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December 17, 2004

Response To Michael Kinsley.

Michael Kinsley has asked Andrew Sullivan for help on the matter of Social Security (part) privatisation (Found this at Tom Maguire’s place ). Leave aside for a moment his specific set of reasons why it cannot work (click through to see them).
Think instead about what is actually being proposed. That some portion of current payroll taxes be sent, not into the Social Security system to pay current benefits, but instead be sent to private retirement accounts. Very simply, that is what is being suggested, is it not?
Rather than get involved in long and learned (or not of course, dependent upon the commentator) discussions of whether this could, in theory or in practice, work or help in any way whatsoever, why not look around the world for somewhere where this was in fact done, then see what the result was?
It was done in 1987 in the UK under the sainted Maggie. Contrary to what Paul Krugman states in this morning’s NY Times it was not a privatisation, it was a part privatisation of exactly the type being mooted in the US. Yes, there are problems with pensions in the UK but they have not been caused by this change (see the other piece for more details).
What was the effect? According to the Treasury, in evidence to a House of Commons select committee:

The report's main findings were that:

    —  the vast majority of people (between 96 per cent and 99 per cent) stood to gain from opting out of SERPS;

    —  where prospective losses arose, losses per case were small, averaging between £33 and £78 a year in reduced pension rights;

—  fixed charges were a major factor in most of the cases where loss was expected, as they slowly erode small or closed policies.

  This is why the Treasury's evidence was that most people stand to gain from opting out of SERPS into a personal pension.

QED. It works.
As Mr. Kinsley now runs the editorial pages at the Los Angeles Times, do you think I should ask him for a job? After all, empirical evidence is so much more satisfying than theorising, is it not?
 

December 17, 2004 in Economics | Permalink

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Comments

There are lots of things that are done in other countries that people insist couldn't work here. Just take the issue of gun rights. In Japan, few have guns and they have a lower crime rate. In Switzerland, everybody has guns (and military ones to boot) and they have a very low crime rate. That's not to say that one or the other model is better, but you can't do both simultaneously.

It's insufficient to point out cases where partial privatization has worked. You have to further demonstrate that the important bits of their society relevant to the issue at hand are the same as or similar enough to here that you can borrow internationally.

Tim adds: fair enough point. Having lived in both places I would argue that the UK and US are indeed similar enough for such borrowing to be valid, but am, of course, willing to admit I might be wrong. When I wrote it up more formally for possible publication I did end with "Has worked elsewhere, might work in the US".

Posted by: TM Lutas | Dec 17, 2004 6:04:02 PM