Countries Backtrack on Privatizing Retirement

Some governments raid private accounts in times of need

A man works on the production line at a cider plant in Bilgoraj, Poland, on Aug. 27, 2014.

Photographer: Bartek Sadowski/Bloomberg

When Poland introduced private retirement accounts in 1999, the government gave its blessing to a $100 million ad campaign explaining why workers were required to contribute. Privately managed savings accounts would assure a comfortable retirement, the pitch went, while giving a boost to Polish capital markets and taking pressure off the underfunded state social security system.

Last year, the Polish government seized more than half the assets held in the individual accounts, telling workers that the state social security system would pay their benefits when they retired. “It was highway robbery, the strong taking from the weak,” fumes Marcin Jaworski, a 34-year-old tax consultant in Warsaw. “I expect the public pension system to go bust,” he says.

Poland is among 11 countries that have recently rolled back or abandoned efforts to privatize their retirement systems. The latest to backtrack was Bolivia, where President Evo Morales in mid-January nationalized $10.2 billion held in individual retirement accounts.

Starting in the 1980s, more than 30 nations in Latin America and the former Soviet bloc overhauled their retirement systems to create individual savings accounts. Unlike the U.S., where private retirement accounts such as 401(k)s are optional, most of these countries required workers to contribute a minimum percentage of their pay. The privatization, strongly encouraged by the World Bank and the International Monetary Fund, reflected what was seen as an urgent need to backstop traditional government retirement systems in which benefits are paid by contributions from people still working. These so-called pay-as-you-go schemes face funding shortfalls in many countries, including the U.S. But the problem is especially acute in countries such as Poland where birthrates have declined or many young people work abroad.

Privatization was supposed to “provide greater financial stability and make pensions less prone to political interference,” says Stephen Kay, an economist at the Federal Reserve Bank of Atlanta. So far, it appears to have achieved neither goal.

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What went wrong? In some places, such as Bolivia and Peru, private pensions never took hold because a majority of the labor force works off the books. “If you put in a system that doesn’t touch 90 percent of the population, what good is that?” asks Tapen Sinha, a professor at Mexico City’s ITAM who studies pension policies. Even Chile—which in 1981 became the first country in the world to replace its state-run retirement system with privately managed personal retirement accounts—reintroduced some public benefits in 2008.

Another problem: In some countries, returns on individual retirement accounts fell far below expectations. In Poland, the government took private fund managers to task for charging high managing fees and barred them from advertising to attract new business. But authorities were partly to blame, because they required that private retirement savings be invested only in Polish stocks and bonds, says Maciej Bitner, chief economist at the Warsaw Institute for Economic Studies. And building a nest egg takes time. Bitner says the average benefit collected by a Polish worker who began putting money into a private plan 15 years ago is 80 zlotys ($22) per month, compared with an average 2,000 zlotys a month under the traditional system, which remains in place alongside private accounts.

Some governments couldn’t resist the temptation to dip into the growing pool of private savings when national budgets were under strain. Hungary and Argentina canceled their private schemes and poured the money into state coffers. Poland said it seized $42 billion held by private fund managers to pay debts the government accumulated to shore up the public social security system.

ITAM’s Sinha expects other countries to join the retreat. Mexico introduced private retirement accounts in 1997. Only about one-third of workers participate, and benefits from private accounts are likely to be far lower than forecast, he says. That will create “tremendous political pressure” to increase benefits under the public-financed retirement system, which may cause it to go bust within 15 years.

—With Maciej Onoszko

The bottom line: At least 11 countries have scaled back or scrapped their systems of privately managed retirement accounts.

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