1.24.2005

Privitization's dirty little secrets

Buying Into Failure
ThinkingPeace.com (12.17.04)
Yes, it's old but in light of Kathryn Harris' "Fact finding trip" to Chile about Privitizing Social Security, we thought we would turn to our old pal (and subject of our man–crush) Paul Krugman on the topic:

Yet, aside from giving the Cato Institute and other organizations promoting Social Security privatization the space to present upbeat tales from Chile, the U.S. news media have provided their readers and viewers with little information about international experience. In particular, the public hasn't been let in on two open secrets:

Privatization dissipates a large fraction of workers' contributions on fees to investment companies.

It leaves many retirees in poverty.
Uh oh. That doesn't sound good, but how could this be?
Decades of conservative marketing have convinced Americans that government programs always create bloated bureaucracies, while the private sector is always lean and efficient. But when it comes to retirement security, the opposite is true. More than 99 percent of Social Security's revenues go toward benefits, and less than 1 percent for overhead. In Chile's system, management fees are around 20 times as high. And that's a typical number for privatized systems.

These fees cut sharply into the returns individuals can expect on their accounts. In Britain, which has had a privatized system since the days of Margaret Thatcher, alarm over the large fees charged by some investment companies eventually led government regulators to impose a "charge cap." Even so, fees continue to take a large bite out of British retirement savings.

A reasonable prediction for the real rate of return on personal accounts in the U.S. is 4 percent or less. If we introduce a system with British–level management fees, net returns to workers will be reduced by more than a quarter. Add in deep cuts in guaranteed benefits and a big increase in risk, and we're looking at a "reform" that hurts everyone except the investment industry.
Yes, we knew the Krug (as we call him) would have the answer.

Don't believe the hype folks: there is no crisis just like there wasn't one from Iraq. Social Security is the most successful and stable government program there is.

This is part of Bush's "ownership society" which means the following: lots of your $$$ for Wall Street to invest in companies with—and without your input we might add (yes, that's right: you won't have a broker you call to play the stock market with: they'll just get your $$$ directly)—and if things go well, bully for you... but if they go south, we'll you "own" that and good luck because the safety net is gone.

Privatization. Bad for America.

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