In Britain and Chile, lessons for revamping Social Security

Under the old system, they would have received none of Manuel's pension if he had worked a day less than 10 years. And even then he still might have taken a loss. Before 1980, many people were paying in more than they got back, explains Tomas Flores, an analyst with Freedom and Development, an independent think tank in Santiago.

"Workers used to have to contribute 34 percent of their salary to pensions and limited health coverage. Today it's only 12 percent for pensions and 7 percent for optional health coverage," he says. "And the returns on that investment are much higher under the new system."

Mr. Flores says one problem Chile has grappled with is administrative costs and the lack of choice. "In Chile, there are only six options, and, really, three of those companies cover the bulk of pensions. My advice to the US is that they try to ensure healthy competition among pension plan providers, perhaps letting banks get involved, too."

Unbridled competition was the name of the game in Britain 15 years ago. In the late 1980s and early 1990s, workers snapped up the government's offer to switch some of their social-security payments to private accounts. The deal involved a lump-sum rebate from the state, a personalized retirement portfolio, and exposure to booming financial markets.

Now, more than a million people have claimed they've been duped in what was dubbed the "pension misspelling scandal." Lawsuits followed, and the government has paid out more than £13 billion ($24.9 million) in compensation. The scandal "eroded confidence in the pension system," says Carl Emmerson, an expert with the London-based Institute for Fiscal Studies.

The British pension-reform movement was born in the mid-1980s, when Prime Minister Margaret Thatcher promoted - and the public embraced - a credo of individualism, shareholder capitalism, and personal control over financial affairs.

Though the plan was voluntary, 6 million people, or eight times the government's estimate, took up the offer to switch out of the State Earnings Related Pension Scheme (SERPS) and into private pensions. "But it was put in place without any controls over the insurance industries selling the policies," says Noel Whiteside, a pensions expert at Warwick University, in central England.

Under the new plan, workers were responsible for investing their own retirement money. Pension sellers, working on commission, frequently coaxed them into unsuitable products, often overstating the potential for returns. "A lot of people were persuaded to leave good occupational schemes and transfer assets to personal pension plans," Dr. Whiteside says.

Richard Idle, a security worker, says he was missold a pension in 1988 by a car-insurance salesman. Four years later, his benefits were paltry and he scrambled to rejoin a company scheme. He was awarded compensation from the government of almost £20,000 ($38,000).

"I thought [the sellers] were advising on what was best, but afterwards I realized they were advising me on what was best for them," he says. He says that the current system is overly complex. "There is no way any normal working man is going to have any concept of it all," he says.

Scores of retirees still rely on a basic state pension, which was left in place after the 1980s reforms, though on a more limited basis. At £80 ($150) a week, it is considered modest, and pension advocate groups say some 2.5 million elderly currently languish in poverty.

Professor John Hills at the London School of Economics says that Mr. Bush's proposals appear to involve collective funds, which would reduce costs. "If that's the case, a lot of the costs would be pooled across many people and so would not be as high as in the UK," he says.

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