The Swedish experience with privatisation of retirement accounts is similar to the British, if less extreme. My suggestion to citizens of countries considering similar schemes would be : Don’t go there !

Henri

PS : If you think I’m exaggerating, read Ms Cohen’s article, to which Professor Samuelsson and I have provided a link below….

January 14, 2005

OP-ED COLUMNIST
The British Evasion

By PAUL KRUGMAN
We must end Social Security as we know it, the Bush administration says, to meet the fiscal burden of paying benefits to the baby boomers. But the most likely privatization scheme would actually increase the budget deficit until 2050. By then the youngest surviving baby boomer will be 86 years old.

Even then, would we have a sustainable retirement system? Not bloody likely.

Pardon my Britishism, but Britain’s 20-year experience with privatization is a cautionary tale Americans should know about.

The U.S. news media have provided readers and viewers with little information about how privatization has worked in other countries. Now my colleagues have even fewer excuses: there’s an illuminating article on the British experience in The American Prospect, [url=http://www.prospect.org]http://www.prospect.org[/url], by Norma Cohen, a senior corporate reporter at The Financial Times who covers pension issues.

Her verdict is summed up in her title: "A Bloody Mess." Strong words, but her conclusions match those expressed more discreetly in a recent report by Britain’s Pensions Commission, which warns that at least 75 percent of those with private investment accounts will not have enough savings to provide "adequate pensions."

The details of British privatization differ from the likely Bush administration plan because the starting point was different. But there are basic similarities. Guaranteed benefits were cut; workers were expected to make up for these benefit cuts by earning high returns on their private accounts.

The selling of privatization also bore a striking resemblance to President Bush’s crisis-mongering. Britain had a retirement system that was working quite well, but conservative politicians issued grim warnings about the distant future, insisting that privatization was the only answer.

The main difference from the current U.S. situation was that Britain was better prepared for the transition. Britain’s system was backed by extensive assets, so the government didn’t have to engage in a four-decade borrowing spree to finance the creation of private accounts. And the Thatcher government hadn’t already driven the budget deep into deficit before privatization even began.

Even so, it all went wrong. "Britain’s experiment with substituting private savings accounts for a portion of state benefits has been a failure," Ms. Cohen writes. "A shorthand explanation for 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."

Many Britons were sold badly designed retirement plans on false pretenses. Companies guilty of "mis-selling" were eventually forced to pay about $20 billion in compensation. Fraud aside, the fees paid to financial managers have been a major problem: "Reductions in yield resulting from providers’ charges," the Pensions Commission says, "can absorb 20-30 percent of an individual’s pension savings."

American privatizers extol the virtues of personal choice, and often accuse skeptics of being elitists who believe that the government makes better choices than individuals. Yet when one brings up Britain’s experience, their story suddenly changes: they promise to hold costs down by tightly restricting the investments individuals can make, and by carefully regulating the money managers. So much for trusting the people.

Never mind; their promises aren’t credible. Even if the initial legislation tightly regulated investments by private accounts, it would immediately be followed by intense lobbying to loosen the rules. This lobbying would come both from the usual ideologues and from financial companies eager for fees. In fact, the lobbying has already started: the financial services industry has contributed lavishly to next week’s inaugural celebrations.

Meanwhile, there is a growing consensus in Britain that privatization must be partly reversed. The Confederation of British Industry - the equivalent of the U.S. Chamber of Commerce - has called for an increase in guaranteed benefits to retirees, even if taxes have to be raised to pay for that increase. And the chief executive of Britain’s National Association of Pension Funds speaks with admiration about a foreign system that "delivers efficiencies of scale that most companies would die for."

The foreign country that, in the view of well-informed Britons, does it right is the United States. The system that delivers efficiencies to die for is Social Security.

I don’t complain about our system. One reason may be that I haven’t been losing on the stock market myself by gambling with the state pension money, but have allowed the governmen’ts salaried experts to do the losing for me.

In the last few years, I think (I’m not very interested in learning more) that the allocated amount in my name has shrunk noticeably but not dramatically. As to the amount received, it is adequate for me. I haven’t even felt the need for initiating payments from my (smallish) private pension fund (which seems to work quite well).

As always, Henri, you present only one side of the story. One wonders what the opponents of privatization in Sweden and Britain may have done to sabotage it. That is happening in the United States, and knowing the U.S. Congress, it will probably produce some significantly diluted version of privatization.

The article you copied does not mention that the U.S. Social Security System is on the verge of collapse. I remember reading an article in Time magazine about 25 years ago that predicted this would happen as the "baby boomer" generation moved into retirement. The gist of the article was that there would not be enough people in their working years to support a large retired population. In the U.S. we are fast approaching a time when there will be only two workers to support 1 retired person. When Social Security first began during the Administration of Franklin D. Roosevelt there were 16 workers to support 1 retired person.

Something similar has happened in the "People’s Republic" of China where draconian birth control measures have long been imposed by that government . As the older Chinese become too old to support themselves there will not be enough workers to support them. Of course, this isn’t really a problem in the "People’s Republic". Their history indicates that they will have no problem euthanizing their aged in large numbers, excluding, of course, older members of the upper echelons of the Communist Party.

Aside from possible sabotage on the part of opponents It is not clear to me what happened in Britain or Sweden, but I would guess that the majority of the people there lacked the self-discipline to make privatization work. I hate to admit it but the same is undoubtedly true of people in the United States. This comes from years of having the government as a surrogate parent for those who are unwilling to take responsibility for their own well being.

However, the fact is that there has never been a time in the U.S., even during the Great Depression,  when the domestic stock market was not higher than it had been six years previously. Retirement investments are intended to be long term, and history shows that such investments are quite secure, much more than U.S. Social Security is today. Retirement accounts in the U.S. have been around for several years and they have proven to be quite successful. It requires only the discipline to leave the money in the account and not to panic during market fluctuations and adjustments.

Still, I agree that it would be prudent for the U.S. to examine the experiences of Britain and Sweden, and perhaps arrive at a workable compromise solution.

SR

[quote author=StoutRex link=board=omni;num=1105716077;start=0#2 date=01/14/05 at 12:38:02]...

Still, I agree that it would be prudent for the U.S. to examine the experiences of Britain and Sweden, and perhaps arrive at a workable compromise solution.

That’s an openness to dialogue as good as any, SR ! Allow me to return the congratulations you were kind enough to extend to me on another thread….

Henri

That’s an openness to dialogue

Why would either of us want dialogue, Henri? Neither you nor I are going to be able to influence anyone that matters, and besides, it would ruin a perfectly good friendship. You enjoy "pushing buttons" and so do I. And if I find myself agreeing with you too often, I might not have a reason to visit the Agora.

SR

Dear Stout,
I can give at least one, but only one example, what will happen with experince from Sweden.
Privatisation of of people’s pension plan is done by law at a certain date.  That date is well known beforehand which means that people (read stock market sharks) will buy and sell shares to each other to up the price (not value) of shares.  The result is, that when  "ordinary" people are suppoused to buy the shares they go for top prices and the stock market bottoms out.  Which means that the poor have (again) contributed to the rich (or the dumb to the smart) as usual.  But this time it was instigated by the political leadership, nice uh.

Iterman,

I don’t recognize your description of pension plans in Sweden.

In the first place, there is no compulsory "privatization". At least for me, the social security authorities have told me that I may choose investment funds for a part of the money that is attributable to me, or they will manage my account through a numbre of pension funds managed by government officials according to law applicable to these funds. Like I told you, I haven’t made any choices myself, but let them manage it all. So, no private initiatives in either direction; it is all managed by government staff.

AFAIK, it is not possible for people to buy and sell shares to each other (I may misread your meaning here), but transactions are made through banks. I don’t think it is allowed to sell specifically to another person, and any way, we are investing in funds, not in specified shares.

There are, I think, limits to the size and frequency of changes in the choice of funds, so short term speculation should be ruled out. Moreover, the way those funds advertise, they aim at long-term stability and consistent growth.

All in all, my impression is that you don’t describe Sweden.

anders,
You obviously live in a bliss.  Lucky you.  Are you not aware of that soon after the privatization of people’s pension the IT-market crashed after a wonderful upturn during the 90s? Don’t you remember how the Swedish population was encourged to buy stocks from left to right in the media and how they were shown that in the long run shares had grown in value from 1945, 1950 or 1960 or whenever?
Well, now you are reminded.
And oc people in the stock market sell and buy from each other.  What do you think trade is?

I don’t think it is ignorance when I for the third time tell you that my pension isn’t "privatized" and that I think that this applies to everybody. How could the word privatization be used, when the government manages the money?

I know that people playing the stock market have lost money, but the goverment funds should be balanced enough to withstand failures in single markets.

My understanding is that people who want to buy or sell shares ask their bank to perform the transactions. The buyer/seller does not know who the selling/buying party is. Am I wrong?

Anders and iterman, I suspect your disagreement is mainly due to the fact that with the latest «reform» in 1994, our pension system became extremely complicated and anything but transparent. Perhaps the best concise sketch of the overall structure of the system is to be be found on the website of Sjunde AP-fonden  which handles invests the premiepension funds of people who, like Anders and myself, chose not to choose to have these funds invested in privately-operated pension funds. (The figures of 16.0 % and 2.5 %, respectively, for the amount deducted from wages up to 7.5 basbelopp = 7 * 39400SEK = 275 800SEK for 2005- apply in full only to those born after 1953).

As I see it, there are two main problems with this type of funding of pensions, one more individual, and one more general. The individual one relates to the fact that people can be induced to invest their pension monies in risky funds - to my mind a general pension system should be based neither upon sheer luck of the draw nor upon the level of investment skills a particular individual happens to possess (nor, of course, the fees that managers take from a captive audience for managing its funds - cui bono ?!!) - interest and/or skill in playing the market should rather be reflected in returns on discretionary saving, not on mandatory savings designed to ensure a certain level of economic decency in old age. More generally, when money is added to a stock market, that market naturally enough tends to rise, when money is withdrawn, it tends to fall. This means that when larger cohorts (baby boomers) retire and withdraw large amounts of money from the system the market will tend to fall, leaving such groups with diminished pensions. My suggestion for reform, in the case that, as the best estimates seem to indicate, Social Security in the US will begin paying out more than it takes in in 2052, would be to increase the upper limit on incomes from which Social Security taxes are deducted. This, to my mind, is what should have been done in Sweden in 1994, but alas, I was not consulted….

Henri

PS : För mer om premiepensionssystemet kan man med fördel konsultera Försakringskassans websida och för frågor och svar PPM-myndighetens....

After reading this article from the Health section of today’s New York Times, I’m slightly less pessimistic about somebody being around to pay my inkomstpension than I was before. I surely hope so, because the premiepension part of the funds that are supposed to enable me to enjoy my otium bring in the princely sum of 8 SEK a month….

Henri

January 16, 2005
Genes Promoting Fertility Are Found in Europeans
By NICHOLAS WADE
R[size=2]esearchers in Iceland have discovered a region in the human genome that, among Europeans, appears to promote fertility, and maybe longevity as well.

Though the region, a stretch of DNA on the 17th chromosome, occurs in people of all countries, it is much more common in Europeans, as if its effect is set off by something in the European environment. A further unusual property is that the region has a much more ancient lineage than most human genes and the researchers suggest, as one possible explanation, that it could have been inserted into the human genome through interbreeding with one of the archaic human lineages that developed in parallel with that of modern humans.

The genetic region was discovered by scientists at DeCode Genetics of Reykjavik who have made the Icelandic population, with its comprehensive genealogy and medical records, a prime hunting ground for the genetic roots of common diseases. Their finding is published in Monday’s issue of Nature Genetics in a report by Dr. Kari Stefansson, Dr. Augustine Kong, Dr. Hrein Stefansson and other Decode scientists.

The report seems likely to receive considerable attention, even though it raises as many questions as it answers. "I thought it was one of the most interesting papers in population genetics I have ever read," said Dr. Nick Patterson, a mathematician at the Broad Institute in Cambridge, Mass., who advised Decode on the article but has no other connection with the company.

The region came to light in the search for a schizophrenia-causing gene, which turned out not to be there. But the DeCode researchers noticed that the DNA sequences they had examined did not seem to agree with those in the standard human genome sequence, said Dr. Kari Stefansson, Decode’s chief executive.

The lack of agreement turned out to be caused by the fact that the region exists in two forms in the Icelandic population. The region is not a single gene but a vast section of DNA, some 900,000 units in length, situated in the 17th of the 23 pairs of human chromosomes. In some Icelanders, the Decode team found, the section runs in the standard direction but in others it is flipped. Looking for any physical consequence, the Decode researchers found that women carrying the flipped or inverted section tend to have slightly more children.

The section carries several known genes, none of which have any obvious connection with fertility. It is not clear why inverting the section should have any effect on the number of children, Dr. Stefansson said. But the inversion does increase the rate of recombination, the shuffling of genes between generations that is a major source of genetic novelty. That could account for some of the increase in fertility.

The Decode scientists found that the chromosome 17 inversion is rare in Africans, almost absent in Asians, but is possessed by 20 percent of Europeans, the same frequency as in Iceland. The inversion seems to have been favored by natural selection among Europeans in fairly recent times, perhaps the last 10,000 years. "Maybe something switched it on in the European environment, such as an interaction with diet," said Dr. David Reich, a population geneticist at the Broad Institute.

Fertility is doubtless affected by different genes in different populations and Decode has found one special to Europeans because that is where it was looking. The increased frequency of the inversion in Europeans is one of a growing number of examples of recent human evolution.

The inversion itself, however, is surprisingly ancient. Its age is revealed by its counterpart, the standard or non-inverted section of chromosome 17. The standard and inverted regions cannot exchange genetic elements during recombination because their DNA sequences do not match. Hence, unlike most of the rest of the genome, which gets shuffled in each generation, the two forms have enjoyed a separate existence ever since their creation. This event presumably happened when the region came adrift from its parent chromosome and got knitted back in the wrong way round.

When all the known versions of a human gene are compared, in most cases they turn out to have had a single common ancestor about a million years ago. But the standard and flipped version of the chromosome 17 region last shared a common ancestor three million years ago. It is highly unusual for two different versions of a gene to endure for so long, because one will usually get lost by a natural random process of elimination.

The Decode researchers propose two explanations. One is that the standard and flipped versions confer different advantages, so it is beneficial for a person to have inherited a copy of each from different parents. This balancing selection can keep two versions of a gene around in a population indefinitely.

Decode’s alternative proposal is that the flipped version was carried for many years in a different human lineage, one of the archaic populations that preceded the emergence of anatomically modern humans in Africa 150,000 years ago. Then, in some episode of rape or interbreeding, a single copy of the flipped version entered the modern human lineage some time before humans left Africa 60,000 years ago.

In support of this view, the flipped version carries far fewer mutations than the standard version, as if it had been accumulating them from a much more recent date. There have been other recent hints of modern human interaction with archaic hominids, notably the finding last October that a lineage of modern human body lice seems to have been inherited from a different human species.

Dr. Stefansson said that another property of the inversion, though one not described in today’s article, is that it is associated with longevity. Decode scientists have located two sites on Icelanders’ genomes where there is some genetic variant that promotes longer lifespan. The chromosome 17 inversion, it turns out, lies at one of these sites. It occurs at much higher frequency in women over 95 and in men over 90 than in the normal population. "It seems to confer on people the ability to live to extreme old age," Dr. Stefansson said.

It is particularly surprising that the same genetic element should promote fertility and longevity since most organisms are obliged to follow a strategy either of breeding fast during short lives or of living longer and having fewer children. "Usually people think of there being a trade-off between fertility and longevity," said Dr. Alan Rogers, a population geneticist at the University of Utah. "So we are getting a free lunch here."

Dr. Stefansson said his findings were empirical observations for which functional explanations have yet to emerge. It is not clear why the inversion should affect fertility or longevity, why it is favored in Europeans or how it has endured for three million years.

Though a surprising claim with so many loose ends would usually be greeted with skepticism, other researchers seem impressed with the solidity of Decode’s findings. "It’s a startling and amazing claim and it’s actually pretty convincing and compelling evidence at the same time," Dr. Reich said.

Dr. Rogers, who

You have less to worry about and cope with your pension plans than a 26-year-old working stiff in Japan,

if the (ir)responsible governmental agency is not allowed to spend pension insurance premium on anything that its bureaucrats regard fit and building a luxuarious resort compound in the provincial Fukushima Prefecture with premium and running it years in deficit and eventually selling it to a local municipality for 330 mil. JPY (the construction only cost 8100 mil. JPY) is not a tip of iceburg;

if the national population is not expected to start shrinking by 2008 at the latest;

if the sovereign credit rating is not as low as that of Botswana (no offense intended for Botswanans) and Moody’s or S & P is not unable to find a Aaa- or AAA-rated bank among the nation’s ten biggest banks;

and if the ratio of government debt agaist GNP was not expected as high as 161% in 2004 (OECD forecast as of Dec. 2003: Economic Outlook vol. 74) and any self-respecting economists cannot see the prospect of bank accounts being blocked within ten years.

[edit]Mr. Takashi Asai, from whom I have stolen in largesse for the first item recently predicted "a drastic change if not a total collapse" of Fiscus of Japan within two years.  I don’t mean to believe everything he predicts but with the way things look here it may not be wise to wait till I see him proven/discredited.[/edit]

Flam

To those willing to, however briefly, put aside the joys of «pushing buttons», I can recommend Roger Lowenstein‘s detailed article in last Sunday’s New York Times Magazine with the catchy title A Question of Numbers. I think it more than repays the concentration it demands of the reader….

Henri

PS : Try the following link for Pat Oliphant‘s take on the matter….

To those willing to, however briefly, put aside the joys of «pushing buttons»,

Maybe for a moment, Henri, but never willingly.

And you already know my opinion of the New York Times.

SR

[quote author=KatyBr link=board=omni;num=1105716077;start=0#11 date=01/16/05 at 15:11:41]I’m completely against privitization.  Ir’s just another step closeer to the "one world government".

How so, exactly?

The more I hear about privatization, the less sense it makes.  It will cost a huge amount of money to change the system over (although on cursory search I can’t find a precise estimate) which reduces if not eliminates any possible benefit of changing the system.  Privatization, from what even its proponents are saying, will not obviate the need or likelihood of reductions in benefits.  

However, it also seems clear that despite the claims of anti-reform proponents, there is a serious problem with the system.  I for one do not expect to reap any signficant benefit from the system.

It seems to me the essential components for "reform" are already in place.  Those who are nearing retirement age will not have their benefits cut in any case:  that would be unfair (not to mention hugely politically unpopular towards a large segment of the population that actually VOTES).  Those of us who are younger already have lowered expectations.  Benefits will have to be reduced with or without privatization—so why not just reduce the benefits without transforming the system?  ‘Privatization’ of retirement already exists in some sense—in the abundant private pension programs—IRAs, Roths, 401ks, etc.  These have been expanded by both Dem and Rep administrations.  These should continue to be encouraged.  THIS is the private sector.  Why screw up the public one?  Just make it clear that people should be less and less dependent on it.

The crisis resulting from the retirement of baby boomers may be prolonged but it will pass, and the solution therefore should be temporary as well.  Reduced benefits can be increased later if it is found necessary or practicable to do so.  Transforming the system is essentially irreversible.  

Social Security began at a time of lower life expectancy.  The government will have to further lower expectations and benefits for younger workers—the extent of which will obviously depend on the philosophy of the party in power.  The Republicans perhaps seek privatization in part because  it is irreversible and later Dem administrations could not change it back, but just as the current changes being contemplated will require broad support, so would any reversal.  

For those interested in more information of experiences abroad:  From the Congressional Budget Office 1999.