Countries privatizing at least part of their social security programs are increasing in number, primarily in Latin America and in Central and Eastern Europe. Most of the world, however, continues to rely on traditional social security systems. This AARP Public Policy Institute Issue Paper by John Turner surveys social security privatization in various countries, presenting a framework for understanding the ways that countries privatize social security. Further, it discusses issues that have arisen as a result of privatization, including high administrative costs, delays in crediting accounts, and the lack of predictability of benefits due to financial market risks. Findings include:
- Types of privatized plans. Social Security privatization using individual accounts has occurred two ways. A few countries, such as the United Kingdom, use voluntary carve-out plans—whereby workers voluntarily contribute to an individual account plan and reduce their social security contributions accordingly. Sweden and some Latin American countries, such as Chile and Mexico, use mandatory plans—in which workers contribute exclusively to individual account plans.
- Risk. Defined contribution individual accounts are riskier for workers than defined benefit social security programs in most high-income countries. The level of benefits they provide is unpredictable. (32 pages)