NCPA - National Center for Policy Analysis


February 25, 2005

President Bush wants to add a personal investment component to the U.S. Social Security system. Under a Bush-style reform plan, workers would be able to contribute a portion of their payroll taxes into personal retirement accounts, which would pay a gradually increasing part of their retirement benefits.

Every country with an individual account system provides a social safety net designed to keep older people above the poverty line. It is often financed out of general government revenues and indexed to prices and/or wages, says Estelle James, a consulting economist to the NCPA:

  • Chile (and many other Latin American countries) provides a minimum pension guarantee -- equal to 25 percent of the country's average wage -- to every worker with 20 years of contributions, and a smaller means-tested welfare benefit for noncontributors.
  • Sweden, Poland, Hungary and most other Eastern and Central European countries also offer a minimum pension -- usually 15 percent to 35 percent of the average wage -- plus a public benefit that increases with work and contributions.
  • Australia, the Netherlands and the United Kingdom supplement the pension from the individual account with a flat or means-tested public benefit that most older people receive, whether or not they have worked.
  • In addition to a minimum pension guarantee, Mexico tries to encourage work and prevent poverty by paying a flat public contribution into the account of every worker for every day worked.
  • Switzerland's safety net is a very progressive defined benefit. The benefit has a floor and a ceiling -- but there is no ceiling on taxable earnings. Benefits grow when the average wage in the economy grows, but at a somewhat slower pace.

A personal account system can be good or bad depending on its design. The experience of other countries provides a guide for constructing a system that avoids poverty and mitigates labor and financial market risks, says James.

Source: Estelle James, "Social Security Reform: Reducing the Risk of Poverty," Brief Analysis No. 505, National Center for Policy Analysis, February 25, 2005.

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