Britain May Give Social Security to Private Firms

Major looks to Chile for dramatic pension reform and 'big idea' for election

While American politicians fret and stall over reforming Social Security, Britain may be about to take dramatic action.

Social Security Secretary Peter Lilley is proposing to phase out pensions paid for by taxes and require all workers to provide their own private pensions.

In his search for models to replace both the state pension introduced in Britain in 1948, and a second-tier, earnings-related pension dating from 1975, Mr. Lilley has looked to Latin America.

He told Parliament earlier this month that a growing inability of governments to pay for pensions through taxes is a "worldwide phenomenon" that needs a "fair" solution "suited to Britain's needs."

Lilley found his inspiration in a pension plan introduced in Chile in 1980. Last year, British government officials say, Lilley held talks with Jos Pinera, the economist who invented Chile's system, which is only now getting under way.

The new system is expected to wipe out that country's social security deficit in 30 years. In Chile, workers pay 10 percent of their earnings into one of 18 specified funds. The system is being copied in Argentina, Peru, and Mexico.

The British government's proposals would dismantle a sizable chunk of the country's tax-hungry welfare state and create what Prime Minister John Major describes as "a revolution in pensions provision." But the plan, which would offer all retired people a tax-free pension of at least L175 ($280) a week (the current state pension is L61 a week), is attracting criticism from some leading members of the opposition Labour Party, which introduced the tax-funded state pension soon after World War II.

Harriet Harman, Lilley's Labour Party "shadow" in the House of Commons, described the government's plans as "a really chilling prospect for hard-working families." Bill Day, pensions officer of the General Workers' Union, spoke of "pension poverty" resulting from the reforms.

Seeking to answer such criticisms, Mr. Major told the Commons that, although workers in the future would be required to take out a private pension through an insurance company, future governments would "intervene and make up the difference" if their plans yielded less than the projected weekly payment of L175.

Major and Lilley surprised even some of their close political associates by unveiling a controversial program only two months before a general election that the government is widely forecast to lose.

One of the prime minister's officials said he wanted a "big idea" to show voters that the Conservatives were still capable of "constructive policymaking."

In fact, however, says Frank Field, a senior Labour Party politician who favors private pensions, Major and Lilley are responding to a problem that is afflicting developed economies as far apart as Germany, Sweden, the United States, Japan, Singapore, and Australia.

"As birth rates fall, and life expectancy increases, fewer and fewer taxpayers are having to fund the pensions of older people," says Mr. Field, who, though an opposition member, chairs the Commons social security committee.

Lilley described government pensions for the elderly as "a financial juggernaut bearing down on future generations."

Figures from the Paris-based Organization for Economic Cooperation and Development indicate that in the US, for example, tax-funded pension payments, currently around 4 percent of gross domestic product, will rise to around 7 percent of GDP by 2030. Contributions, however, will remain flat at between 4 and 5 percent over that period.

Lilley points out that when state-paid pensions were first introduced in Britain, the ratio of retired people to those in work was 1 to 5. Today it is 3 to 5. According to Britain's social security ministry, Lilley's plan, when operational, would save the government up to L40 billion a year.

The program had an expected warm welcome from insurance companies that would provide the pension plans. David Prosser, chief executive of Legal and General, a leading private pension provider, says the plan offers "a breakthrough, giving a fair pension for everyone."

But Labour's Field, though friendly to the concept of private pensions, is more cautious. "There are risks involved," Field says, "and Britain should proceed with great care." So far, he says, no country has moved to an exclusively private pension plan. "Chile is moving in that direction, but it is still some years away from when the first pensions have to be paid," he says.

Field concedes that Lilley has done Britain and its taxpayers a service by "starting a great debate on pensions."

Some analysts warn that there will be heavy initial costs to the government, peaking at about L7 billion a year, as money currently paid as taxes to fund state pensions is diverted into private plans.

Economist Tony Jackson says the government's move should be warmly welcomed by insurance companies and would be good for the British economy. "For those who make a living handling other people's savings, it means business," he says.

Lilley also said that private retirement plans will "cut the need for government borrowing as well as spending," and "divert investment funds into the provide sector," thus "promoting industrial growth."

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