Privatization not the best idea

By BJ

One of George W. Bush’s great failures, (failure in this case meaning something he actually failed to do, rather than its usual use, for things he was successful in doing that then turned into complete FUBARs), was his inability to privatize Social Security, something for which Americans should be immensely grateful for these days. Italians, whose government was partially successful in just such a scheme, are learning the lesson the hard way.

Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.

The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.

Prime Minister Silvio Berlusconi’s administration is now considering ways to compensate as many as 1.2 million people who made the switch, giving up a fixed return for private plans linked to financial markets. It’s also letting people delay redemptions on retirement funds to avoid losses after Italy’s benchmark stock index fell 50 percent in 2008, destroying 300 billion euros ($423 billion) in wealth.

“The reform didn’t help anyone,” said Gabriele Fava, who heads the Fava & Associati law firm in Milan and writes about labor law. “Not the government, which was hoping everyone would make the switch to take the strain off its coffers, nor the workers who have not resolved the problem of needing a supplement to their social security pensions.”

Those who shifted their retirement savings into private funds lost much of them, and the government which forwent that money in the hopes of easing its own financial difficulties in the future now needs to find additional money to replace it. Something sold as a way to save government money winds up costing more than if they’d left well enough alone.

Somehow I doubt such results will have the least impact on the arguments of those who support such privatization.  The debate is ideological rather than fact-based.  In any case, Americans should be real happy the ideologues failed with this one, or the current crisis would be even worse than it already is.