LONDON -- A conservative political leader, basking in a second-term electoral victory, announces a plan to rescue the state-funded retirement system from a looming deficit crisis. One of the leader's keystone proposals: allow participants in the system to divert a sizeable chunk of their contributions to private savings accounts where they can get a better return than in the government system.
Sound familiar? What President Bush is proposing for the United States closely echoes the privatization plan that then-prime minister Margaret Thatcher -- an apostle of rolling back the modern welfare state -- implemented in Britain in the late 1980s. Millions of Britons flocked to Thatcher's plan, egged on by government subsidies, by hard-selling private investment funds and by state-sponsored advertisements showing a pair of hands breaking free from the chains of government regulation.
A protester attends a September rally in London of British pensioners seeking an increase in benefits.
Social Security Around the World As U.S. Considers Private Accounts, Experiences in Chile and Britain Provide Some Inspiration and Offer Cautionary Tales
But for many investors Thatcher's plan has fallen flat. Many investment funds charged huge commissions and fees, leaving contributors worse off than they would have been in the state system. The stock market collapse four years ago compounded their losses. Meanwhile, many private pension plans have gone bust, after companies drained those plans to pay off rising debts.
These days many of the same insurance companies and banks that heavily sold their funds are sending out letters suggesting that customers rejoin the state system. Since November alone, an estimated 90,000 clients have followed that advice.
"You've got a situation where people were told the best thing to do is go private and now, 15 years later, the same people are being told to go back to the state system," said Neil Duncan-Jordan, spokesman for the National Pensioners Convention, which represents 1.5 million retirees. "It hasn't exactly boosted public confidence in the system."
Like many Western countries, Britain faces a pension crisis fueled by demographics. The Pensions Commission, an independent body established by the government, says the percentage of Britons age 65 or older will double over the next 50 years. All of the potential solutions, a recent commission report suggests, are painful: People must either retire later, pay more taxes or manage on lower benefits.
"Until 20 years ago, when it came to pensions, the state was king and virtually everyone was looked after," said Tom McPhail, head of pensions research at Hargreaves Lansdown, a private asset-management firm. "Now everything is massively more complex, people have lost the support of the state and their employer and everyone has to stand on their own two feet."
Thatcher came to power in 1979 promising to rein in what she called "the nanny state," including Britain's state retirement system. One of her first moves -- similar to what the Bush administration is considering -- was to change the indexing formula so that basic state pensions rose according to the rate of inflation rather than the rate of wage increases. Unnoticed at the time, it amounted to a huge long-term reduction in pension payments.
After she won reelection in 1983, Thatcher and her treasury chief, Nigel Lawson, turned their attention to the state pension fund. Unlike the U.S. Social Security system, Britain has a two-tiered fund, providing a minimal pension (currently about $150 per week for individuals and $240 for couples) and a more generous supplemental system known then by the acronym Serps. Faced with projections that Serps would be running a deficit within a decade, officials proposed cutting it back and allowing recipients to invest their funds in private accounts -- similar to the Bush proposal.
Britain's own actuaries indicated that personal pension plans would only be profitable for a limited slice of taxpayers -- perhaps 500,000 who were either young enough to benefit over the long run or relatively well-off. But a hard-sell campaign by the government and private fund providers led to a stampede -- more than 5 million people opted for the private system.