|
Imagine receiving a Social Security
statement that looks like the one you get for your retirement account. It features pie
charts and graphs detailing mutual funds, stock market updates, and an account balance
that reflects your investing style. There is even a toll-free number to call for
prerecorded "help topics" about investing.
If George W. Bush makes good on his campaign
proposal to implement Social Security "private accounts," that could be where
we're headed, and we won't be alone. Around the world, governments are looking at partial privatization
of their systems for providing old-age pensions (Social Security in the United States).
The trend toward individual control over government
retirement benefits has picked up steam recently in other countries, including Hong Kong,
Sweden and Great Britain, where policy-makers have revised their teetering systems under
the pressure of aging populations and looming insolvency.
Burden Shifts to Individuals
The changes vary widely depending on the country, but the
general trend is there, experts say. Although no country seems to want to drastically
reduce or completely eliminate the government's role in retirement financing, many
countries are moving away from reliance on the government to direct how money is invested.
Some countries, like Sweden, have created systems where
individual investment accounts are administered by governments, while individuals choose
the investments. This is commonly called "privatization." Others, like Hong
Kong, have tried new strategies that force people to save in accounts separate from the
government pension scheme, creating something like a mandatory 401(k) account for each
worker.
Stephen Kay, a senior economic analyst with the Latin
America Research Group at the Federal Reserve Bank of Atlanta, said the "prevailing
thinking (worldwide) is that private systems can be run more efficiently" than
government agencies. There "is a great deal of support for privatization
internationally," including by the World Bank, he said.
"Aging populations are a phenomenon across the
globe," creating the need to reform pension schemes, said Peter Orszag, president of
Sebago Associates, a public policy consulting firm, and a former Social Security advisor
to President Clinton.
Americans Debate Social Security
This dilemma has been on Americans' minds lately. George W.
Bush and Al Gore offered contending visions for Social Security during the presidential
campaign, as competing headlines told of a booming stock market that encouraged private
investment.
The term privatization is sometimes used to further
political agendas and elicit emotional responses. "Privatization is a bit of a
value-laden word," said Sylvester Scheiber, vice president of research and
information for Watson Wyatt Worldwide.
When President Bush talks about privatization, he's
referring to the idea of individual accounts for Social Security holders, which he has
said he supports and will soon appoint a commission to investigate the possibilities.
"Individual account" generally refers to the
notion that a person has investing control over either a portion or all of the
taxes paid in a government retirement plan. Scheiber said the Bush plan would probably
include setting aside "2 percent of payroll for funding individual accounts."
Americans currently pay a 6.2 percent payroll tax for
Social Security, with a matching 6.2 percent paid by employers, for a total of 12.4
percent.
Scheiber also noted, "Bush campaigned that we would
take (ideas) from other countries."
What ideas might he consider?
Looking to Europe
Sweden introduced a new system of individual
accounts last fall that shares basic ideas with the Bush plan.
Currently, the Swedish pension system taxes 18.5 percent of
wages. Of that, 16 percent is used to fund benefits for current retirees. The other 2.5
percent is allocated to the "Premium Pension," an individual investment account
administered by the government. These investments are "self-directed and one can pick
among several funds to invest in," according to Annika Sundưn, a Swedish native who
is associate director at the Center for Retirement Research at Boston College.
Sundưn also said the Swedish reforms have been tough to
implement. "I think it's complicated for people to understand the two parts of the
system — the individual account and the general account," she said. "I
talked to some of my friends in Sweden recently ... all are college-educated, and all had
trouble understanding how the system really works."
This is despite the government's massive effort to educate
the population about topics such as risk, return and other general investment concepts.
 |
"I think it's complicated for
people to understand the two parts of the system — the individual account and the
general account. I talked to some of my friends in Sweden recently ... all are
college-educated, and all had trouble understanding how the system really works."
|
— Annika Sundưn, associate director at the Center for Retirement Research at Boston
College. |
|
Britain offers similar individual-style accounts.
The current system was introduced in the late 1970s under Margaret Thatcher. Every worker
pays into the system, which essentially has two tiers. The first tier functions as a basic
retirement fund similar to the U.S. Social Security system, and the second provides the
option for an individualized account. Essentially, workers can choose to invest their
second-tier money in a government-insured fund or entirely on their own.
The British individual accounts, however, have been plagued
by problems. During the 1980s, many government-approved investment companies
misrepresented their products to the public.
"My conclusion on the U.K. system is that it is a
mitigated disaster," Orszag said. "Even the U.K. government has acknowledged
that its experience with private accounts has been problematic."
Still, it may prove to be the most carefully watched system
by American policy-makers because of the traditionally close alliance between the two
nations.
Not all of Europe is as far along with individual accounts
as Sweden and Britain. Germany and France face a situation similar to that
of many Latin American countries. "They have limited employer pension plans and do
not have a viable government pension system," said Olivia Mitchell, executive
director of the Pension Research Council at University of Pennsylvania's Wharton Business
School. "Basically, there is an excess of promises over the ability to pay."
Indeed, Germany's lower house of parliament passed pension
reform legislation in January to address the government's "excess promises."
That legislation seeks to cut state pension benefits in favor of tax breaks and cash
incentives that promote voluntary private savings.
Individual Control in Asia
The trend towards individual control has spread to Asia,
too, with Hong Kong and Japan each looking to reform their retirement planning schemes.
On Dec. 1, 2000, Hong Kong officially launched its Mandatory
Provident Fund (MPF), a new retirement savings system mandated by the government. The
MPF requires that workers and employers contribute to a retirement savings account that is
held by a private investment manager. Workers choose their manager and direct the
investment of their contributions. In essence, the system functions as a mandatory 401(k)
plan with matching contributions paid by the employer.
In Japan, a 401(k)-style system has been approved,
but its implementation is expected to be delayed — possibly until 2002 — because
of political events.
Latin America: Reform Central
While it's not likely that Bush will look to Latin America
as a guidepost, the example of Chile is instructive because of both its problems
and promise.
Recognized as the world's privatization
"granddaddy," Chile introduced a radically new system of individual accounts in
1981, partly to stimulate growth. "The pro-privatization climate in Latin America is
very much created by the idea that more money in private pensions will help capital
markets and create a greater degree of investment overall," said Rafael Rofman, vice
president at Naciưn AFJP, a company that runs Argentine pension funds.
|
"We're shifting from social
security systems where you have no responsibility to one where you might
have responsibility. We have to get individuals to think about risk, return, or savings in
a meaningful way."
|
— Olivia
Mitchell, executive director of the Pension Research Council at University of
Pennsylvania's Wharton Business School.
|
|
Under Chile's current system, individuals must deposit 10
percent of their salary into individual investment accounts that are managed by private
pension companies under close government regulation.
Each pension company is required to post returns for
investors that fall in line with the average for the pension fund industry as a whole.
This provides a predictable level of return for investors; however, high marketing costs
reduce the return considerably.
The Chilean system has been praised as a model for reform,
but the system has significant problems and may not be an appropriate model for fully
industrialized nations with developed labor markets like the United States, said Kay and
Rofman.
In general, the United States probably won't adopt a Latin
American system, said Mitchell. "Americans tend not to be enthusiastic about looking
towards Latin American for examples."
Educating Investors
As governments shift investment risk to individuals,
investor education will become increasingly important. "We're shifting from social
security systems where you have no responsibility to one where you might
have responsibility," said Mitchell. "We have to get individuals to think about
risk, return, or savings in a meaningful way."
The U.S. may have a unique advantage; mutual funds and
investment lingo are now a part of the general culture. Twenty years ago, 401(k)
was an obscure part of the tax code; now, it's a household word. Today, many Americans are
accustomed to making investment choices on their own.
Still, if a program of individual accounts is eventually
passed, Congress is not likely to allow people free rein with their tax contributions,
said Scheiber. Most nations with government-sponsored individual accounts limit the use of
money in those accounts for retirement spending. They do not allow withdrawals for
nonretirement spending on things like home purchases or college tuition.
"Congress will be more circumspect about the ways we
spend our own money than if they were spending it," Scheiber said. |
