WASHINGTON—The man in charge of recommending changes to Great Britain's retirement system offers Americans a warning: Beware of changes to Social Security such as those President Bush is urging.
Nearly 20 years ago, Britain adopted a form of personal investment accounts much like the one Bush proposes. Britain also changed the way it calculates retirement benefits to adjust for inflation, keying them to consumer prices rather than wages, as Bush and others are considering for Social Security.
The result: "We have created the most complicated pension system in the world," said Adair Turner, a Merrill Lynch vice president and the chairman of the United Kingdom Pension Commission.
Moreover, Turner said, contrary to the benefits promised when the British changed their system, their new approach isn't increasing national savings, isn't fostering an "ownership society" and workers are retiring poorer than they did before.
As a result, Turner is looking at revising Britain's system again to make it more like the traditional U.S. Social Security system that Bush proposes to change.
Britain's system works like this: All workers get basic state pensions paid for by a tax on each worker's wage. On top of that they get a second-tier benefit whose amount varies according to how much they've earned. Many workers have company pensions or 401(k)-style investment plans as well. The tax on wages also funds an additional safety-net payment for people whose basic pensions leave them below the poverty line.
Since 1987, Britain has allowed workers to "carve out" a portion of their wage taxes to invest in stocks and bonds, much like Bush's proposed personal accounts. British workers accept a cut in their future guaranteed retirement benefits in exchange for the chance that their investments might earn more.
The program initially was hailed as a success, peaking at 4.3 million participants in 1991. The accounts were designed to encourage individuals to take ownership of their retirement. They, not the government, would build nest eggs for life's waning years, the same "ownership society" message that Bush delivers in selling his proposal.
"The problem is that simply isn't occurring," Turner said during a recent address to AARP, the powerful lobby for Americans 50 and older.
Britons aren't saving more for retirement, and they aren't earning more in private accounts, according to the Pensions Policy Institute, a research group in London.
"It is not a panacea," said Alison O'Connell, the director of the institute. Indeed, the British government had to provide the additional safety-net payments to subsidize citizens whose pensions fell short of a minimum income.
U.S. Social Security benefits are indexed to rise with wages, but Bush and lawmakers are weighing a shift to a price-based index to cut costs.
Because Britain indexed pension benefits in 1979 to rise in line with prices, the basic state pension grew so slowly that Britons now receive among the most meager pensions in the developed world. Their pensions would have been 24 percent higher had they continued to be indexed to growth in wages, which tend to rise faster than prices.
Some British lawmakers and the influential Trades Union Congress are calling for Britain to return to wage-indexed benefits.
In an interview, Turner was careful to avoid direct criticism of Bush. But he did note that the president's plan to borrow trillions of dollars to pay for the transition to his new system would defeat the goal of boosting savings.
"If they are fully offset by borrowing to the full amount, then by definition they are not increasing the national savings rate," he said.
White House Spokesman Trent Duffy countered that once personal accounts were completely phased in decades from now, the transition debt would be over, private accounts would be gaining capital, government would be paying less in benefits, and thus national savings would expand.
Turner spotlighted another problem for Britain: Its changes were made without enough regulation. Insurance companies were allowed to sell private accounts to older workers who would've been better off staying in the traditional retirement system; they were too old for their investments to grow much through compound interest.
In addition, bank fees and administrative charges ate up as much as 30 percent of retirees' benefits before regulators stepped in with new rules.
President Bush promises that a government agency would administer the personal accounts, which would be contracted out to a private fund manager that could invest only in conservative stock and bond index funds. That, administration officials say, would safeguard against the abuses that occurred in Great Britain.
Turner offered some advice for Americans as they wrestle over what to do about projected funding shortfalls in Social Security. He suggested raising the retirement age and tying pension benefits to life expectancy. Since Americans are living longer, they could work longer and pay into the pension system longer. He also said that pension benefits, now paid as fixed amounts, could be raised annually for each year a worker stayed on the job past the typical retirement age.
"We've got to get society to understand ... that an essential part of dealing with that demographic challenge is an increase in average retirement age," Turner said. "And it is better to say these are unchanged benefits at a later retirement age rather than, `Good news, your retirement age is going to stay the same, but through some indexation process that you don't fully understand, we are going to cut the benefit.'"
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(c) 2005, Knight Ridder/Tribune Information Services.
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