September 15, 1997

September 15, 1997 | Commentary on Social Security

ED091597a: Somebody Fixed Social Security?

You can touch the "third rail" of politics and live to tell about it.

Politicians in a wealthy Western democracy with a large baby-boom population and "entitlement" programs headed for bankruptcy (welfare, Medicare, Social Security--sound familiar?) have done what is considered politically impossible in the United States: reformed their Social Security system.

 Even more remarkable is how they did it. Rejecting the standard "fixes" such as raising taxes, they elected to partially privatize their state pension (Social Security) system, allowing workers to put part of their payroll tax into mutual funds, annuities and other private investments.

Nearly three-fourths of all eligible workers have taken advantage of the private pension option. The result: an inflation-adjusted median return on their investments of roughly 9 percent a year (compared to 2 percent under the U.S. Social Security system). On top of that, the economic growth caused by savings, forecasters predict, will completely eliminate the nation's national debt--not deficit, debt--by the year 2030.

Where can U.S. politicians learn to perform a similar feat for the United States? They can ask their mother--country, that is. This bold experiment in Social Security reform took place in none other than Great Britain, a country whose economy and culture closely mirror America's.

Britain's success has been largely ignored in America. But a new Heritage Foundation report by Louis Enoff, former deputy administrator of the Social Security Administration, and my colleague Robert Moffit says the British experience contains a number of lessons for U.S. politicians.

Britain has a two-tiered government retirement system: a basic state pension, created at the end of World War II, and a supplemental layer of benefits called the State Earnings Related Pension Scheme, or SERPS, created in 1978. In 1986, just eight years after the creation of SERPS, it became apparent that government pension benefits would soon outgrow the money coming in to pay for them. So British officials offered the privatization option.

Workers in Britain now have two choices: They can remain in SERPS, or they can take a payroll-tax cut equal to about one-third of their required pension contribution and invest it themselves. The private options include either a company pension plan or a personal pension plan similar to Individual Retirement Accounts available in the United States.

It's a tremendous success. British workers have rushed into the private options, which have been delivering impressive rates of return. British workers now own private pensions worth 650 billion pounds (more than $1 trillion), an amount approaching the size of the entire British economy and exceeding the pension funds of all other European nations combined.

With personal savings way up, the British economy has the capital necessary to expand. This is easing demand on the government's coffers and therefore wiping out Britain's national debt. In 2030, the year the Organization for Economic Cooperation and Development predicts Britain will erase its national debt, America will have a debt of $39 trillion (according to the Congressional Budget Office), due primarily to the growth of entitlement spending. Coincidentally, Social Security, the largest entitlement, is projected to go bankrupt in 2029.

Enoff and Moffit say a system like Britain's could be successfully duplicated in the United States. In fact, a proposal to restructure the U.S. Social Security system along the lines of the British model is already on the table.

Oddly enough, the privatization option is considered the most "radical" of several being considered for the United States. But for Britain, privatization is just good common sense.

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Note: Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington-based public policy research institute. Additional information about The Heritage Foundation can be found on the World Wide Web (www.heritage.org).

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office