NCPA - National Center for Policy Analysis


June 16, 2005

Social Security reform in the United States has become a nationally debated topic, but privately managed, funded plans are already a component of the social security systems of more than 30 nations around the world, says economist Estelle James.

For example:

  • Chile, Switzerland, the Netherlands and the United Kingdom were the first countries to reform, in the 1980s.
  • Most countries in Latin America, Eastern and Central Europe, as well as some in the Asian-Pacific region, created similar systems during the past 10 years.
  • The Latin American and Eastern European countries funded their worker-based personal account systems by diverting money from a pre-existing payroll tax.
  • By contrast, the industrial countries in Western Europe, along with Australia and Hong Kong, made employer-based retirement plans mandatory, in addition to their tax-financed systems.

Although most pension reforms have similar goals, there are dramatic structural differences and also some striking similarities among them, says James. For example:

  • Contributions to personal accounts range from a low of 2.5 percent of wages in Sweden to a high of 12.5 percent (including fees) in Chile.
  • In most cases, contributions are made with funds that otherwise would have been paid as payroll taxes, however, in the mandatory employer-based plans the contributions are typically in addition to payroll taxes.
  • Practically every country (except Argentina, Colombia and the United Kingdom) requires new labor market entrants to enroll in the new systems.

Examining these reformed systems may offer useful insights for the United States as we consider our own social security reforms, says James. The experience of other countries suggests problems to be avoided and solutions to be emulated. In particular, we can learn how to keep administrative costs low, how to reduce risk, how to handle payouts and how to ensure that the elderly are kept out of poverty.

Source: Estelle James, "Reforming Social Security: Lessons from Thirty Countries," NCPA Study No. 277, National Center for Policy Analysis, June 2005.

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