Privatizing Social Security: Ohio State U Prof Raises Caution Flag

COLUMBUS (TDB) -- An Ohio State University professor who studied Sweden's privatization of its public pension system found that investment companies advertised heavily and were able to fleece workers. They promoted investment programs that charged high fees and performed poorly. Professor Henrik Cronqvist examined mutual fund choices of 4.4 million Swedes who invested $5.6 billion in 2000, when the nation partially privatized its pension system.

"The results showed that firms that advertised generally charged higher fees than did other firms. Moreover, these firms did not seem to provide more services that would have made these higher fees worthwhile. Investors didn't get more value by paying higher fees. The bottom line is that choosing mutual funds based on advertising -- and as a result paying higher fees -- can be a costly mistake."

Cronqvist's research gives ammunition to those who doubt the wisdom of President George W. Bush's call for privatizing Social Security in the U.S. The OSU prof shows that unsophisticated investors subjected to a barrage of investment industry advertising can easily be separated from their savings. And privatization can boost the financial industry at the expense of workers.