Even Russia beat us to personal retirement accounts.(Be not afraid: Social Security reform is no radical idea)

In one more enormous step on its path to civilized liberal capitalism, Russia recently launched a privatization of its national old-age pension system. The long-term impact on the country's economy, society, and politics is hard to overestimate. Privatization of even a relatively small portion of the pension payroll tax will eventually make billions of rubles available for investment and modernization--resources that today are reduced by inflation in the vaults of the Russian treasury or state-owned banks. Next to the blossoming availability of food since the end of communism, pension privatization may become the most direct demonstration of the benefits of capitalism to tens of millions of ordinary Russians.

The concept of replacing the "distributive" pension system with one of private savings and investments was first outlined by President Boris Yeltsin in 1997. Along with the 13 percent flat income tax and the privatization of land, making a portion of the mandatory pension deduction the personal property of the worker was one of the key market reforms that President Vladimir Putin set out to accomplish in his first term in office from 2000 to 2004. In February 2001, Putin declared that "the current pension system has outlived itself," and four months later the Duma began the reform process (despite opposition from Communist deputies inside, and leftists outside parliament). In the fall of 2003, the mechanisms of a new private system were finally approved.

The urgency of change has never been in question. Under the pay-as-you-go system inherited from the Soviet Union, all of the 28 percent payroll tax which Russian employers pay for each worker went to the pensions of the nation's 38 million retirees. Even still, the pension fund was running large deficits, and among Russians living in poverty, more than half were pensioners.

The structural deficiencies inherited from the Soviet state were compounded by demographic trends. Russian women are having fewer children and the Russian population is rapidly aging. The ratio of earners to pensioners fell from 2.3 to 1.7 just in the latest 12 years. By 2040 there could be only one worker per pensioner.

Saving Russian pensioners from poverty and the national pension fund from bankruptcy are the most urgent objectives of last year's pension reform. But the authors of the reform also expect it to stimulate a virtuous cycle of capitalist investment and growth. This will modernize the Russian economy, create millions of new investors, and direct the psychology of citizens away from reliance on the state. Giving tens of millions of Russians stakes in Russian capitalism contributes greatly to political stability and helps to increase citizen control over national policies.

The design of Russia's pension privatization divides the ...