|This memorandum appears in the January 21, 2005 issue of Executive Intelligence Review.
Looting of Nations by Pension Privatizationby EIR Staff
Eleven countries in Ibero-America have privatized their social security systems, under pressure of the International Monetary Fund and their creditor banks. Chile was the model for the others, both in privatizing its system in 1981, and in its spectacular failure over the long termso much so, that all forces in the country now agree it must be radically reformed. The Chilean government itself will be submitting a proposed reform to congress in early 2005.
The Chilean fiasco can be summarized in a few statistics:
In the other countries where social security has been privatized, it has followed the same trajectory of attaching billions of dollars in workers' pensions, and using it to bail out foreign banks. For example, in Peru, workers in the privatized system are forced to pay in 11.2% of their gross wage, the AFPs take an average 28.7% of the amount paid in as a "commission," and the AFP's average profit rate, as of May 2004, was 68%.
Mexico attempted a privatization of its system of retirement assistance in 1992; when that "reform" fell apart, a more dramatic privatization was legislated in 1997. The old pay-as-you-go system, based in significant part on the employer's contribution, had generated surplus reserves for years, but these reserves had often been tapped by the government for expenses and public investments. The new private funds, called by the acronym AFORES, are based very closely on the "Chile model."
The AFORES manage $30-40 billion in funds of 12 million workers previously affiliated with the Mexican Social Security Institute (IMSS). These funds were created in 1997 with very large increases in retirement contributions by the Mexican government (from 0.425% of wage under the old system to 2.425% under the new) and employers (from 9.5% under the old system to 12.9% under the privatization scheme). As a result:
The partial privatization of Argentina's Social Security system in 1994 was a major contributing factor in the explosive debt crisis, default, and economic collapse of the country in December 2001.
The other Ibero-American countries that have privatized social security to date are: Peru (1993), Colombia, Costa Rica, Ecuador, Uruguay (1994), Bolivia (1997), El Salvador (1998), Panama (1999).
Canada's Old Age Security system was privatized in 1999 with the creation of the Canadian Pension Plan (CPP). In 1997, in preparation, the Chretien government, of which present Prime Minister Paul Martin was Finance Minister, drastically raised the contribution rate (payroll tax) from 5.8% of earnings to 9.9%needless to say, creating since 1998 a substantial surplus of $74 billion, projected to keep growing through 2015. Under Law C-2 passed by the government in 1999, this surplus was then turned over to a CPP Investment Board (CPPIB); the CPP's chief actuary charged that figures were being faked in this process, and the government fired him. The CPP Investment Board's self-description: "We are an investment corporation managed independently of the CPP by experienced investment professionals drawn from the private sector." The CEO for 1999-2004 has been John McNaughton, former president of Nesbitt-Burns Investment Advisors, an investment firm linked to the Bank of Montreal.
In 1998, the Swedish social security system was opened to "the markets." Of the Swedish worker's income, 2.5% (about one-seventh of the total retirement contribution) was diverted to private accounts managed by funds, for investment in the stock market, after a TV propaganda blitz to convince Swedes they would become millionaires thereby. Though most Swedes remained opposed to privatization, it was done anyway. An Oct. 29, 2004 Swedish investigative TV report exposed those 1998 claims as simple lies, including the patently false "warning" that Swedish pension funds invested in safe government Treasury bonds would soon be losing money.
Also in 1998, the four large public funds which manage the other 16% in "pay-as-you-go" retirement contributions, suddenly shifted from 30% equity investment of those public funds, to 70% equity investments. And the government began heavily to "borrow" the funds' surpluses for general expenses, Bush-style, in anticipation of their great near-future gains!
The IT bubble's collapse ensued. The losses by the public funds are likely to increase the retirement age from 65 to 69 in near-future legislation. The individual employees, on their own modest scale, are also losing: In 2003, some 87% of all the private investors of retirement funds, in 654 investment funds available, were losing money, with an average annual loss of 10%-20%. Now, Swedish employees and retirees dread opening the bright red envelopes which contain their checks and statements about "their" accounts.
Another disastrous early privatization examplethe United Kingdom under Margaret Thatcherbroke into the U.S. debate in mid-January. Many media reported a scathing account of the British privatization scheme by a London Financial Times senior reporter, which is appearing in American Prospect magazine in February. This history of the switch to private accounts almost 20 years ago under Thatcher, is titled, "A Bloody Mess," and reports, "It was the biggest financial scandal in the United Kingdom to date." The only privatization with a longer and more conclusive history, is that of fascist Chile itself.
The study delineates the disaster and scandal which resulted from Prime Minister Thatcher's 1984-88 series of laws which forced privatization of a part of Britain's public old-age pension system. The old system, though set up after World War II, closely resembled America's Social Security in its insurance benefits and its means of funding. Thatcher's privatized system did indeed prop up the British stock and bond markets after 1988. But it was such a loss for most of the British workers who flocked into it like lemmings, that the current Blair government of Britain has had to order those workers to be paid £12 ($20 billion) in compensation, for being taken in by a swindle!
Thatcher's first government cut the old-age pension benefitsno surprise, by the same method as Bush's scheme, switching from wage-indexing of benefits to inflation-indexing. Thatcher's second government bribed (with expensive tax rebates from the public treasury) and hyped (with a huge advertising campaign) 4.3 million Britons by 1991 to shift from Social Security into private accounts, like 401(k)s. By the late 1990s, it became clear that most of those who switched, were doing much worse toward their retirement, than if they had stayed in the public system even with its benefit cuts. "On average, fees and charges [reduced] pension lump sums by up to 30% on retirement," the article reports.
The succession of stock collapses since the later 1990s has made their situation even worse: "According to the Department for Work and Pensions, in 2004 alone, 500,000 people abandoned private pensions and moved back into the state system. Government actuaries expect another 250,000 to contract back in this year."
In 2004, the Association of British Insurers urged all its member firms, to avoid further liability, to warn those still "contracted out" that they "might have made a bad choice" for their retirement.