Privatization Around the World

How well has privatization of retirement accounts worked in other countries where it has been tested? Kevin Drum has the answer (short answer: not well).

First there's Chile. They implemented privatization a couple of decades ago, and originally the World Bank was enthusiastic. Today, though...not so much. Greg Anrig of the Century Foundation summarizes:

* Investment accounts of retirees are much smaller than originally predicted — so low that 41 percent of those eligible to collect pensions continue to work.

* The World Bank found that half of the pension contributions of the average Chilean worker who retired in 2000 went to management fees. The brokerage firm CB Capitales...found that the average worker would have done better simply by placing their pension fund contributions in a passbook savings account.

* The transition costs of shifting to a privatized system in Chile averaged 6.1 percent of GDP in the 1980s, 4.8 percent in the 1990s, and are expected to average 4.3 percent from 1999 to 2037.

Bummer! Still, maybe that's just Chile. How about results from some nice, progressive, wealthy country instead? How about Sweden?

Sweden implemented a partial privatization back in 2001. Here's what the president of the Swedish Society of Actuaries reports:

General benefit levels have been significantly lowered, future benefits are impossible to forecast, and administrative costs have quadrupled — mostly because of the mutual fund part — to 2.0% of total benefits. (If real investment return is 3% per annum, the amount accumulated after 30 years of regular annual savings will be 22% lower if the cost factor is 2.0% instead of 0.5%.)

...Everyone in the new system is forced to speculate in mutual funds and results in the first years have been disastrous. From March 2000 until March 2003, the Swedish stock market declined by 68%. As of 31st January 2004, 84% of all accounts had lost money, despite the upturn in the market since March 2003.

So this is obviously the way to go, right?