NCPA - National Center for Policy Analysis


December 16, 2005

Government pension systems worldwide are facing insolvency because of demographic pressures. However, by adjusting some pension benefits to account for increased longevity, they could survive according to a new paper from the National Bureau of Economic Research.

The authors analyzed 12 different countries, including the United States, Japan and several European nations. The greatest challenge for all of these nations is to increase work participation by the elderly:

  • Despite lengthening life spans and better health in old age, the proportion of men who are officially out of the labor force between ages 55 and 64 has increased substantially in industrialized countries since 1960.
  • It now ranges from 70 percent in Belgium to about 20 percent in Japan.

The solution to pension insolvency is to encourage more people to work longer while reducing their benefits. The authors model different policy solutions and how the pension systems would adjust. They find that:

  • Raising retirement ages in existing social security systems by three years would generate savings of over 40 percent in the United Kingdom, about 30 percent in the United States and slightly over 15 percent in Italy.
  • Reducing the pension benefits to those who retire early (before 60) would reduce costs by about 40 percent in Germany and by 10 to 20 percent in Belgium, Denmark, Japan, Italy and the Netherlands.

Source: Linda Gorman, "Social Security and Early Retirement," National Bureau of Economic Research, NBER Digest, December 2005; based upon: Jonathan Gruber and David Wise, "Social Security Programs and Retirement Around the World: Fiscal Implications Introduction and Summary," National Bureau of Economic Research, Working Paper No. 11290, May 2005.

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