The budget agreement reached last week by Congress and the White House allows for a token of 300,000 Medicare recipients to establish their own medical savings accounts. It is a small step toward financial independence and security for the elderly and for the Baby Boomers whose retirement will break the Social Security “bank” if something isn’t done soon. That something should resemble what the British have created.
Both the Labor and Conservative parties have agreed to partially privatize the British Social Security system, permitting workers to redirect a portion of their payroll taxes into stocks, bonds and other private investments. Unlike the American system, which taxes workers to pay for retirees, the British system allows workers to save their own money at high interest rates and guarantee that even if markets go sour, their benefits will be at least as generous as the state system.
Nearly three-fourths of the British workforce has already elected to enroll in private pension plans. They are seeing a 13 percent per year median return on their investments (compared to just 2 percent in the American Social Security system). The lighter government burden has lead forecasters to predict that Britain will have completely eliminated its national debt (not its annual deficit, its total accumulated debt) by the year 2030. That’s about the time the United States will face economic disaster if it refuses to reform its Social Security entitlement. The Congressional Budget Office estimates that if nothing is done, the U.S. debt will have soared to $39 trillion by 2030 and Social Security will go bankrupt a year earlier.
An analysis of the success of the British system has been written for The Heritage Foundation by Louis Enoff, former deputy director of the Social Security Administration, and Robert Moffit, Heritage’s deputy director of domestic policy studies. They write that Britain’s two-tier system consists of 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, established in 1978.
As in America, need quickly outstripped resources, so now British workers have two choices: They can remain in SERPS, or they can take a payroll tax cut equal to 4.6 percent of their annual earnings (about one-third of their total required pension contribution) and invest it in a private pension plan. This would be either a company pension plan or a personal plan similar to our IRAs.
The choice has produced private pensions worth 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 demands on government reduced, public debt has significantly declined.
British lawmakers guaranteed that privatization would give workers benefits at least as generous as those provided by government pensions. Under British law, the investment companies managing private pension funds must provide workers with as much retirement income as they would have under SERPS. In practice, private pension plans are delivering incomes more than double SERPS. Any British worker who wants to remain in SERPS may do so and those workers and retirees already in SERPS suffer no benefit cuts.
Enoff and Moffit say the British model would work in the United States. And last year, the best option among three recommended by President Clinton’s Social Security Advisory Council to restructure Social Security would have adopted a version of the British model. At the time, opponents called the idea “radical.” The British don’t think so. They’re on the way to real financial stability and the elimination of their national debt. British workers and retirees are receiving real financial security because it’s their money and most will no longer have to rely on government taxation of their fellow citizens.
On this issue, the United States should follow the lead of the mother country, and soon.
