Been There, Done That

During last night’s State of the Union, Bush said, “As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers. And the best way to reach that goal is through voluntary personal retirement accounts.” This morning the Wall Street Journal has a review of other countries who have experimented with privatizing government retirement programs. It hasn’t gone very well. Here’s a few highlights from the article:


Argentina’s transition was initially projected to cost a little less than 1% of gross domestic product annually, or around $2.5 billion. When the law was drafted in the early 1990s, Argentina’s economy was booming, tax revenue was high and officials were confident they wouldn’t have to borrow much…By 2001, the cost of the entire social-security overhaul had grown to about 2.7% of output…That amount approached the entire government budget deficit that year. Financing the shortfall forced Argentina to borrow billions of dollars more at high interest rates, adding to an already towering debt…. investors eventually became so worried about the country’s solvency they wouldn’t lend it more money. The result was an economic collapse in December 2001.



Transition costs also helped to batter Bolivia, which adopted private accounts eight years ago in place of a traditional pension system. Bolivia’s budget deficits more than doubled because of higher-than-expected transition costs. Even with additional borrowing, the government hasn’t been able to pay promised benefits to many retirees. Some have joined in recurrent anti-government street protests.


In 1988, worried that baby-boomer retirement might someday bankrupt the state system, the Conservative government let consumers opt out of the supplementary state plan and set up private accounts… Insurance-company salespeople persuaded many people to switch out of workplace plans to private accounts…Trouble was, that advice often wasn’t sound. Reason: The returns from the market would have had to have been gigantic to make salesmen’s scenarios work…Regulators in the 1990s cracked down on what was called the “mis-selling” scandal, and insurers had to compensate customers who’d done worse by switching to private pensions…Given all the new rules, insurance-company salesmen complain it takes as long as 12 hours to sell a personal pension. But ever since the bursting of a stock-market bubble in 2000, fewer people have wanted the private accounts anyway, despite stocks’ 2003 rally.