Proponents of Social Security privatization often claim that their motive is to help workers. Armed with sunny sales pitches and multi-million dollar marketing budgets, privatizers claim that individual accounts would give workers “better returns,” “freedom of choice,” and “improved efficiency.” Interestingly, though, these groups that are purportedly fighting for workers are not funded by workers, but by the finance industry. Given this potential conflict of interest, one might reasonably question whether privatization would really help working people or whether such reform would simply benefit Wall Street. Evidence from Britain, where the social security system was partially privatized more than a decade ago, suggests that the finance industry is the main beneficiary.
The United Kingdom has a two-tier pension program. The first tier, called the basic state retirement pension (BSP) provides a modest flat-rate benefit. When it was originally implemented in 1908, the first tier did not require workers to pay in and only disbursed benefits to needy retirees. In 1925, the program was redesigned: the means testing requirement was dropped and contributions were mandated. Currently, the BSP provides a full benefit of approximately $105 in U.S. currency per week to all workers who contribute for the requisite number of years (44 years for men, 39 for women).
A second tier pension was added in 1961. Called “graduated pensions,” benefits for the program were based on earnings. Graduated pensions were designed to provide workers with modest benefits to supplement their basic state pensions. The second tier was reformulated in 1978 when graduated pensions were replaced by the more generous State Earnings Related Pension System (SERPS). Similar to the U.S. Social Security system, SERPS is run on a pay-as-you-go basis (meaning that today’s contributions pay today’s retirees) and contributions and benefits are based on earnings. Workers earning less than the lower limit of $95 per week do not contribute to the system and are not eligible for benefits. Workers who earn more than the lower limit must contribute 2 percent of earnings up to $95 per week, plus 10 percent of earnings over $95 and below $719 per week. Employers also contribute between 3 and 10 percent of employees’ earnings. SERPS benefits replace approximately 25 percent of a worker’s pre-retirement wage, based on his or her 20 highest-earning years. Since the inception of the program, employers have been allowed to contract out of SERPS and substitute their own pension plans, provided they offered benefits at least as generous as the public program.
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