Making Old Age Less Safe

It is almost an optical illusion: looming on Japan’s horizon, and on Europe’s and on America’s, is a pensions crisis. The problem is real, though exaggerated. The illusion is in some of the plans being devised to deal with it.

The main question is whether privatizing pension systems, as President George W. Bush has proposed for Social Security in the United States, would solve the problem or merely make matters worse. With many countries pondering whether to adopt variants of the Bush plan, the question requires careful examination.

By itself, privatization is clearly not the solution. America’s troubled private pension system – now several hundred billion dollars in debt – already appears headed for a government bailout. There was a time when privatization – allowing individuals to set up individual savings accounts – seemed better than Social Security, which invests in lower-yielding Treasury bills. Advocates of privatization argued that funds would do much better if invested in stocks, predicting a return of 9%.

But the stock market does not guarantee returns; it does not even guarantee that the stock values will keep up with inflation – and there have been periods in which they have not. America’s Social Security system insulates individuals against the vagaries of the market and inflation, providing a form of insurance that the private market does not offer.