NCPA - National Center for Policy Analysis

Social Security Lessons From Other Countries

August 29, 2002

The U.S. Social Security system is relatively healthy compared with other countries that have not yet reformed their systems. However, some 20 countries in Latin America, Europe and the Asian-Pacific region have already made major structural reforms to their pension systems. At least another 10 countries are moving in that direction.

The reformed systems have many differences, but share certain characteristics. These include:

  • A partial shift from a pay-as-you-go system to a funded system, with private management of the funds.
  • A partial shift from defined benefit plans to defined contribution plans.
  • Compulsory contributions to the private accounts; regulation of the investments; and integration with the public social security program.

There are several lessons that reformers in the United States can learn from the experiences of other countries around the world. Among them:

  • Private sector control over personal retirement accounts is more profitable than a centrally controlled pension reserve -- the average privately managed pension fund in developed nations around the world earned a 4.1 percent average annual rate of return, while the average publicly managed pension fund lost an average of 8.4 percent per year.
  • Individual accounts can be created in a way that minimizes administrative fees.
  • Risk can be reduced by encouraging diversification or instituting a minimum guaranteed benefit.
  • Reformed systems can, in some cases, redistribute income from high earners to low-income earners better than traditional pay-as-you-go programs, which are biased against people with shorter life expectancies.
  • Reform involves transition costs -- but in the course of reform, the total pension obligation of the government has actually been reduced in almost every country.

Currently, some 80 million workers have access to personal retirement accounts. The list includes countries both large and small, industrialized and developing, socialist and free market -- but not the United States.

Source: Estelle James, "Social Security Reform Around the World: Lessons from Other Countries," NCPA Policy Report, August 2002, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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