NCPA - National Center for Policy Analysis


March 30, 2005

The U.K. experience with personal accounts provides a good model of how not to do things in America. It shows that personal accounts can be good or bad, depending on how they are designed, says Estelle James, a consulting economist on Social Security issues to the National Center for Policy Analysis.

Since 1988, U.K. workers have been able to put some of their pension funds in accounts that are invested by managers of their choosing. They had lots of choices, says James:

  • Investment choices were virtually unlimited; the result is that some workers made wrong decisions and lost billions of pounds in foregone benefits.
  • The lesson for the United States is unlimited investment choices in a mandatory old age security system is a mistake because many workers are inexperienced investors.

Fees for personal accounts have been largely unregulated, and are often high, says James:

  • As a result, in many cases, U.K. workers' pensions will be 25 percent to 30 percent lower than they would have been in the absence of fees.
  • The lesson for the United States: A mandatory personal account system working through the institutional (wholesale) market will secure much lower fees by aggregating small contributions and cutting marketing expenses.

U.K. workers can game the system by using personal accounts while they're young and switching to the State Pension system in their 50s, says James:

  • If the United States reforms Social Security by allowing workers to voluntarily switch to personal accounts, rules should limit the option to switch back.
  • Excepting Britain, almost all countries with personal account systems prohibit switching funds back to the pay-as-you-go system.

The British system has too much choice and too little safety net. In designing a personal account system for U.S. Social Security, we should take steps to avoid those twin dangers, explains James.

Source: Estelle James, "What We Can Learn from the British Experience with Personal Accounts," National Center for Policy Analysis, Brief Analysis No. 512, March 30, 2005.

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