Investor’s Business Daily
Stealing Pensions
Social Security: Europe is trying to dig out of its budget hole by seizing private pensions. It's a last-ditch effort to preserve socialism at the expense of the very assets that would sustain its future growth.
In Hungary, Poland, Bulgaria, Ireland and France, big government, a demographic death spiral and weak tax revenues have left fiscal coffers in trouble. Unwilling to stand up to voters — or rioters — most governments have little taste for doing the right thing: cutting their budgets.
So, they're going after pensions to make up for shortfalls. Public and private pensions co-exist in European countries. In some cases, public ones resemble our own Social Security, stressing budgets.
But instead of privatizing pensions, as Chile did in 1980 — which would have turned these obligations into assets — three former stars of European emerging markets have come up with heavy-handed incentives to turn private savings public. It's a step backward.
In November, Hungary's parliament ordered its nationals to fork over $14 billion in private pensions to the state, effectively nullifying the country's 1997 pension reform. Anyone who balks loses his right to a public pension, but not his obligation to pay into it anyway.
Bulgaria's parliament named its price first — $300 million — and told workers to pay that from private savings or else. The Christian Science Monitor notes that had trade unions not protested it, the amount would have been five times larger. But they still lost.
Poland's parliament, in a move strongly opposed by the NSZZ Solidarnosc union, cut contributions to private accounts by a third, diverting that money to the public system at a cost of $2.3 billion a year.
France and Ireland were less heavy-handed, but also aimed to avoid austerity. Both siphoned public savings set aside for future years of pension payouts to the spending spigot. In Ireland's case, they spent money citizens contributed for retirements to bail out banks, while in France's case, to pay for underfunded current pensions.
All of these moves amount to short-term fixes for deep structural problems that call for governments to cut spending.
Curiously, big socialist governments always end up making the old pay. If it's not killing them off — as what happened in France during the 2003 summer heat wave when doctors went on vacation and air conditioners were shut off — it's through euthanasia laws in the Low Countries that help governments "control costs," but leave the elderly afraid to seek care. Now they're simply going after private savings.
But by taking tomorrow's money and spending it today, not only are the elderly cheated, the young are robbed, too. Far from being just payouts to retirees, private pensions are also a key channel for investment and economic growth. Just look at Poland's stock market.
As money was being siphoned away from private holders, Reuters reported that Poland's WIG20 stock index posted its biggest two-day drop since August, falling 2.8%. Equity purchases by pension funds are now expected to drop by two-thirds this year to just $1.4 billion. That means a lot less private money to build the economy.
There are two reasons nations do this, according to Johns Hopkins University economist Steve Hanke, who previously helped manage private pension funds in Argentina. (Argentina's private pensions were crudely expropriated in 2008.)
"One, politicians' urge to redistribute wealth, taking it from the deserving to give to the undeserving," he said. "Two, the notion that the public sector can manage assets more efficiently than the private."
Hanke scoffs at both, noting the success of Chile's private pensions, which in 30 years yielded an average 9.23%. Meanwhile, his own Toronto Trust Argentina fund was rated the world's best-performing mutual fund in 1995 by Standard & Poor's Micropal.
So Europe ends up stiffing both its young and its old by seizing private pensions. And who's the big winner? Socialist government.
With similar problems for Social Security looming in 2015, it behooves the U.S. to watch this mess — and to avoid repeating it.