Social security programs in most countries, including the United States, follow the European model in which benefits to current retirees are financed by mandatory payroll taxes on current workers. These pay-as-you-go systems are rapidly approaching a financial crisis as fertility rates decline and life expectancies increase worldwide.

A growing number of countries have taken steps to avoid the crisis by allowing workers and employers to choose private alternatives to their public retirement systems:

Singapore, Chile and the United Kingdom have set up particularly innovative alternatives to traditional social security.

• Singapore's Central Provident Fund (CPF) requires employees and employers to contribute jointly to individual investment accounts for retirement, medical expenses and such other purposes as financing college tuitions or purchasing a home.

• Chile, the first nation in the Western Hemisphere to adopt a public social security system, became the first nation in the world to dismantle its public system, replacing it with the equivalent of Individual Retirement Accounts and affording workers both greater freedom of choice and higher retirement income.

• Britain allows employers and workers to opt out of the earnings-related tier of public social security by setting up private plans with benefits at least as generous as the public system.

These privatized systems shift from a public pay-as-you-go system to a fully funded system in which each generation provides for its own retirement. In the process, they avert the long-term financial crisis of traditional systems and encourage saving, which in turn generates additional economic growth.

Source: Peter J. Ferrara, John C. Goodman and Merrill Matthews Jr., "Private Alternatives to Social Security in Other Countries," NCPA Policy Report No. 200, October 1995, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, TX 75251, (972) 386-6272.