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Reforming Social Security: Lessons from Abroad

Introduction

In developed and some developing countries around the world, low fertility rates, rising life expectancy, and early retirement have resulted in shrinking ratios of workers to retirees. Concern about the escalating cost of supporting growing retired populations and the sustainability of public pension programs has prompted many of those countries to introduce pension reforms that shift some of the burden of retirement support from the government to the private sector, particularly to individuals. Efforts to privatize public pension systems, beginning with Chile in 1981, have intrigued policymakers in other countries and prompted many of them to propose legislation that would do the same. In the United States, introducing voluntary individual accounts under Social Security has been a key goal of President George W. Bush.

Are there lessons to be learned from countries that have introduced elements of privatization to their pension systems? To attempt to answer that question, AARP's Public Policy Institute (PPI) hosted a seminar on pension reform abroad in May 2005 and invited pension experts to discuss reforms that five countries have implemented to ensure the solvency of their retirement income systems and the adequacy of retirement benefits. The five papers that were produced as a result of this seminar examine in detail a variety of reforms that shift some of the pension burden away from the public sector.

John Williamson of Boston College provides an update on how workers and pensioners are faring with individual accounts in Chile, the first country in the world to shift from a pay-as-you-go defined benefit social insurance model to a funded defined contribution model. Sweden's private accounts, which will appear in a forthcoming paper by Edward Palmer of Uppsala University and the Swedish Social Insurance Agency, turn out to be a relatively small add-on to a generous social security program. Individual accounts are also the focus of the paper by David Blake of the Cass Business School in London and John Turner of AARP's Public Policy Institute, who examine voluntary carve-out accounts in the United Kingdom that enable workers to choose to have part of their social security payroll taxes diverted into an individual account.

“Private” accounts take on a different meaning in Australia. Australia's superannuation guarantee charge, as discussed by James Schulz, Professor Emeritus of Economics at Brandeis University, is a mandatory employer-funded pension system that requires pension contributions by employers for almost all employees.

Some proposals to strengthen the U.S. Social Security system would permit the investment of a portion of the trust fund reserves in equities. Canada allows such investment, and how that works is the subject of the paper by Michael Mendelson of the Caledon Institute of Social Policy in Ottawa. Mendelson also describes the organization and experience of the plans' investment boards.

The papers in this series do, indeed, provide insights and information relevant to debate on Social Security reform in the United States. There are lessons-both positive and negative-that the United States stands to learn from the experiences of these five countries with pension reform.

Sara E. Rix, Ph.D.
Senior Policy Advisor
AARP Public Policy Institute

Papers on Reforming Social Security: Lessons from Abroad

Financing the Canada and Quebec Pension Plans by Michael Mendelson, Caledon Institute of Social Policy (December 2005)
Full Report (PDF, 30 pages)   In Brief (PDF, 2 pages)

Old-Age Income Security: Australia Tries a Different Way by James Schulz, Professor Emeritus of Economics, Brandeis University (December 2005)
Full Report (PDF, 42 pages)   In Brief (PDF, 2 pages)

An Update on Chile's Experience with Partial Privatization and Individual Accounts by John B. Williamson, Boston College (December 2005)
Full Report (PDF, 28 pages)   In Brief (PDF, 2 pages)

Voluntary Carve Outs for Social Security Reform: Lessons from the United Kingdom by David Blake, Cass Business School, London, and John Turner, AARP Public Policy Institute (December 2005)
Full Report (PDF, 24 pages)   In Brief (PDF, 2 pages)

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