; but what about children and the disabled to whom working in order to fund private accounts is not an option? Currently, benefits reach 4 million surviving children and 6 million disabled citizens. The system now being discussed, which is based on individual earnings, does not address these family and life insurance protections.
Women could also be hurt by Social Security reform, despite the overwhelming growth of their presence in the workforce. On average, a working woman's pension equals less than half then a man's due to lower pay and traditional caretaking responsibilities which result in employment and income gaps. Women also tend to live longer than men; making their smaller pension even more significant as its benefits must be able to stretch over a longer period of time. Pam Greenlee – Retiree Intern.
