NCPA - National Center for Policy Analysis

CBO Report: Privatizing Social Security Boosts Saving

February 15, 1999

Countries that have partially or completely privatized their pay- as-you-go social security systems with prefunded systems based on saving and investment may lower government expenditures in the long run and increase rates of saving, says a Congressional Budget Office report on five countries.

Chile, for instance, replaced its pay-as-you-go system with a system based on private retirement accounts in 1981. Workers already in the old system could choose to remain there or switch to a new system based on private retirement accounts -- funded by contributions from individuals and employers and invested in stock funds. The new system has increased Chile's national saving rate by 2 percent to 3 percent of Gross Domestic Product.

Mexico, beginning in 1997, and Argentina, in 1994, have followed the Chilean model with modifications. The British, however, have had an evolving, multitiered social security system for decades. People with an employer pension were allowed to partially opt out of the government's pay-as-you-go system and received a rebate on their payroll taxes.

  • The option was extended in 1986 by allowing workers who set up a personal pension plan to opt out as well.
  • Transition costs are financed out of general revenue and by reduced benefits in the government system.
  • Under current law, spending on the basic state pension and a second tier of benefits will fall from 4.4 percent of Gross Domestic Product in 2000 to 3.4 percent of GDP by 2050.

Finally, Australia previously used general revenues to pay for a means-tested pension not regarded as an entitlement. Now it requires most employers to contribute to workers' retirement funds. In the long run, the reform may increase national saving by about 1.5 percent of GDP.

Source: Jan Walliser and Scott M. Becker, "Social Security Privatization: Experiences Abroad," January 1999, Congressional Budget Office, Washington, D.C.


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