(FORTUNE Magazine) – IN HIS RECENT STATE OF THE UNION speech, President Bush waxed rhapsodic about the benefits of partially privatizing Social Security. "You can build a nest egg for your own future," he said. "Best of all, the money in the account is yours, and the government can never take it away."

But one need only look to Britain, once held up as a model by pension reformers, to see how the lofty ideals behind privatization can easily go awry. Britain now has a state pension system that's so stingy and a system of private accounts so inadequate that it has the potential to create a generation of impoverished retirees. In fact, Britain's experience has been so bad that it's effectively dismantling a system strikingly similar to what the White House is proposing here.

As part of its goal to shrink the welfare state, Margaret Thatcher's government undertook pension reform in several stages. In 1981 it linked the basic state pension increases to price inflation rather than average wage increases--something Bush officials have openly suggested. Then, in the British 1986 Social Security Act, workers could reduce their payroll taxes by "contracting out" of part of the state plan. The net effect of both moves: The basic state pension was reduced, and workers were allowed to invest the supplemental portion in employer-run pension plans or personal accounts. In a 1988 speech Thatcher declared, "We want people independent of government and not dependent on it."

More than five million workers in Britain switched to new personal plans--often under high-pressure selling from financial advisors and an onslaught of advertising and marketing. The downside? In most cases the new plans didn't receive the matching contributions from employers that the original state pension plan did. The new accounts were also costly to set up and run--some charged a whopping 25% of the account value in commissions and administration fees.

Partial privatization did succeed in keeping the economic burden of the state pension system relatively low, at around 6% of Britain's gross domestic product, compared with the average 11% across Europe. But even before the 2000 stock bubble burst, the system was generating a deafening chorus of complaints about deceptive advertising, bad financial advice, and high fees. Faced with such charges, the financial services industry was eventually forced to fork over more than £15 billion ($28 billion at today's exchange rates) in restitution. Since the mid-1990s the percentage of people in contracted-out private arrangements has been in decline.

"The private system is not developing to offset the state's retreating role," said the 2004 report of the Turner Commission, a national panel headed by Merrill Lynch U.K. investment banker Adair Turner that was tasked with assessing the problem and providing recommendations.

Meanwhile, a generation of near retirees lives in fear of poverty. The basic state pension is £79.60 per individual--around $150 a week. The government, under pressure to bail out retirees and future retirees, now appears to be back near square one, facing many of the same painful choices--Cut benefits? Raise taxes? Lift the retirement age? Compel more saving?--confronting nations like the U.S. that are still thinking about an overhaul. "A comfortable retirement costs a lot of money with fewer people per retiree paying into the system," says Mike Orszag, an expert at the London offices of Watson Wyatt and an editor of the Journal of Pension Economics and Finance. "There's no magic bullet." And that goes for both sides of the pond. -- Peronet Despeignes