State Privatization Programs Unpopular, Unsuccessful
President Bush has said that Americans want to join the "ownership society," and his Social Security privatization plan counts on two-thirds of those eligible diverting funds into private investment accounts.
But public employees in seven states -- offered the chance for similar private accounts over the past decade -- almost universally rejected the opportunity.
Of more than 1.5 million public employees offered the choice of accounts at various points in the last decade, about 125,000, or 8%, have signed up, according to a Feb. 22 story in the Los Angeles Times, with the vast majority of those during the stock market boom of the late 1990s.
Furthermore, the employees were found to lack investment knowledge -- putting them at risk to underperform their colleagues avoiding the private accounts. That apparent lack of comfort was often cited as a reason for the private accounts unpopularity.
How unpopular are the privatization efforts at the state level?
-- In Florida, early surveys suggested more than half of the state's 600,000-plus public employees suggested would go for accounts. But since the accounts' introduction in 2002, 43,000 employees, or about 7%, have enrolled.
-- In Michigan, in spite of the state offering to contribute generously to the accounts, about 3,000 workers out of 57,000 signed on since the format was created in 1997, according to state officials.
-- In Ohio, teachers and state and local workers were given a choice starting in 2001 of private accounts or a hybrid that combined a pared-down pension with an account. Less than 5% picked accounts.
-- When Montana made a similar offer to 30,000 state workers in 2002, it spent $1.5 million to set up the new system, conducted more than 600 seminars and gave people a year to decide. The result, according to Michael J. O'Connor, executive director of the state's Public Employee Retirement Administration: 900 chose accounts.
In many cases, state and local pensioners felt uncomforatable making their own investment decisions -- the very power that Bush touts when he trumpets the privatization program.
"We get individuals into our training sessions and ask them about basic investment terms — What is a stock? What is a bond? — and they rate themselves as practically unknowledgeable," Washington state retirement director John F. Charles told the Times. The result, Charles and others said, has been a series of investment choices that officials fear will leave many workers without adequate funds after they retire.
In West Virginia, teachers who shifted from pensions to accounts plowed 40% of their money into investments so conservative that they effectively ensured that they would get a pension-like payment in old age — but at a lower benefit level than in the system they had left behind.
In Montana, those who chose accounts allowed the majority of their money to flow into a default investment set by the state, a balanced fund of half stocks and half bonds. While that may seem like a sensible decision, O'Connor told the Times that it showed account holders were not actively managing their money.
In Nebraska, state and county workers failed to outperform those with fixed-benefit pensions. The Nebraska Legislature quickly ended the program.
"If people have private accounts in Social Security and they're left to make the decisions themselves, the results likely will not be positive," Anna Sullivan, executive director of the Nebraska Public Employees Retirement Systems, told the Times.
Joseph Jankowski, executive director of the West Virginia Consolidated Public Retirement Board, echoed Sullivan's remarks: "The vast majority of people don't have the inclination or comfort level to be responsible for their own retirements." The Times reports that West Virginia board officials are currently debating whether to drop the state's private account plan.