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Social Security Financing: Automatic Adjustments to Restore Solvency

Like the United States, many countries are facing social security insolvency. Some countries have adopted automatic mechanisms to improve solvency, rather than changing taxes or benefits in an ad hoc manner. These countries have enacted laws requiring that benefits be automatically reduced or taxes increased when certain triggering events such as deterioration in solvency or an increase in average life expectancy occur. This paper describes the various automatic stabilizing mechanisms and explains how they have been adopted in 12 countries. It appears likely that automatic adjustment mechanisms adopted in Sweden and Japan will succeed, whereas those adopted in Italy and Germany have already been overridden. Because these mechanisms are relatively new, it is not clear how well they will work in the long run. Nevertheless, the experience of these 12 countries provides useful insights on the potential design features of auto-stabilization mechanisms and what their effects might be if implemented in the U.S. (32 pages)

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