Privatization Around the World (Part II)

As I noted a few days ago (following Kevin Drum), the privatization of retirement plans around the world indicate good reason to be skeptical. Today Paul Krugman writes about the issue. He explains that the two main problems encountered in even the most successful cases (e.g., Chile and Britain) are:

1. Privatization dissipates a large fraction of workers' contributions on fees to investment companies.
2. It leaves many retirees in poverty.

On the first point, Krugman writes:

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.

The second problem (continuing poverty among the elderly) has required massive subsidies in addition to the retirement plans.

On a related note, I was watching CSPAN's coverage of the White House Conference on the Economy. One of the panelists was Sandy Jaques--just an ordinary middle-class single mother from Iowa who wants to save Social Security for herself and her daughter. She is surprisingly articulate about the issue for a nonexpert "regular citizen." As Josh Marshall has noted, even the NYTimes identifies her as simply as "a single mother from Iowa." In fact, she has been interviewed on television as just such an ordinary person, but this is classic astroturf (i.e., articial grassroots organizing). Actually, Sandra Jacques manages to know the Republican talking points so well because she works for an organization called Women for a Sound Social Security Choice. In other words, she is a paid Republican operative. Here is her bio:

Sandra Jaques, director of the Iowa chapter of FreedomWorks, will be available for talk radio interviews on Personal Retirement Account (PRA) reform plans and the role that the Social Security issue is playing in this election cycle.

Ms. Jaques is an Iowa native and an expert on Social Security reform. Before joining FreedomWorks this year, she served as the Midwest Regional Director of For Our Grandchildren, a national nonprofit organization dedicated to educating the public about the need for Social Security reform. In her new role with Iowa FreedomWorks, she organizes statewide grassroots support for PRAs.

She "organizes statewide grassroots support"; therefore, she is not a grassroots nonexpert and "regular citizen." The media need to treat her the way they should every other shill of the administration; of course, the media continue to do a poor job of calling the privatizers on their lies. The two biggest whoppers I keep hearing are:

1. Social Security is in dire trouble.
2. Privatization will solve this so-called trouble without cutting benefits.

At least, let's not listen to astroturf campaigns promoting these lies as if they are just coming from sincere citizens asserting their democratic right to join the public deliberation. Propaganda needs to be recognized for what it is.

UPDATE: This article in Saturday's NY Times is a good start.

The exchange was an example of how Mr. Bush promotes his agenda with testimonials from "regular folks," in the words of Joshua B. Bolten, the White House budget director, who introduced Ms. Jaques.

But Ms. Jaques is not any random single mother. She is the Iowa state director of a conservative advocacy group, FreedomWorks, whose founders are Jack F. Kemp, the former vice-presidential nominee, and Dick Armey, the former House Republican leader.

Ms. Jaques also spent much of the past two years as a spokeswoman in Iowa for a group called For Our Grandchildren, which is mounting a nationwide campaign for private savings accounts.