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More International Experience With Social Security Reform.

Opponents of Social Security reform frequently attempt to bring up examples of market reforms in other countries as evidence that the U.S. should NOT reform its Social Security plan. Unfortunately for them, the facts do not square with their claims. In reality, the concept of personal accounts is a winner, but it is indeed true that peripheral elements of a policy can harm the overall efficiency of the reform. The United States can learn a lot from reform experiences in other countries, avoiding pitfalls while focusing on what works. And personal accounts work.

A good example of reform that worked (but could be tweaked and refined for American consumption) is Chile, a country WILLisms.com profiled in a previous post. Chile is one such country those against Social Security reform point to as proof that personal accounts are bad, despite the stunning and unequivocal successes of the Chilean reforms.

How do they get away with making such blatantly erroneous claims? Well, because they can get away with making such blatantly erroneous claims. Very few Americans are able to call them on it. Pension systems in the United States are hard enough to understand as it is, so adding the international layer almost guarantees Americans will not have the tools to spot misleading or patently untrue facts.

The Heritage Foundation blog examines the findings in this Economist article (unfortunately, the article is "premium content," available only to subscribers):

One blogger posts this tidbit from the Economist article:

"However, in both Sweden and Australia, as in Chile, the new accounts are mandatory, while in America they will be voluntary. To find out how voluntary accounts have worked, Americans need to look at Britain, where Margaret Thatcher introduced them in 1988.

That should be enough to put them off the idea for good, according to Mr Bush's critics. In their version of history, Britain's experience was a disaster, in which people who opted for individual accounts were made worse-off by pension mis-selling. Fortunately, the critics are wrong."

Indeed, the experiences in the U.K. with Thatcher's highly successful market reforms are almost compulsively cited by reform critics as grounds for inaction. While Britain's pension system underwent some turmoil, nothing was wrong with the system itself; the problems Britain experienced were totally unrelated to the reform, as the Economist explains:

"To be sure, pensions were mis-sold in the late 1980s and early 1990s: the bill for putting things right was £12 billion ($22 billion). But the mis-selling was out of employers' defined-benefit plans, not out of the state system. Many people were lured away from generous employers' plans into funded individual pensions when they would have been better off staying with their employers' schemes. 'Mis-selling was not about people being sold private pensions when state pensions would have been better for them,' says Philip Booth, the editorial director of the Institute of Economic Affairs, a think-tank.

Britain's mis-selling scandal occurred within a distinctive pension system that had long allowed employers to provide part of the overall state benefit in return for rebates on part of their payroll taxes. In the late 1980s, this right to 'contract out' was extended to individuals, who were also given the right to leave their employers' plans. In America, as Olivia Mitchell, a member of Mr Bush's pensions commission in 2001, points out, there is no 'contracting out' for private workers in Social Security and the new individual accounts will form part of Social Security."

In other words, what happened in Britain 1) was not because of the personal accounts, and 2) could not happen in the United States.

"So what's the bottom line? According to the Economist, 'The international experience isn't as scary as the Democrats imply.' And there are good reasons to believe that reform here could be even better."

Finally, just a reminder of something WILLisms.com noted previously: how widespread personal accounts are becoming around the globe:

"Currently, some 80 million workers in 20 countries have access to personal retirement accounts. These countries include Chile, the United Kingdom, Switzerland, Denmark, the Netherlands, Argentina, Colombia, Peru, Bolivia, Mexico, Uruguay, Australia, Hungary, Kazakhstan, Poland, Latvia, Sweden, Hong Kong, El Salvador and Croatia (roughly in the order in which they adopted the plans).

Macedonia, the Dominican Republic, Kosovo and even China have passed reform laws, which they are now in the process of implementing. Other countries are moving in that direction."

Click for larger version.

That's one heck of a coalition of the willing. One wonders if Democrats might be a little more willing to go along with Social Security reform if they knew of its broad international support.

The international experience underscores a serious point:

For America to remain at the top of the economic ladder in an increasingly integrated global economy, we must reform Social Security now. Do we really want China, potentially our future arch-rival, getting personal accounts before we do?

Posted by Will Franklin · 18 February 2005 06:44 AM

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