Skip to content

The House Bill Would Mean a Tax Hike for Millions of Seniors. Learn More

 

Four Pathways to Pension Coverage

Around the world, countries have used widely diverse policies to provide their workers pensions that supplement Social Security. Among countries with well-developed pension systems, the diverse approaches can be categorized into four pathways.

Those are:

  • voluntary provision of pension plans with tax preferences for motivation
  • voluntary contracting out from Social Security
  • quasi mandatory through widespread labor contracting, and
  • mandatory.

In considering these four approaches, an important issue is how well each performs in increasing pension coverage rates. In the area of pension coverage policy, policymakers in different countries can learn much from international experience.

Voluntary provision of pension plans is the approach used by the United States and Canada, but by few other countries with well-developed pension systems. Most countries that now have well-developed pension systems began with this approach but have since incorporated one of the other approaches in an effort to further increase coverage. With this approach, employers are encouraged through special tax provisions to provide pensions, but they are free to decide whether to provide a pension plan for their employees. Coverage rates using this approach have rarely exceeded half the workforce.

Voluntary contracting out is used by Japan and the United Kingdom, but currently is used by no other country with a well-developed pension system. The President’s Commission to Strengthen Social Security in 2001 proposed this approach for the United States. With this approach, the worker or the employer has the option of not fully participating in the Social Security program. Contributions to Social Security may be reduced in exchange for reduced Social Security benefits. If this option is chosen, pension plans or individual accounts must be established for workers that replace the lost Social Security benefits. This approach has provided pension coverage rates in about the same range as does the previous approach.

Quasi-mandatory pensions are not mandated by law but are required by labor contracts. In some countries, high pension coverage rates have been achieved through labor contracts negotiated by labor unions. The Netherlands and Sweden are examples of countries using this approach. With this approach, high coverage rates of 80 percent or more are achievable. This approach is only feasible in countries with a strong labor union movement.

In some countries, pensions are mandatory. Employers are required by law to provide a pension for their employees. Australia and Switzerland use this approach. In these countries, however, low-wage workers are excluded from the mandate. This approach is capable of producing high coverage rates, up to near total coverage of the workforce.

The approaches that involve greater compulsion also tend to provide higher coverage rates. International experience suggests that countries that rely solely on tax incentives and are unwilling to incorporate a degree of compulsion into their pension systems may need to accept that their pension systems may not cover more than half of the workforce. Since different pathways lead to different levels of pension coverage, while most countries have as a policy goal to increase pension coverage, this raises the question of why do countries choose different pathways?

©2002 by AARP. All rights reserved. Four Pathways to Pension Coverage is adapted from Coverage Lessons from Abroad by John Turner and Martin Rein of MIT. To review this report and other pieces by John Turner and the AARP Public Policy Institute, please visit http://www.aarp.org/research/ppi/

About the Author

John Turner is Senior Policy Advisor in the Public Policy Institute at AARP. He has published numerous articles in professional journals concerning pension and Social Security policy. He is the author or editor of ten books, two of which have been translated into Japanese. He has a PhD in Economics from the University of Chicago.