The Democrats, Clinton, and the Welfare state

eople with low earnings do not find personal pensions attractive because those pensions charge proportionately higher amounts for workers with low and unstable contributions." ....Norma Cohen, property correspondent for Britain's Financial Times, noted in a report for the AARP that the British "learned the hard way that the costs of administering private accounts can affect returns and reduce the size of a retirement pot by up to 30 percent." Cohen similarly noted in the February 2005 edition of The American Prospect that "what has gone wrong is that the costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn." As a result, Cohen reported to AARP: "In 2004 alone, 500,000 people abandoned private pensions and moved back into the traditional government plan."

POLAND

Although the privatized Polish system was implemented only in 1999, early signs have not been promising. The Financial Times reported on June 25, 2001:

Two years into a landmark pension reform, many Poles who chose to contribute to private retirement funds have little to show for their nest eggs. Glitches in the computerisation of ZUS, the state social-security body, have meant that billions of zlotys in pension savings failed to reach Poland's 21 private pension funds. Many funds have produced unimpressive returns, often lagging investments in government bonds, bank deposits and even inflation in some cases.

The net rate of return was actually negative during the program's first three years, according to a 2002 report by the Social Security Administration; workers are protected, however, because unlike Bush's proposal for private accounts in the U.S., in Poland the "government guarantees a minimum pension ... indexed for inflation and funded by general revenues." As SSA international expert Barbara E. Kritzer, who wrote the report, noted: "Polish pension funds' net rate of return (deducting administrative fees) for the first 2 years was between -8.95 percent and -13.76 percent. The situation improved somewhat in the third year, although a total net loss was recorded."

The report also noted: "In November 2001, ZUS's debt was reported as more than US$776 million."

Like the British system, Poland's privatized government pension system proved susceptibile to scandal and manipulation. As the New York Times reported on February 12:

In Poland, an army of sales agents, hired under a new private savings regime in 1999, defrauded the system by charging commissions on false accounts. Since some of the sales agents were paid a commission for every new account, they simply invented them. Other accounts were in the names of deceased people.

Similarly, The Wall Street Journal reported on February 3 that about 18 percent of all private pensions were "bogus 'dead accounts,'" according to Polish deputy minister for social insurance Agnieszka Chlon-Dominczak.

CHILE

As Media Matters for America has previously noted, Chile's system of private accounts has been less effective for poor and middle-class workers than the public pension system that preceded it. The New York Times reported on January 27 that middle-class workers have discovered that private accounts "are failing to deliver as much in benefits as they would have received if they had stayed in the old system," and many poor Chileans don't receive "even a minimum pension" or "remain outside the system altogether." According to a Chilean government official specializing in pensions, "If people really had freedom of choice, 90 percent of them would opt to go back to the old system," the Times noted.

SWEDEN

Like the Polish system, the Swedish system of government-run private accounts system was implemented in 1999 and has already shown signs of significant problems (see here and here).

More important, a comparison between that system and Bush's proposal, which McCain and others have drawn, is meaningless. While Bush's plan involves diverting a portion of existing Social Security payroll taxes into private accounts, Sweden financed its government-mandated private investment accounts with an additional tax. The New York Times explained the distinction in a February 12 article: "Unlike Mr. Bush's Social Security overhaul proposal, which would carve voluntary private accounts out of existing taxes, the Swedish system imposes a mandatory 2.5 percent saving on top of its basic benefit."