February 12, 1999

February 12, 1999 | News Releases on Retirement Security

Britain Offers Good Model for Social Security Reform, Analyst Says

WASHINGTON, FEB. 12, 1999-As members of Congress debate the best way to reform Social Security, they should consider emulating the privatization measures used in Britain, where workers enrolled in private pension plans exert greater control over their money and enjoy a higher return on their investments, says a new paper by The Heritage Foundation.

"America's Social Security reformers can learn a great deal from the British experience," writes Robert Moffit, a domestic policy expert at Heritage. In fact, the House Ways and Means Committee heard yesterday from Peter Lilley, the member of Parliament who spearheaded Britain's privatization efforts under former Prime Minister John Major. Numerous other countries, including Australia, Sweden, Poland and Mexico, have also privatized or partially privatized their government-run pension systems, but strong economic and political ties between the United States and Britain make comparisons particularly relevant, Moffit says.

The current British program features a two-tiered system of government and private-sector pensions. As with Social Security in the United States, payroll taxes fund the main government pension, which pays a flat rate to British retirees. Workers may also take advantage of a second government pension, known as the State Earnings Related Pension System (SERPS), that pays benefits based on an employee's earnings.

But unlike with Social Security, British workers may "opt out" of the second government pension and divert a portion of their payroll tax to private plans that offer significantly higher returns. More than two-thirds of British workers have placed their retirement funds in private plans, Moffit writes, where they earn a 10 percent rate of return-a dramatic improvement over the 2 percent realized by U.S. workers under Social Security. This pool of private pension funds now totals almost $1.4 trillion in U.S. dollars-larger than the entire British economy or the pension funds of all other European nations combined.

Britain's Labor government is now proposing further reform by creating new, low-cost "stakeholder pensions" for workers who lack employer-based or personal pensions, and by replacing SERPS with a new government pension targeted to low-income workers.

The British experience shows that serious reform of a major entitlement program is not only possible but prudent, Moffit writes. "If Washington policymakers take the British lessons to heart, the next generation of American workers should enjoy a much more secure and prosperous retirement."

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