As the subject of entitlement “reform” once again rears its head, we would do well to look at the experience of Italy. As Bloomberg reported recently:
Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.
The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.
While earlier conservative governments made cuts to Italy’s basic social security program and raised the retirement age, it was the leftist government of Romano Prodi that instituted a privatization option for of the TFR, a lump-sum payment that Italians receive when they retire.
According to Bloomberg, “The TFR plan was meant to dent Italy’s risk-averse culture and lure more people to investment funds.” The (apparently wise) Italians invest in the stock market at very low rates, preferring to keep their money in the bank. In fact, only 10 percent chose to shift their TFR funds to the private plan–but those people have seen their money evaporate as Italy’s benchmark stock index fell 50 percent in 2008.
Efforts to privatize a portion of the U.S. Social Security system have failed under both the Clinton and Bush administrations. (A leading proponent of partial privatization under Bill Clinton was Deputy Treasury Secretary Lawrence Summers, soon to become Obama’s chief economic advisor.) But a combination of recession and demographics, fueled by disinformation, already seems to be reviving a debate that had been written off as the “third rail” of American politics.
While “privatization” may have become a dirty word, we might instead simply see cuts to Social Security and Medicare, leaving old people to fall back more and more on their own resources–which in the end, amounts to pretty much the same thing.