Social Security Reform Around the World: Lessons from Other Countries

Policy Reports | International | Social Security

No. 253
Friday, August 30, 2002
by Estelle James

Equity and Distribution

A third key issue concerns the distribution of the costs and benefits of a Social Security system that includes individual accounts. Different systems affect distribution of income across generations, between workers and retirees at a given point in time, between full-career versus part-career workers, between the two genders, and among various socioeconomic groups. For purposes of this discussion, we focus on only two types: redistributions to low earners to keep them out of poverty and "perverse" redistributions to high earners.

What Have Countries Done? As already discussed, pay-as-you-go systems are not as progressive as we might like to believe - features such as longer lifetimes and steeper age-earnings profiles often make high earners the chief gainers. Even in the United States, which has a supposedly progressive benefit structure, recent empirical studies suggest that lifetime redistributions do not benefit the poor, on the average.15 Because many traditional systems are both inefficient and inequitable, an opportunity exists to improve both outcomes. However, it is still an open question whether or not the reforms have succeeded in improving equity. Closer examination suggests that the devil is in the details and some of the results are surprising.

"Pay-as-you-go systems often benefit high-earners more than low-earners -- just the opposite of what many expect."

For example, workers are eligible for Chile's minimum pension guarantee (about 25 percent of the average wage) after 20 years of contributions, meaning that the government tops up the benefits of these workers to the guaranteed point if their own accumulation does not suffice. The main beneficiaries will be low earners who worked only 20 years - disproportionately females with limited labor market attachment - while workers who remain in the formal sector for a full career are unlikely to receive this subsidy. This benefit is well targeted toward the poor but may encourage them to withdraw from the formal labor market after they reach the 20-year point.

In contrast, Argentina pays all workers with at least 30 years of contributions a flat benefit of about 25 percent of the average wage (plus an additional 1 percent for every year above 30 up to 45 years). This benefit structure encourages and rewards continued formal labor market participation. The main recipients are workers who have spent most of their adult lives in the formal labor sector. In sharp contrast to Chile, women and other low-income transient workers are unlikely to qualify.16

Switzerland's public pillar is earnings-related and hence appears less redistributive than Argentina's. However, the benefit schedule is very compressed and the payroll tax that finances it is levied on all earnings (that is, there is no ceiling on taxable earnings), which makes it quite redistributive toward the poor. In fact, low earners get such a high replacement rate from the public pillar that they are not even required to contribute toward the private pillar, thereby increasing their take-home pay as well. [See the sidebar for ideas on ensuring equity in the United States.]

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