How Safe are Americans' Private Retirement Savings?

Five European governments are in the process of seizing retirement funds. Could it happen here?

In Europe, the cost of socialism is apparently reaching critical mass. According to the Christian Science Monitor, five countries--Hungary, Bulgaria, Poland, Ireland and France--are in various stages of confiscating or attempting to confiscate citizens' pension savings as a means of offsetting government revenue shortfalls.  Since most pensions plans in Europe are state-generated, such seizures are relatively easy to accomplish.  Yet while two of the attempts are being made to get back savings invested in national funds, the other three are grabs for "private personal savings."

On November 24, 2010, the Hungarian government approved a series of laws forcing their citizens to go back into a state-controlled pension plan.  Hungary has a "three pillar" pension system: pillar one is a state-funded pay-as-you-go pillar; pillar two is a mandatory private pension deducted from gross wages and invested in the market; and pillar three is a private pension in which workers can invest some of their net income for additional future savings.

The government has scrapped pillar number two and offered Hungarians a stark choice: either remit their private pensions savings to the state, or lose the right to collect a pillar one state pension--even as the obligation to continue contributing to it would remain.

Such a confiscation would raise $14 billion, which represents the savings of nearly three million pensioners over the course of 13 years.  It is an amount of money equivalent to 10% of Hungary's GDP, and government insists the seizure is necessary to satisfy the demands engendered by the European Union and International Monetary Fund assistance it has already received, which included a strict budget deficit target of 3% of GDP in 2011.  Hungarians have until January 31, 2011  to decide whether they will remit their pillar two funds to the government.  Only those who wish to remain in private funds must express that desire.  Those who don't will have their pensions automatically transferred.

In Bulgaria, similar attempt was made for similar reasons: to shore up government finances.  The original plan there, first drafted in October of last year, was one in which nine private funds worth approximately $300 million would be transferred to government coffers, despite a warning from the International Monetary Fund (IMF) that such a transfer would "not close the gap in the social security system."  The private pension funds themselves agreed with the IMF, despite the government's insistence that the confiscation would "help provide higher and more just pensions for those persons who have the right of early retirement.“  "We feel confident because after the information that we provided to the government today, there is no way for the government to take a decision based on misleading data,” said Daniela Petkova, head of the Doverie retirement funds.

Due to protests by trade unions, the government relented:  only 20% of the original proposal will be implemented.

In Poland, government wants to transfer one-third of future contributions to individual retirement accounts into the country's state-run social security system.  Unlike Hungary however, the proposed Polish seizure will not touch money its citizens have already accumulated.  Yet it will still cost Polish savers $2.3 billion dollars a year.

In Ireland, The National Pensions Reserve Fund was established in 2001 to meet pension costs from 2025 onward, when budget projections revealed social welfare and public service pensions would increase substantially due to an aging population.  The payouts from the fund would have continued until 2055 with the rules for drawdowns established by the Minister for Finance, and were seen as the best way to keep the system sustainable.

In March 2009, the rescue of Irish banks from the worldwide financial crisis necessitated a withdrawal of $5.35 billion from the fund.  The remaining $2.66 billion was withdrawn in November 2010, when the entire nation required a bailout totaling $113 billion.

France is country number five in which funds earmarked for the future will be used to shore up government finances today. $43.9 billion will be taken from national reserve pension fund (FRR) and used to reduce the deficit accumulated in short-term pensions.  Retirement funds earmarked for the years 2020-2040 will be used for the years 2011-2024 instead, and the French government will use the additional saving resources for "other purposes."

What do such seizures have to do with America?  Nothing--so far.  Government already has control of our "pubic pension system," aka Social Security, and a simple act of Congress can alter both the amount and the percentage of its Social Security obligations any time Congress desires to do so.  President George W. Bush used up considerable political capital attempting to forestall the looming insolvency of a system which went into the red for the first time this year, a threshold which was not expected to be reached until 2016.  Democrats were enormously successful in convincing a majority of Americans that part of that reform, a partial privatization of the system, would be catastrophic.

That success is a testament to the economic illiteracy of many Americans, who essentially believed that leaving the Social Security portion of their retirement accounts in the hands of spendthrift bureaucrats was a better idea than putting that money into private accounts under their own control.  But as Europe is currently demonstrating such choices may become irrelevant.  No doubt the idea of government seizing private retirement accounts was once considered as unthinkable in Europe as it currently is here.  And Americans might be surprised to learn that as recently as October of last year Senate Democrats held hearing to discuss the possibilities of seizing private 401(k) plans.  Their rationale? To "fairly" distribute taxpayer-funded pensions to everyone.  The motivating factor?  Under-funded public service employee pension funds.

A Republican-controlled House of Representatives may have a far bigger budget battle on their hands than they might imagine.