March 9, 1999

March 9, 1999 | News Releases on Social Security

Britain Points the Way for U.S. Social Security Reformers

WASHINGTON, MARCH 9, 1999-The British model of pension reform, which has gradually introduced measures allowing British workers to invest privately for retirement, offers important lessons for U.S. lawmakers debating how best to reform Social Security, according to Peter Lilley, former secretary of state for Social Security in Britain, in recent testimony before the House Ways and Means Committee of Congress.

Rather than "taxing those who work to pay for the pensions of those already retired," the British government "encourages people to save and invest during their working life to pay for their future pension," said Lilley, the member of Parliament who spearheaded Britain's privatization efforts under former Prime Minister John Major. This pool of private pension funds now totals more than $1.3 trillion in U.S. dollars-larger than the entire British economy or the pension funds of all other European countries combined.

"The International Monetary Fund has calculated that if [European] countries maintain their present systems, then by 2050 France and Germany would accumulate government debts nearly twice their national income," Lilley said. "By contrast, the United Kingdom would have paid off its entire national debt and accumulated a surplus."

The 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 British workers, unlike workers in the U.S. Social Security system, 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, where they earn a 10 percent rate of return-a dramatic improvement over the 2 percent realized by U.S. workers under Social Security.

"There is now more of a political consensus in Britain that private pension provision is a success and that, wherever possible, more people should be enabled to opt out of the state system," Lilley said.

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