The British tried to privatize social security in the 1980s, and failed miserably. It was a great bleedin' waste of time, effort, and money and it left people worse off than before. People got hoodwinked into signing up for crappy plans, fund managers took a 30% cut of their benefits, and even the government lost more money than it saved, providing "tax incentives" for people to set up private accounts.

On top of that, Britain's traditionally strong employer-provided pension schemes are in the process of going broke. Low interest rates, you see. Business cycles happen. But the silly politicians have so gutted the old state program that all the employees who got screwed over have almost nothing left to fall back on.

Oops.

It's going to be based on a program that the US Congress already has for itself and is successful. We already know that that program is successful because it has been going on for years.

Here in Canada, many businesses run their employees' pension plan. They make all of the payments into the plan, invest the money intelligently, and make payments from the investment fund to retirees. Everything was good until the government changed the regulations governing these plans. The new rule stated that as long as there was enough money in the investment fund to cover the payments to retirees, the company could defer putting more money into the plan, so long as they did pay it back later. Later being defined as when the money was needed. I think that they'd have to pay interest on the money, as well. So essentially, companies could take loans from their employees retirement funds. So what happened? Companies in financial trouble withheld payments to the fund. They managed to keep the fund solvent, but there was still that big debt they owed to the fund. Eventually, it got to the point that the fund needed that debt paid, but the company still didn't have any money. So the fund was empty, and the company was bankrupt. Guess who wasn't a secured creditor? That's right, the investment fund. So now there's a bunch of 60-somethings who spend their whole life working for the company, were looking to retire soon, and now they find that the retirement income they worked their whole lives for is gone, and they have to continue working. Someone explain to me why letting private companies take over Social Security is supposed to be a good thing?

ah - much like the way that health care is based on a program that the Congress has had for itself for years now? Or am I stretching the analogy too far?
To make myself clear, why should anyone expect that the rules for a program for the general public should be anything like the rules Congress uses for its own programs? Safeguards and backups that Congress allots to itself would be way too expensive for general use, so to say that it works fine for the Congress, so it should work fine for everyone, is quite a leap of faith. I'll wait and see what the actual plan is (assuming that the details are actually released to the public sometime, like after the bill is passed).

If they hadn't changed that rule in Canada, all those people probably wouldn't have gotten screwed over. But anyway, private employer pension schemes aren't a bad thing in themselves. It's just that people forget that the private sector always carries risks. Which is why you need regulations. And in certain cases (but not all), the government should provide a back-up plan.

Anyway, I found this pretty good article that explains why privitization in the USA isn't going to work: There is no free lunch.

For those of you who don't want to give out your email addresses to read the article, here's some excerpts:

First of all, it's a crazy idea:


And here's why it won't work:


To pay for privatization, the government must borrow - it has to sell a whole lot of bonds. But who's gonna buy them?

Edited for Broken Code. I still suck at this.

It's simple, Kea. The instant all that extra money hits the market, chasing the same limited pool of shares; shares will immediately see massive price inflation. At which point, they will be worth very little as an investment (but a great deal for short term profit taking); and so the stocks will then be sold to the chumps, and the uninflated bonds (now a much better *investment* than stocks) will be purchased by the insiders. Problem solved; that's who will buy the bonds.

The chumps will, of course, lose almost their entire investment when the bubble inevitably bursts (as it will when they and their entire age group try to sell these shares to live on; since the dividend payments will be trivial). Of course, by then Dubya's buddies will have long since laughed their way to the bank.

Here's an unofficial Krugman web page for those who want to read the whole column.

I've followed what you're saying thus far, Weremensch, but what if the sudden flood of new bonds on the market triggers a panic selling of bonds by either private investors or Asian governments? Then what happens?

That may happen at any time anyway, Kea. We were jumping around congratulating ourselves on being able to sell, to foreigners, bonds and securities worth 20 billion more in November than our trade deficit; but the Federal Government borrowed roughly twice that during the same month, and so (money being fungible) that surplus went poof. Frankly, we now consider that when $40 billion in lost domestic investment (the money the Fed borrowed couldn't be used for economic growth) is reduced to $20 billion by foreign borrowing, it's *good* news; so the Sword of Damoclese may already be falling for all we know.

All I was discussing is who would buy the bonds if everything worked the way the poop wanted; not what would happen in the real world if we tried this. In reality, if you acknowledge that Dubya and his buddies on the Hill have trashed the US credit rating (which is why the dollar is tanking, btw); then you have to admit that any major program predicated on more borrowing is a non-starter. Since Dubya and Co are already lying when they claim that the whole stocks for bonds thing can make money for the new wave of stock buyers, what's another lie about being able to sell the bonds?

Second part understood... but um, while Bush's policy nuts may be dishonest, they can't be that stupid, can they? Surely they're aware of the risks of trashing the currency? Widespread financial panic can't be good for millionaires either... Unless they've all got hedge funds, which I'll have to go look up to remember how they work, but I believe they enable you to make a buck off a plummeting currency. Even so, the ensuing global recession can't be good for Corporate America either.

First part - Huh? Isn't Federal borrowing and selling bonds to foreigners the same thing?

US citizens can also buy Federal bonds, Kea. It is allowed. Also, part of the money we raised `overseas' was from selling equities (stocks) and physical assets. Which means we had to sell off part of the country to help raise that $20 billion surplus...then the GOP squandered it.

As for the rest, you have to ask exactly who it's bad for. The very wealthy can make a killing (and always have) in a financial panic; they have the capital in hand to buy up all the heavily discounted assets that will go on sale. Thus, even if they lose some income on the assets they currently hold, when the smoke clears they're way ahead of where they were. On the other hand, most large corporations will lose a lot of money (and in some cases, go bust); since they don't live on assets, they live on cash flow (which will dry up).

So assuming that the Bushies don't have their heads so far up their ideological fundaments that they can't see what's happening; the question they're asking themselves is `what's in it for me'. Are they working for corporate bribes, or do they see themselves as wealthy enough to clean up in a panic? If the former, then they probably won't want to deliberately trash the US economy. If the latter, the US is pretty much screwed.

In passing, this leaves aside the political gains a party might want to harvest from a financial panic. Sure, it's very risky; but what's Dubya got to lose if it comes to that? He clearly doesn't care about the political risks for the Republicans on the Hill (though they very much do; hence the current fight over Social Security); and his political career is over in no more than four years anyway.

I know US citizens can buy bonds; I'm not quite that ignorant. I just didn't quite grasp what you said from the way it was initially phrased. It sounded like "The Administration boasted about having borrowed money from foreigners, but screwed it up by borrowing even more money." Which didn't make any sense. But now you've explained that by "We" you meant "Americans In General" and not a sarcastic reference to "Our Elected Government", and that they were boasting about having sold stuff they owned to foreigners, it does.

Ok, the first bit was tongue in cheek. I'll contemplate an emoticon next time.

As for the rest; there are actually two different thoughts here. Yes, the administration and various pundits were boasting about borrowing the money; because it meant that our credit rating is still good enough to enable us to squander vastly more than we earn on current consumption. This was the *good* news; the US can still go deeper into debt.

However, the truth of the matter is that we didn't borrow the money; we borrowed part of the money, and sold off assets to raise the rest. Now; having sold off these income producing assets, the US is poorer (anything those assets earn belongs to someone else). On top of that, more of that smaller remaining pool of income must be used for debt service. So we've paid a fairly high price for that $20 billion; which (one would hope) would indicate a very important use for it. However, the US Government (who's in front of the line at borrowing time) soaked it all up, as well as some $20 billion in domestic capital, just to cover day to day expenses. Next to none of this money was put into anything particularly important (from an investment standpoint); in fact, a third went right back out in debt service.

Which brings us back to your characterization. The establishment types were boasting (dishonestly); but the country as a whole having acquired the money, the Federal Government sucked it all up before it could do any good (and did little good with it themselves). The detail that much of the money actually came from selling off bits of the country merely made it all worse.

But...isn't that like some dippy teenager being overjoyed at getting a new credit card because they can use it to pay off their other credit card??

Sounds like the US government could use some financial counselling. Oh, hang on, I'll bet that they've cut financial planning out of the budget...

OK - I've been researching the British pension system, and these are my discoveries.

1. We don't spend much on it, and could easily cut that further. The EU average is 11 percent of GDP - we only spend 5. Of that, a quarter goes on tax relief and rebates for the top 10 percent of earners, all on private penssions.

2. The National Insurance fund has a 25 billion pound surplus.

3. Yes, the number of pensioners is set to rise. However, we currently have 27 million workers supporting 32 million non-workers. The decline in the number of children means this is expected to remain roughly constant for the next 50 years. As the cost of pensions rises, the cost of state schools and child support will fall. Futhermore, policies aimed at increasing employment would obviously increase National Insurance contributions whilst reducing the cost of unemployment benefit.

4. The increase in life expectacy is disproportionately due to those who don't need state pensions. Top male managers have a life expectancy of 78.5 years, whereas male manual workers are looking at only 71.

5. If The government follows through on its plan to limit the state pension for public workers, they could destroy the public sector. In a recent survey, 40 percent of NHS staff gave the good pension as a key reason for staying in the job.

Aaaaanyway, I just loooooove the argument that goes:
Look! The politicians are squandering the pension fund!
So....let's get rid of the pension fund!
Ok, now we've gotten rid of the pension fund, the politicians are squandering the education fund. Let's get rid of the education fund!

I say we get new politicians. Bah.