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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
October 2005:
Social Security Reform:
Other Countries' Experiences Provide Lessons for the United States:
GAO-06-126:
GAO Highlights:
Highlights of GAO-06-126, a report to congressional requesters:
Why GAO Did This Study:
Many countries, including the United States, are grappling with
demographic change and its effect on their national pension systems.
With rising longevity and declining birthrates, the number of workers
for each retiree is falling in most developed countries, straining the
finances of national pension programs, particularly where contributions
from current workers fund payments to current beneficiaries—known as a
pay-as-you-go (PAYG) system. Although demographic and economic
challenges are less severe in the United States than in many other
developed countries, projections show that the Social Security program
faces a long-term financing problem. Because some countries have
already undertaken national pension reform efforts to address
demographic changes similar to those occurring in the United States, we
may draw lessons from their experiences.
The current and preceding Chairmen of the Subcommittee on Social
Security of the House Committee on Ways and Means asked GAO to study
lessons to be learned from other countries’ experiences reforming their
national pension systems. GAO focused on (1) adjustments to existing
PAYG national pension programs, (2) the creation or reform of national
pension reserve funds to partially prefund PAYG pension programs, and
(3) reforms involving the creation of individual accounts.
We received technical comments from SSA, Treasury, the OECD, and other
external reviewers.
What GAO Found:
All countries in the Organisation for Economic Co-operation and
Development (OECD), as well as Chile, have, to some extent, altered
their national pension systems, consistent with their different
economic and political conditions. While changes in one country may not
be easily replicated in another, countries’ experiences may nonetheless
offer potentially valuable lessons for the United States. Countries’
experiences adjusting PAYG national pension programs highlight the
importance of considering how modifications will affect the program’s
financial sustainability, its distribution of benefits, and the
incentives it creates. Also, how well new provisions are implemented,
administered, and explained to the public may affect the outcome of the
reform. Most of the countries GAO studied both increased contributions
and reduced benefits, often by increasing retirement ages. Generally,
countries included provisions to help ensure adequate benefits for
lower-income groups, though these can lessen incentives to work and
save for retirement.
Countries with national pension reserve funds designed to partially pre-
fund PAYG pension programs provide lessons about the importance of
early action and sound governance. Some funds that have been in place
for a long time provide significant reserves to strengthen the finances
of national pension programs. Countries that insulate national reserve
funds from being directed to meet nonretirement objectives are better
equipped to fulfill future pension commitments. In addition, regular
disclosure of fund performance supports sound management and
administration and contributes to public education and oversight.
Countries that have adopted individual account programs—which may also
help prefund future retirement income—offer lessons about financing the
existing PAYG pension program as the accounts are established.
Countries that have funded individual accounts by directing revenue
away from the PAYG program while continuing to pay benefits to PAYG
program retirees have expanded public debt, built up budget surpluses
in advance, cut back or eliminated the PAYG programs, or taken some
combination of these approaches. Because no individual account program
can entirely protect against investment risk, some countries have
adopted individual accounts as a relatively small portion of their
national pension system. Others set minimum rates of return or provide
a minimum benefit, which may, however, limit investment diversification
and individuals’ returns. To mitigate high fees, which can erode small
account balances, countries have, for example, capped fees or
centralized the processing of transactions. Although countries have
attempted to educate individuals about reforms and how their choices
may affect them, studies in some countries indicate that many workers
have limited knowledge about their retirement prospects.
www.gao.gov/cgi-bin/getrpt?GAO-06-126.
To view the full product, including the scope and methodology, click on
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[End of section]
Contents:
Letter:
Results in Brief:
Background:
Adjustments to Existing PAYG Programs Show Importance of
Sustainability, Safety Nets, and Incentives to Work and Save:
Early Action and Effective Management Help Strengthen National Pension
Reserve Funds:
Individual Account Reforms Show the Importance of Funding Decisions and
Benefit Adequacy:
Concluding Observations:
Agency Comments:
Appendix I: Scope and Methodology:
Methodology:
Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms:
Appendix III: GAO Contact and Staff Acknowledgments:
Glossary:
Tables:
Table 1: Countries' National Pension Reforms--1970-2004:
Table 2: Countries Undertaking Selected Types of Adjustments to their
PAYG Pensions--1970-2004:
Table 3: Background on OECD Countries and Chile:
Table 4: Information concerning Countries' National Pension Systems:
Table 5: Examples of Adjustments to PAYG Programs, 1970-2004:
Table 6: National Pension Reserve Fund Reforms:
Table 7: Individual Account Reforms:
Figure:
Figure 1: National Pension Reserve Funds as a Percentage of GDP:
Abbreviations:
GDP: gross domestic product:
ILO: International Labour Organization:
NDC: notional defined contribution:
OECD: Organisation for Economic Co-operation and Development:
PAYG: pay-as-you-go:
SSA: Social Security Administration:
United States Government Accountability Office:
Washington, DC 20548:
October 21, 2005:
The Honorable Jim McCrery:
Chairman:
Subcommittee on Social Security:
Committee on Ways and Means:
House of Representatives:
The Honorable E. Clay Shaw, Jr.:
House of Representatives:
Many countries, including the United States, are grappling with
demographic change and its effect on their national pension systems and
long-term fiscal posture. With increasing longevity and declining
birthrates, the number of workers for each retiree is falling in most
developed countries. These trends can strain the finances of national
pension programs, particularly those in which contributions from
current workers fund payments to current beneficiaries--a form of
financing known as pay-as-you-go (PAYG). Demographic and economic
challenges are less severe in the United States than in many other
developed countries--the birthrate is not as low, people are more
likely to stay in the labor force for a greater number of years, and
immigration continues to provide young workers. Yet projections show
that the Social Security program faces a significant long-term
financing problem. Because some countries have already undertaken
national pension reform efforts to address demographic changes similar
to those occurring in the United States, their experiences can provide
lessons for U.S. policymakers.
To assist the Subcommittee in its deliberations concerning Social
Security's future, you asked us to review the experiences of other
developed nations and highlight lessons that can be learned from their
various approaches to national pension reform. Historically, developed
countries have had national pension systems that included some form of
a PAYG pension program. Countries have typically undertaken quite
different approaches to reforming their pension systems. These reforms
fall into three broad categories--adjustments to PAYG programs
(decreased benefits or increased contributions),[Footnote 1] efforts to
set aside funds to help pay future benefits through a national reserve
fund, and efforts to prefund retirement income through contributions to
individual accounts. Accordingly, our objectives were to examine the
lessons that can be drawn from countries that have (1) adjusted their
existing PAYG national pension systems, (2) adopted national pension
reserve funds to help finance their national pension systems, and (3)
adopted individual account reforms to their national pension systems.
To address these objectives, we studied the experiences of the
countries that constitute the Organisation for Economic Co-operation
and Development (OECD), plus Chile, the nation that pioneered the use
of individual accounts.[Footnote 2] As part of our analysis, we
assessed both the extent to which another country's circumstances are
similar enough to those in the United States to provide a useful
example and the extent to which particular approaches to pension reform
were considered to be successful.[Footnote 3] We aligned our lessons
with the criteria GAO developed for evaluating domestic Social Security
reform proposals--fiscal sustainability, adequacy and equity, and
implementation and administration of reform.[Footnote 4] At the same
time, drawing lessons from other countries' experiences requires
recognition that countries have different starting points, including
unique economic and political environments, and that availability of
other sources of retirement income, such as occupational pensions, also
varies greatly. Therefore, reforms in one country may not be easily
replicated in another or may not lead to the same outcome.
Our review included interviews with, and analysis of materials provided
by, officials and interest group representatives in Washington, D.C;
Paris; and London. We met with pension experts and country specialists
at the OECD as well as French and British experts. In addition, we drew
from interviews conducted by GAO with Chilean officials in 2002. We
conducted our review between August 2004 and September 2005 in
accordance with generally accepted government auditing standards. For
additional discussion of our scope and methodology, see appendix I. We
also include a glossary of key terms in the back of this report.
Results in Brief:
With respect to adjustments to PAYG programs, the experiences of the
countries we studied highlight the importance of considering how
modifications will affect the program's financial sustainability, its
distribution of benefits, the incentives it creates, and the extent to
which the public understands the new provisions. To reconcile PAYG
program revenue and expenses, most OECD countries have both increased
contributions and reduced benefits, often in part by increasing
retirement ages. Although several countries have yet to make their
programs financially sustainable, some have come close to doing so.
According to OECD economists, some countries (Sweden and Italy, for
example) have succeeded in large part by automatically linking benefits
to factors such as worker contributions, changes in demographics, and
growth in the national economy. Generally, the countries that have come
closest to achieving sustainability have also undertaken other types of
reform, such as the individual account programs in Sweden and
Australia. These reforms may, however, substantially reduce benefits
promised originally, leaving future retirees with benefits that replace
a lower portion of their earnings than those provided to earlier
generations or make them payable beginning at a later age. Other
countries' adjustments to their existing PAYG programs have had mixed
results for the programs' solvency, and debate continues about
additional reforms to reduce benefits or increase revenue. This is the
case in France and Germany, for example. Often countries have included
in their reforms provisions to help ensure adequate benefits for lower-
income groups. In certain cases, however, such provisions lessen
incentives to work and save for retirement, and can weaken the
country's economy over time. In addition, the way in which new
provisions are implemented, administered, and explained to the public
affects the outcome of the reform. For example, most countries phase in
changes to the national pension programs, such as changing the
retirement age over a certain period of time. Governments such as the
United Kingdom have had only limited success in efforts to educate
workers about changes in provisions that will affect their retirement
income.
Where countries created national reserves to partially prefund PAYG
pension programs, many lessons can be drawn, including the importance
of early action and sound governance. In some countries where
requirements for prefunding through national reserves have been in
place for a long time and have been complemented by other reform
measures, significant amounts of money have already
accumulated.[Footnote 5] These are projected to help make substantial
contributions to the financial sustainability of national pension
programs. While acting early in setting up national reserve funds helps
maintain adequate benefits and distribute pension costs more equitably
across generations, governing these funds in the interest of
participants is also crucial. Countries that insulate national reserve
funds from being directed to meet nonretirement objectives are better
equipped to fulfill their future pension commitments. Some countries
have legislated specific starting dates for drawing down national funds
to resist demands for their immediate use. Effective governance of
national funds also requires that governments commit to making regular
transfers into these funds. Countries that count on budget surpluses to
finance their reserve funds will need strong and sustained budgetary
discipline to accumulate enough reserves to prepare for future pension
spending requirements. Moreover, where transfers to national funds are
limited to social security surpluses, reserve funds may not grow
sufficiently to help national pension systems become solvent. In
addition, regular disclosures of fund performance help achieve
transparency in management and administration and contribute to public
education and oversight.
The countries adopting individual account reforms offer lessons about
the importance of addressing the financial solvency of existing PAYG
pension systems as the accounts are established. Countries adopting
individual accounts face the common challenge of how to pay for both a
new funded pension and an existing PAYG pension simultaneously. Some
countries did this by expanding public debt, building up budget
surpluses, cutting back or eliminating the PAYG system, or using some
combination of these approaches. Additionally, two countries, Australia
and Switzerland, used new sources of funding to add individual accounts
to their existing system. Because no individual account program can
fully protect individuals from investment risk, some countries protect
the overall level of benefits. For example, some have adopted
individual accounts as a relatively small portion of their national
pension system. Others that rely more heavily on individual accounts,
including Chile and Australia, set minimum rates of return or provide a
minimum benefit. While these provisions are intended to protect
individuals, they may also have unintended consequences. For example,
guaranteed rates of return imposed on fund managers in some countries
have been done in a way that may limit investment diversification and
variation in individuals' returns (in Chile and Switzerland, for
example). In addition, important lessons can be learned regarding the
administration of individual accounts, including the need for effective
regulation and supervision of the financial industry to minimize
investment risks that individuals face. To mitigate high fees that can
erode small account balances, some countries have capped the level of
administrative fees. Information about individual accounts should be
provided to help individuals make informed decisions about their
retirement savings. Some countries have done a better job than others
in providing information about their individual account programs.
Additionally, although studies in some countries indicate that many
individuals have only limited knowledge about their retirement
prospects, several countries have programs to provide information on
investment choices and retirement income options, such as annuities.
The effectiveness of these programs is unclear, however.
We received technical comments from the Social Security Administration,
the Department of Treasury, the OECD, and other external reviewers and
incorporated them where appropriate.
Background:
The U.S. Social Security program's projected long-term financing
shortfall stems primarily from the fact that people are living longer
and having fewer children. As a result, the number of workers paying
into the system for each beneficiary is projected to decline. A similar
demographic trend is occurring or will occur in all OECD countries.
(See table 3 in app. II for demographic and other characteristics of
OECD countries and Chile.) Although the number of workers for every
elderly person (aged 65 and over) in the United States has been
relatively stable over the past few decades, this ratio has already
fallen substantially in other developed countries. The number of
workers for every elderly person in the United States is projected to
fall from 4.1 in 2005 to 2.9 in 2020 and to 2.2 in 2030. In nine of the
OECD countries, this number has already fallen below the level
projected for the United States in 2020.[Footnote 6] These decreases in
the projected number of workers available to support each retiree could
have significant effects on countries' economies, particularly during
the period from 2010 to 2030. These effects may slow growth in the
economy and standards of living, and increase costs for aging-related
government programs. Long run demographic projections are imprecise,
however, due to uncertainty about future changes in longevity, for
example.
Pension and Other Social Insurance Programs in OECD Countries:
Although social security programs in all OECD countries and Chile
provide benefits for qualified elderly people, survivors, and the
disabled, the programs differ in many respects across the countries. In
some countries, "social security" refers to a wide range of social
insurance programs, including health care, long-term care, workers'
compensation, unemployment insurance, and so forth. To generalize
across countries, we use "national pensions" to refer to mandatory
countrywide pension programs providing old-age pensions. We use "Social
Security" to refer to the U.S. Old-Age, Survivors, and Disability
Insurance Program, since that is how the program is commonly known.
Although nearly all OECD countries use contributions from workers and
employers designated to finance pension benefits, most also use general
revenues as a funding source. Nearly all OECD countries, including the
United States, make pension benefits dependent on an individual's work
history, while several also provide benefits to all qualified residents
whether or not they have a work history. Countries' pension systems may
be financed differently, use different criteria for identifying
qualified beneficiaries, and calculate benefits in a different manner.
Several OECD countries finance benefits to the disabled or survivors
with worker or employer contributions designated for this purpose.
Others use general revenue to finance these benefits or have a single
fund that provides old-age pension benefits and benefits for the
disabled and survivors. Some OECD countries provide a universal benefit
of a specified amount each week or each month. Some adjust benefits
based on time spent raising children, or pursuing education, as well as
years spent working. Some national pension programs, identified as
"defined benefit" programs, provide retirees a pension of a set amount
per week or month or an amount calculated based on such factors
specified by law as their number of years of work and the level of
their earnings or contributions, and their age at retirement. Other
national pension programs, identified as "defined contribution"
programs, provide retirees income based on the accumulated value of
contributions and investment earnings on those contributions. Many OECD
countries have a pension system that includes a combination of pension
programs rather than a single program, providing many retirees with
more than one source of income. (See table 4 in app. II for additional
information concerning countries' national pension systems.)
Voluntary occupational pension programs are common in many OECD member
countries though the aggregate accumulated value of these pension funds
exceeds 25 percent of gross domestic product (GDP) in only seven
countries, including the United States, Canada, and Denmark. These
include programs sponsored by employers, trade associations, or trade
unions and regulated by governments; in some cases, the pensions
provided by these programs are to some extent insured by governmental
entities--counterparts to the Pension Benefit Guaranty Corporation in
the United States. Tax laws in many countries encourage participation
in these voluntary programs. Germany, for example, supplements its
national pension system with voluntary individual "Riester" accounts,
supported by subsidies as well as tax incentives. Our review, however,
did not include these programs, except in the United Kingdom, where
workers' contributions to PAYG national pension programs are reduced if
they choose to participate. Where these voluntary programs are
prevalent, they can affect countries' decisions about public pension
reforms.
Types of National Pension Reform:
Historically, developed countries have relied on some form of a PAYG
national pension program.[Footnote 7] Over time, countries have used a
variety of approaches to respond to demographic challenges and the
ensuing increases in expenditures for these programs. In many cases,
these approaches provide a basic or minimum benefit as well as a
benefit based on the level of a worker's earnings. Several countries
are preparing to pay future benefits by either supplementing or
replacing their PAYG programs. For example, some have set aside and
invested current resources in a national pension reserve fund to
partially prefund their PAYG program. Some have established fully
funded individual accounts. These are not mutually exclusive types of
reform. In fact, many countries have undertaken more than one of the
following types of reform (see table 1 for the reforms OECD countries
and Chile have undertaken):[Footnote 8]
* Adjustments to existing pay-as-you-go systems. Typically, these are
designed to create a more sustainable program by increasing
contributions or decreasing benefits, or both, while preserving the
basic structure of the system. Measures include phasing in higher
retirement ages, equalizing retirement ages across genders, and
increasing the earnings period over which initial benefits are
calculated. Some countries have created notional defined contribution
(NDC) accounts for each worker, which tie benefits more closely to each
worker's contributions and to factors such as life expectancy and the
growth rate of the economy.
* National pension reserve funds. These are set up to partially prefund
PAYG national pension programs.[Footnote 9] Governments commit to make
regular transfers to these investment funds from, for example,
budgetary surpluses. To the extent that these contribute to national
saving, they reduce the need for future borrowing or for large
increases in contributions to pay scheduled benefits. Funds can be
invested in a combination of government securities and domestic as well
as foreign private sector securities. Because of differences in
accounting practices, some countries report reserve funds as part of
national budgets while others do not include them in federal
figures.[Footnote 10]
* Individual accounts. These are fully funded accounts that are
administered either by employers, the government, or designated third
parties and are owned by the individual. The level of retirement
benefits depends largely on the amount of contributions made by, or on
behalf of, an individual into the account during his or her working
life, investment earnings, and the amount of fees individuals are
required to pay.
Table 1: Countries' National Pension Reforms--1970-2004:
Only adjustments to PAYG:
Austria;
Czech Republic[A];
Italy;
Germany[D];
Turkey;
Adjustments to PAYG and national pension fund:
Belgium;
Canada;
Finland;
France;
Greece;
Ireland;
Japan;
Luxembourg;
Netherlands;
New Zealand[G];
Norway[H];
Portugal;
South Korea;
Spain;
United States.
Adjustments to PAYG and individual accounts:
Australia;
Chile[B];
Hungary;
Iceland[E];
Mexico;
Poland;
Slovak Republic;
United Kingdom[F].
Adjustments to PAYG, national pension fund, and individual accounts:
Denmark;
Sweden;
Switzerland[C].
Source: OECD, International Social Security Association, and Social
Security Administration.
[A] The Czech Republic's defined contribution account program is not
included as an individual account reform as it is a voluntary
supplementary program. For a discussion of these accounts, see GAO,
Social Security Reform: Information on Using a Voluntary Approach to
Individual Accounts, GAO-03-309 (Washington, D.C.: Mar. 10, 2003), pp.
46-54.
[B] Chile is not an OECD country, but was included in our study because
it pioneered individual account reforms.
[C] Switzerland's mandatory occupation-based pensions provide
individual accounts that accrue credits at least at a minimum
prescribed interest rate. The program's requirements are phrased in
terms of individual accounts and the consulting actuaries must make an
individual account calculation applying the differing contribution
rates per age bracket in order to determine compliance with the law.
But in fact many companies offer plans that work like defined benefit
pensions. Benefits are based on the notional balance of the account at
retirement.
[D] Germany's Riester pension program is not included as an individual
account reform because it is a supplement to the mandatory national
pension program, rather than an alternative. For a discussion of these
accounts, see GAO-03-309, pp. 55-63.
[E] Iceland's mandatory occupation-based pension program allows for the
creation of defined contribution individual accounts as a complement to
defined benefit pensions. However, in practice, employers have not yet
established these. Voluntary supplementary individual accounts are also
available.
[F] The United Kingdom requires participation in either a state
earnings-related pension program or an approved alternative, including
an individual account.
[G] New Zealand's national pension is technically not a PAYG program as
it is funded with general government revenue rather than workers' or
employers' contributions to the program.
[H] Norway's Petroleum Fund is not, by law, dedicated exclusively to
future pension expenditures, but it is regarded as a fund to meet the
future expenses of an aging society, including pensions.
[End of table]
Adjustments to Existing PAYG Programs Show Importance of
Sustainability, Safety Nets, and Incentives to Work and Save:
The countries that have adjusted their existing PAYG national pension
programs demonstrate a broad range of approaches for both reducing
benefits and increasing contributions in order to improve the programs'
financial sustainability. Their experiences also provide lessons about
the potential effects of some adjustments on the distribution of
benefits, including the maintenance of a safety net and incentives to
work and save. They also emphasize the care required in implementing
and administering reforms and ensuring that the public understands the
new provisions.
PAYG Adjustments Prove Key to Financial Sustainability:
To reconcile PAYG program revenue and expenses, nearly all the
countries we studied have decreased benefits, and most have also
increased contributions, often in part by increasing retirement ages.
Generally countries with national pension programs that are relatively
financially sustainable, based on estimated changes in spending on old-
age pensions, have undertaken a package of several far-reaching
adjustments.[Footnote 11] Most of the countries we studied increased
program revenue by raising contribution rates, increasing the range of
earnings or kinds of earnings subject to contribution requirements, or
increasing the retirement age. Most of these countries increased
contribution rates for some or all workers. Canada, for example,
increased contributions to its Canadian Pension Plan from a total of
5.85 percent to 9.9 percent of wages, half paid by employers and half
by employees. Several countries, including the United Kingdom,
increased contributions by expanding the range of earnings subject to
contribution requirements.
Nearly all of the countries we studied decreased the promised level of
benefits provided to future retirees, using a wide range of techniques.
Some techniques reduce the level of initial benefits; others reduce the
rate at which benefits increase during retirement or adjust benefits
based on retirees' financial means.
* Increased years of earnings. To reduce initial benefits, several
countries increased the number of years of earnings they consider in
calculating an average lifetime earnings level. France previously based
its calculation on 10 years but increased this to 25 years for its
basic public program. Austria is gradually increasing the number of
years from 15 to 40 years.
* Increased minimum years of contributions. Another approach is to
increase the minimum number of years of creditable service required to
receive a benefit. France increased the required number of years from
37.5 to 40 years. Belgium is increasing its minimum requirement for
early retirement from 20 to 35 years.
* Changed formula for calculating benefits. Another approach to
decreasing the initial benefit is to change the formula for adjusting
prior years' earnings. Countries with traditional PAYG programs all
make some adjustment to the nominal amount of wages earned previously
to reflect changes in prices or wages over the intervening years.
Although most of the countries we studied use some kind of average wage
index, others, including Belgium and France, have adopted the use of
price indexes. The choice of a wage or price index can have quite
different effects, depending on the rate at which wages increase in
comparison with prices. The extent to which wages outpace prices varies
over time and among countries.
* Changed basis for determining year-to-year increases in benefits once
retirement begins. In many of the countries we studied, the rate at
which monthly retirement benefits increase from year to year during
retirement is based on increases in prices, which generally rise more
slowly than earnings. Others--including Denmark, Ireland, Luxembourg,
and the Netherlands--use increases in earnings or a combination of wage
and price indexes. Hungary, for example, changed from the use of a wage
index to the Swiss method--an index weighted 50 percent on price
changes and 50 percent on changes in earnings.
* Implemented provisions that adjust benefits in response to economic
and demographic changes. Adjustments, which link benefits to factors
such as economic growth, longevity, or the ratio of workers to
retirees, may contribute to the financial sustainability of national
pension systems.[Footnote 12] Finland and Germany, for example, have
adopted adjustment mechanisms of this kind. In some countries, such as
Italy and Sweden, this approach takes the form of a notional defined
contribution program. Italian and Swedish workers have "notional"
accounts in that both the incoming contributions and the investment
earnings exist only on the books of the managing institution. At
retirement, the accumulated notional capital in each account is
converted to a stream of pension payments using a formula based on
factors such as life expectancy at the time of retirement.
Most of the countries we studied undertook more than one of these types
of reforms as indicated in table 2. See table 5 in appendix II for
additional information concerning adjustments to PAYG programs.
Table 2: Countries Undertaking Selected Types of Adjustments to their
PAYG Pensions--1970-2004:
Country: Australia;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Austria;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Belgium;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: Yes;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: No.
Country: Canada;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: Yes;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Chile;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: No.
Country: Czech Republic;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: No.
Country: Denmark;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Finland;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: France;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: Yes;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: Yes;
Other decrease in benefits: No.
Country: Germany;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: Yes;
Other decrease in benefits: Yes.
Country: Greece;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Hungary;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Iceland;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Ireland;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: No.
Country: Italy;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: Yes;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: Yes;
Other decrease in benefits: Yes.
Country: Japan;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Luxembourg;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: Yes;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Mexico;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: No.
Country: Netherlands;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: New Zealand;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Norway;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Poland;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: No;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: Yes;
Other decrease in benefits: No.
Country: Portugal;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Slovak Republic;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: Yes;
Other decrease in benefits: No.
Country: South Korea;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: No.
Country: Spain;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Sweden;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: Yes;
Other decrease in benefits: No.
Country: Switzerland;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: Turkey;
Increase in contribution rates or coverage: No;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: No;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: United Kingdom;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: Yes;
Change in indexation for calculation of initial benefit: No;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Country: United States;
Increase in contribution rates or coverage: Yes;
Increase in retirement age[A]: Yes;
Change in years of earnings considered in benefit calculation: No;
Change in indexation for calculation of initial benefit: Yes;
Change in indexation for benefits during retirement: Yes;
Other adjustment mechanisms linking initial level of benefits to
demographic or economic factors: No;
Other decrease in benefits: Yes.
Source: OECD, International Social Security Association, and individual
government sources.
[A] Generally, increasing the retirement age both increases lifetime
contributions and decreases lifetime benefits, as people remain in the
workforce for a longer period and spend a shorter period in retirement,
without changes in monthly contribution rates or benefit amounts.
[End of table]
Several countries, such as Sweden and the United Kingdom, have
undertaken one or more of these adjustments to their PAYG programs and
have achieved, or are on track to achieve, relative financial
sustainability. Other countries, including France, and Germany, may
need to take additional action to finance future benefit commitments.
Generally, the countries that have come closest to achieving
sustainability are those that have undergone more than one type of
national pension reform.
Essential Reform Elements Include Maintenance of a Safety Net and Work
and Saving Incentives:
All of the countries we studied that reformed their PAYG pension
programs by reducing projected benefits included provisions to help
ensure adequate benefits for lower-income groups and put into place
programs designed to ensure that all qualified retirees have a minimum
level of income.[Footnote 13] Most did so by providing a means-tested
program that provides more benefits to retirees with limited financial
means. Two countries--Germany and Italy--provide retirees access to
general social welfare programs that are available to people of all
ages rather than providing programs with different provisions for
elderly people.
Twelve countries use another approach to providing a safety net: a
basic retirement benefit. The level of the benefit is either a given
amount per month for all retirees or an amount based on years of
contributions to the program (but not the level of earnings during
those years). In Ireland, for example, workers who contribute to the
program for a specified period receive a flat-rate pension equal to
about 167 euros a week in 2004--approximately one-third of average
earnings.[Footnote 14] According to the Social Security Administration
(SSA), Chile set a minimum pension for those younger than age 70 at
62.7 percent of the minimum wage in 2004. The United Kingdom and
Belgium give low-income workers credit equivalent to the minimum level
contribution even though their earnings were too low to require a
contribution. Several countries give workers credit for years in which
they were unemployed, pursued postsecondary education, or cared for
dependents. Establishing a safety net requires a careful consideration
of costs and incentives for working and saving. Costs can be high if a
generous basic pension is provided to all eligible retirees regardless
of their income. On the other hand, means-tested benefits can diminish
incentives to work and save. The United Kingdom provides both a basic
state pension and a means-tested pension benefit. Concern about the
decline in the proportion of preretirement earnings provided by the
basic state pension has led some to advocate making it more generous.
Others argue that focusing safety net spending on those in need enables
the government to alleviate pensioner poverty in a cost-effective
manner.
Prior to 2003, retirees in the United Kingdom received a means-tested
benefit that brought their income up to a guaranteed minimum retirement
income level. This benefit left those retirees with low to moderate
incomes no financial incentive to work or save, because additional
income was offset by equal reductions in the means-tested
benefit.[Footnote 15] To help remedy this, the United Kingdom
introduced the savings credit, which provides a supplementary benefit
equal to a portion of an individual's additional income within a range
near the guaranteed retirement income level. This new benefit
increases, but does not fully restore, the incentive to work and save
because a portion of the additional income is lost through reductions
in pension income. If, for example, a retiree with pre-benefit income
of $700 a month increases this income to $800 a month, his or her total
retirement income including these means-tested benefits would increase
by $60, from $892 to $952. The proportion of United Kingdom pensioners
eligible for these means-tested benefits is expected to rise. The
United Kingdom Pensions Commission projects that unless current pension
rules are changed, almost 65 percent of retiree households will be
eligible for these means-tested benefits by 2050, because the increases
in the Basic State Pension are linked to prices, but increases in other
components of the United Kingdom's pension system are linked to
earnings.
Successful Reform Requires Careful Implementation, Administration, and
Public Education:
The extent to which new provisions are implemented, administered, and
explained to the public may affect the outcome of the reform. Although
many adjustments to PAYG programs are not difficult to implement and
administer, some more complex reforms, such as the development of a
notional defined contribution program, can be challenging. Poland, for
example, adopted NDC reform in 1999, but the development of a data
system to track contributions has been problematic. As of early 2004,
the system generated statements documenting contributions workers made
during 2002, but there was no indication of what workers had
contributed in earlier years or to previous pension programs. Without
knowing how much they have in their notional defined accounts, workers
may have a difficult time planning for their retirement. Additionally,
countries typically phase in certain changes, such as increasing the
retirement age. This could help to provide workers with enough time to
understand how the changes to the pension program will affect their
retirement income.
To educate workers about how PAYG programs and PAYG reforms affect
them, countries including Canada, Sweden, the United Kingdom, and the
United States, send workers periodic statements concerning the program,
the record of their contributions to it, and the benefits they are
projected to receive.[Footnote 16] To increase the likelihood that
recipients will read and understand them, the United Kingdom provides
different messages tailored to workers of different ages. Nonetheless,
the United Kingdom has had limited success in efforts to educate
workers about changes in provisions that will affect their retirement
income. For example, a survey of women in the United Kingdom showed
that only about 43 percent of women who will be affected by an increase
in the retirement age knew the age that applied to them. A large
proportion (70 percent) of younger women indicated that they expect to
retire before their state pension eligibility age--65 years.[Footnote
17]
Early Action and Effective Management Help Strengthen National Pension
Reserve Funds:
Another measure often found in reform packages is the accumulation of
reserves in national pension funds with the aim of partially prefunding
PAYG pension programs. With public centralized prefunding, governments
set aside resources in the current period to safeguard the financing of
their PAYG pension programs in the future. Typically invested in
various combinations of bonds and equities, these reserve funds are in
some cases meant to remain untouched for several years before being
channeled into the public pension system, in particular to maintain
adequate pension levels for the baby boom cohort. Pension reserve funds
can contribute to the system's financial sustainability, depending on
when they are created or reformed, as well as how they are invested and
managed. Countries that took action early have had time to amass
substantial reserves, reducing the risk that they will not meet their
pension obligations. Effective management of reserve funds has also
proved important, as a record of poor fund performance has led some
countries to put reserve funds under the administration of a relatively
independent manager with the mandate to maximize returns and minimize
avoidable risk.[Footnote 18]
Early Action Matters:
Establishing reserve funds ahead of demographic changes--well before
the share of elderly in the population increases substantially--makes
it more likely that enough assets will accumulate to help meet future
pension obligations. In countries such as Sweden and Denmark, which
have had long experience with partial prefunding of PAYG programs,
important reserves have already built up. Combined with long-term
policies aimed at ensuring sound public finances, raising employment
rates, and adjusting pension program provisions, these resources are
expected to make significant contributions to the long-term finances of
public pension programs.[Footnote 19] For example, Denmark's reserve
fund, set up in 1964, had assets equivalent to about 25 percent of GDP
in 2000. Sweden's reserve fund, created in 1960, was around 24 percent
at the end of 2003.
Other countries that have recently created pension reserve funds for
their pension programs have a shorter period in which to accumulate
reserves before population aging starts straining public finances. In
particular, the imminent retirement of the baby boom generation is
likely to make it challenging to continue channeling a substantial
amount of resources to these funds. France, for example, relies
primarily on social security surpluses to finance its pension reserve
fund set up in 1999. Given its demographic trends, however, it may be
unable to do this beyond the next few years. Similarly, Belgium and the
Netherlands plan on maintaining budget surpluses, reducing public debt
and the interest payments associated with the debt, and transferring
these earmarked resources to their reserve funds. However, maintaining
a surplus will require sustained budgetary discipline as a growing
number of retirees begins putting pressure on public finances. Some
countries have set specific starting dates for drawing down national
funds to resist demands for their immediate use.
Though the Irish National Pensions Reserve Fund was established in
2001, as of 2004 it had already amassed substantial assets, nearly 10
percent of GDP. Its resources are projected to support the financial
sustainability of the pension program for two main reasons. First,
Ireland enjoys relatively favorable demographics. Its aging problem is
expected to increase in severity at a later date than those of other
Western European countries; thus, it has in effect created its pension
fund relatively early, with more time for returns to accumulate.
Second, Ireland provides somewhat less generous public pensions to
their beneficiaries than other OECD countries; its pension spending is,
therefore, relatively low.
Effective Management Can Contribute to Financial Sustainability:
Examples from several countries reveal that prefunding with national
pension reserve funds is less likely to be effective in helping assure
that national pension programs are financially sustainable if these
funds are also used for purposes other than supporting the PAYG
program. Some countries have used funds to pursue industrial, economic,
or social objectives. For example, Japan used its reserve fund to
support infrastructure projects, provide housing and education loans,
and subsidize small and medium enterprises.[Footnote 20] As a result,
Japan compromised to some extent the principal goal of public
prefunding, which is to save in advance and accumulate assets so as to
continue providing adequate benefits to retirees while keeping
contribution rates of workers stable. Japan has since implemented a
series of reforms. The latest wave, which became effective in 2001,
refocused the fund's objective in the interests of participants, rather
than those of the general public. Measures introduced include
management improvements and more aggressive investment strategies with
the aim of maximizing returns.
Past experiences have also highlighted the need to mitigate certain
risks that pension reserve funds face, in addition to the risks that
are inherent in investment of any pension funds. One kind of risk has
to do with the fact that asset buildup in a fund may lead to competing
pressures for tax cuts and spending increases, especially when a fund
is integrated into the national budget.[Footnote 21] For instance,
governments may view fund resources as a ready source of credit. As a
result, they may be inclined to spend more than they would otherwise,
potentially undermining the purpose of prefunding. For example,
according to many observers, the United States' Social Security trust
fund, which is included in the unified budget and invested solely in
U.S. Treasury securities that cannot be bought or sold in the open
market, may have facilitated larger federal budget deficits. Ireland
sought to alleviate the risk that its reserve fund could raise
government consumption by prohibiting investment of fund assets in
Irish government bonds. Some economists argue in favor of similar
limits on the share of domestic government bonds the fund portfolio can
hold.
Additionally, pension reserve fund investments in private securities
can have negative effects on corporate governance. There is the danger
that if the government owns a significant percentage of the stocks of
individual companies and as a result controls their corporate affairs,
the best interest of shareholders may not be upheld because of
potential conflicts of interest. Limiting the government's stock voting
rights by investing national pension resources in broad index funds may
provide a safeguard against this type of risk.
Another risk is that groups may exert pressure to constrain fund
managers' investment choices, potentially lowering returns. For
example, Canada and Japan have requirements to invest a minimum share
of their fund portfolios in domestic assets, restricting holdings of
foreign assets to stimulate economic development at home. In contrast,
Norway chose to invest its fund reserves almost exclusively in foreign
assets.[Footnote 22] The funds of Ireland and New Zealand also have
large shares of foreign investments.[Footnote 23] Investing a
significant share of reserves in foreign assets may not be a realistic
or viable option for large economies with mature financial markets,
such as the United States. Funds in several countries have also faced
pressure to adopt ethical rather than purely commercial investment
criteria, with a possibly negative impact on returns.[Footnote 24] In
recent years, some countries have taken steps to help ensure that funds
are managed to maximize returns and minimize avoidable risk. Canada,
for example, has put its fund under the control of an Investment Board
operating independently from the government since the late 1990s.
Several countries, including New Zealand, have taken steps to provide
regular reports and more complete disclosures concerning pension
reserve funds which may help achieve transparency in management and
administration and contribute to public education and
oversight.[Footnote 25] (For additional information concerning national
pension reserve programs, see fig. 1 and table 6 in app. II.)
Figure 1: National Pension Reserve Funds as a Percentage of GDP:
[See PDF for image]
Note: The figure for Finland excludes the statutory pension funds
(58.3% of GDP). Figures as of 2003, except as follows: as of December
31, 2000, for Portugal, as of December 31, 2004, for Spain, Ireland,
the United States, and Norway.
[End of figure]
Individual Account Reforms Show the Importance of Funding Decisions and
Benefit Adequacy:
Countries that have adopted individual account reforms--which may also
help prefund future retirement income--offer lessons about financing
the existing PAYG pension program as the accounts are established. To
manage this transition period these countries have expanded public
debt, built up budget surpluses in advance of implementation, reduced
or eliminated the PAYG program, or used some combination of these
approaches. Another important consideration for countries that have
individual account programs is how to balance achieving high rates of
return while ensuring individuals receive an adequate level of
benefits. Measures such as limits on how the funds are invested and the
level of fees and charges may help to ensure that benefits will be
adequate, but should not be so restrictive that they unduly harm
individuals or pension fund managers. In addition, administering
individual accounts requires effective regulation and supervision of
the financial industry to protect individuals from avoidable investment
risks. Educating the public is also important as national pension
systems become more complex.
Approach to Funding Individual Accounts Affects Sustainability of
National Pension System:
The experiences of other countries demonstrate the importance of
considering how individual accounts may affect the long-term and short-
term financing of the national pension system and the economy as a
whole. In the long-term, individual accounts can contribute to
sustainability by providing a mechanism to prefund retirement benefits
that could be less subject to demographic booms and busts than a PAYG
approach. Individual accounts prefund benefits in private accounts
rather than government accounts. If governments are unable to save
through national pension reserves, private accounts may facilitate pre-
funding that would not occur otherwise.[Footnote 26]If, however, such
accounts are funded through borrowing, no such prefunding is achieved.
In the short-term countries adopting individual accounts face the
common challenge of how to pay for both a new funded pension and an
existing PAYG pension simultaneously. The cost of the transition from a
PAYG program to individual accounts depends on whether the individual
accounts redirect revenue from the existing PAYG program, the amount of
revenue redirected, and how liabilities under the existing PAYG program
are treated.
The countries we studied vary in the amount of revenue diverted from
their PAYG programs to fund their individual accounts, resulting in a
range of related transition costs. Australia and Switzerland used new
sources of funding to add individual accounts to their existing,
relatively modest, national pension systems.[Footnote 27] Transition
costs were not an issue, because no resources were diverted from paying
current benefits. Nonetheless, new financing was needed to both fund
the new program and to support the existing program. (For additional
information concerning these "add-on" programs and other countries'
individual account programs, see table 7 in app. II.) Some countries
diverted revenue from the existing PAYG program to the individual
accounts, a "carve out," resulting in shortfalls that reflect, in part,
the portion of the PAYG program being replaced with individual
accounts. For example, transition costs may be less in countries such
as Sweden where the contribution to individual accounts is 2.5 percent
of covered earnings, than for Poland or Hungary, which have
contribution rates of 7.3 percent and 8 percent, respectively.
In addition to the level of transition costs resulting from redirecting
PAYG revenue, how a country manages these costs also affects the
success of the reform. All of the countries we reviewed also made
changes that were meant to help finance the transition to individual
accounts, such as increasing contributions to or decreasing benefits
from their PAYG programs. In addition, Chile built a budget surplus in
anticipation of major pension reform, and Sweden had large budget
surpluses in place prior to establishing individual accounts. Some
countries transferred funds from general budget revenues to help pay
benefits to current and near retirees, expanding public borrowing.
Where they financed individual accounts through borrowing, these
countries will not positively affect national saving until the debt is
repaid, as contributions to individual accounts are offset by increased
public debt.[Footnote 28] For example, Poland's debt is expected to
exceed 60 percent of GDP in the next few years, in part because of its
public borrowing to pay for the movement to individual accounts.
Countries sometimes had difficulty predicting their transition costs.
In particular, countries that allowed workers to opt in or out of
individual account programs had difficulty estimating costs. For
example, more workers in the United Kingdom, Hungary, and Poland
responded to incentives to contribute to individual accounts than
originally anticipated, leaving the existing PAYG programs with less
funding than planned. Hungary's short-run fiscal concerns resulted in a
slower increase in contribution rates to individual accounts than
originally planned.
Regardless of whether workers have a choice of participating in the
program, individual accounts may also affect the long-term costs to the
government. For example, if income from substitute accounts leaves
particular individuals with less retirement income than if they had not
participated, some may qualify for benefits from other means-tested
programs. On the other hand, to the extent that the accounts increase
retirement incomes, costs for such programs may fall. Under a voluntary
approach, such effects could depend partly on the rate of
participation. The actual effect of countries' individual account
programs on other programs as they relate to government spending will
not be clear for years to come, when cohorts of affected workers
retire.
Countries Balanced Opportunities to Realize High Expected Returns with
Provisions to Help Ensure Benefit Adequacy:
Countries adopting individual accounts as part of their national
pension systems have had to make trade-offs between giving workers the
opportunity to maximize expected returns in their accounts and helping
assure that benefits will be adequate for all participants. Some
countries set a guaranteed rate of return to reduce certain investment
risks and help ensure adequacy of benefits. Guaranteed rates of return
may be relative, that is, related to other funds' returns, as in Chile,
or fixed--a guaranteed percentage rate return, as in Switzerland. In
Chile workers with individual accounts are guaranteed a minimum rate of
return set at 2 percentage points below the average return for funds of
the same type during a 3-year period.[Footnote 29] In Switzerland,
account holders were assured a minimum rate of return of 2.25 percent
in 2004.[Footnote 30] This type of guarantee may, however, result in
limited investment diversification or conservative investment
decisions, resulting in lower rates of return overall. In Chile, for
example, the guaranteed return may have resulted in a "herding" effect,
creating an incentive for fund managers to hold similar portfolios and
reducing variation in returns. To help ensure that individuals receive
at least a benefit based on the guaranteed rate of return, several
countries require fund managers to have reserve funds to pay benefits
at the guaranteed return level. A number of these countries have
further provisions that the government will provide benefits if all of
the fund reserves are used.
Another measure to ensure retirees will have at least a minimally
adequate level of income is to provide some form of minimum guaranteed
benefit. All countries with individual accounts that we reviewed
provide such a benefit. This can be increasingly important as
individuals assume risks with the investment of funds in their
individual accounts. Some experts believe that a minimum pension
guarantee could encourage investors to select riskier investments or
spend their assets more quickly. For example, in countries with a large
flat-rate pension, individuals may make risky investment decisions
because they can rely on the guarantee if their risk taking brings poor
results. In countries where additional benefits are added on to the
individual account payment to meet a minimum standard ("top-up"
benefits) individuals may minimize their voluntary contributions in
order to receive a higher benefit from the government. There is some
belief that this may occur in Chile, where low-income workers might try
to stop making contributions after meeting the contribution year
requirement. Individuals in countries with a means-tested benefit may
spend down their retirement assets quickly to qualify for the benefit.
This has occurred in Australia, and as result, that country plans to
increase the age when individuals can access their individual account
funds from 55 to 60 between 2015 and 2025. In any of these cases, the
government could incur increased costs because it ensures that
individuals have at least a certain level of income. The financial risk
to the government will be greater in countries that have a larger
guarantee. However, the protection of individuals against poverty could
also be greater in these countries.
Outside of providing a minimum pension guarantee, countries have taken
additional measures to help ensure an adequate retirement
income.[Footnote 31] To prevent fees from eroding small account
balances, some of these countries also exclude low-income workers from
participation requirements in the individual account program. Another
approach to help protect low-income workers occurs in Mexico, where the
federal government provides a flat-rate contribution on behalf of
workers.[Footnote 32]
It is important to consider the payout options available from
individual accounts, as these can also affect income adequacy
throughout retirement. For example, an annuity payout option can help
to ensure that individuals will not outlive their assets in
retirement.[Footnote 33] However, purchasing an annuity can leave some
people worse off if, for example, premiums are high or inflation erodes
the purchasing power of benefits. Several countries also allow for
phased withdrawals, sometimes with restrictions, helping to mitigate
the risk of individuals outliving their assets and becoming dependent
on the government's basic or safety net pension. Some countries offer a
lump-sum payment under certain circumstances. For example, Chile and
Mexico allow lump sums for persons who have account balances above a
certain amount.[Footnote 34] Australia allows a full lump-sum payout
for all retirees age 55 and above (age 60 and above by 2025).
Effective Regulation, Implementation, and Education Can Protect
Individuals:
Countries also protect individuals by regulating how the funds in their
accounts can be invested. Initially, several countries offered
individuals choices among a limited number of investment funds and
often restricted the portion of assets that could be invested in
certain products, such as publicly traded equities, private equities,
and foreign securities. Later, however, the options were expanded in
most countries to allow more investment diversification, but they still
include some restrictions. Additionally, as investment options have
expanded, some countries have incorporated other protections. For
example, Chile and Mexico have incorporated investment options that
take into account individuals' ages and risk tolerance. Chile requires
each pension administrator to offer four types of funds with varying
degrees of risk, including a higher risk fund and a fund invested in
fixed-rate instruments. Pension administrators may offer a fifth higher
risk fund, available to workers more than 10 years from the age of
retirement. Mexico recently allowed pension fund managers to offer more
than one investment fund and included options to help provide workers
with an adequate rate of return at acceptable risk. Sweden limits
individuals to selecting at most five funds from among all the
qualified investment funds that choose to participate--over 650 funds
as of 2004. Some experts have suggested that having such a large number
of funds available may discourage active choice. About two-thirds of
participants made an active investment choice in 2000. Since 2001,
however, about 85 percent of new entrants have left their money in the
default fund--a separate fund for those who do not wish to make a fund
choice.[Footnote 35] This default option can be an important safeguard.
However, depending on who makes the default decisions, it may be open
to some of the same issues as pension fund reserves, such as political
pressures for certain investment criteria in order to meet other social
objectives.
To further protect individuals, most of the countries with individual
accounts have some sort of limit on the fees that fund managers can
charge. Nonetheless, it is unclear how these restrictions may affect an
individual's account balance and returns. Chile allows funds to charge
fees on new accounts, and individual account contributions, and for
phased withdrawals of funds during retirement. In addition to imposing
this type of limit, Poland has a ceiling on the amount of some types of
charges. Sweden has variable ceilings on charges, and the United
Kingdom has a fixed ceiling charge on its stakeholder pension.[Footnote
36] Sweden uses a formula to calculate the size of fees that are
permitted to help ensure that fees are not too high. Additionally, it
plans to spread certain fixed costs over the first 15 years of the
program, helping avoid high fees in the early years. Limits on the
level of fees can also affect fund managers. In the United Kingdom, for
example, regulations capping fees may have discouraged some providers
from offering pension funds.
Countries have also taken steps to lower administrative costs that
contribute to the fees participants are charged. For example,
regulations regarding how often individuals are permitted to move
assets from one investment fund to another can also protect program
participants by helping contain program costs that arise when people
switch funds frequently. Many countries restrict the number of times an
individual can switch. Mexico reportedly has lower administrative costs
than some other Latin American countries, in part because it limits
individuals to annual switching. Chile permitted people to switch fund
managers three times a year, but later restricted switching to two
times a year to help lower costs. Poland provides an incentive for
individuals to stay with a pension fund manager for at least 2 years by
requiring fund managers to charge lower fees for these contributors.
Sweden does not restrict the number of times individuals can change
their investments. To help keep costs low, however, Sweden aggregates
individuals' transactions to realize economies of scale.[Footnote 37]
Some countries' experiences highlighted weaknesses in regulations on
how pension funds can market to individuals.[Footnote 38] Poland's and
the United Kingdom's regulations did not prevent problems in marketing
and sales. Poland experienced sales problems, in part, because it had
inadequate training and standards for its sales agents, which may have
contributed to agents' use of questionable practices to sign up
individuals. The United Kingdom had a widely-publicized "mis-selling"
scandal that resulted in over a million investors opening individual
accounts when they would more likely have been better off retaining
their occupation-based pensions. Insurance companies were ordered to
pay roughly $20 billion in compensation. In contrast, Sweden protects
individuals from excessive marketing by not allowing pension funds
access to information about individuals' investments. Instead, funds
rely on mass advertising and provide reports and disclosures to
investors through a clearinghouse.
Countries' individual account experiences reveal pitfalls to be avoided
during implementation. For example, Hungary, Poland, and Sweden had
difficulty getting their data management systems to run properly and
continue to experience a substantial lag time in recording
contributions to individuals' accounts. Sweden purchased a new computer
system after the program it intended to use proved insufficient for
managing individual accounts, resulting in an unexpected cost of $25
million. Once a record-keeping system is in place, however, problems
may persist. For example, Poland had some difficulty matching
contributions with contributors because it allowed two different
identification numbers to be used for reporting purposes. In such
cases, workers' contributions were not being credited to their
accounts. Additionally, Poland experienced problems with its computer
system that resulted in a backlog. The government was required to make
interest payments to funds for delays in contribution transfers.
According to a report from the International Labour Organization (ILO),
the government initially failed to make 95 percent of the transfers to
private funds and as of 2002 was still unable to make 20 percent to 30
percent of required monthly transfers.[Footnote 39]
In countries where workers have a choice of whether to participate in
the individual account program, it is important that policymakers make
timely decisions about other details concerning the administration and
implementation of the program, so that workers can make informed
choices. Hungary and Poland reportedly implemented their individual
account systems without having made such decisions, including those
concerning annuities. Both countries required annuity payouts, but the
markets did not have the appropriate type of annuity available. For
example, inflation-adjusted and gender-neutral annuities were not
available in Hungary. Experts suggest that while these decisions may
not have seemed important initially, the lack of information could make
it difficult for workers to decide whether to participate in the
individual account program and to assess their potential retirement
security.
Not only is information important to help workers make initial
decisions about participation in an individual account program, but it
should be provided on an ongoing basis. It is also of increasing
importance as national pension systems become more complex. Several
countries require disclosure statements about the status of a pension
fund.[Footnote 40] The inclusion of fees charged on these disclosure
statements could help individuals to make more informed decisions when
choosing a fund manager. Some countries have done a better job than
others of providing fund performance information. For example,
Australia requires its fund providers to inform members through annual
reports clearly detailing benefits, fees and charges, investment
strategy, and the fund's financial position. In contrast, Hungary
reportedly did not have clear rules for disclosing operating costs and
returns, making it hard to compare funds' performances. Other more
general information about individual account savings is also important.
In the United Kingdom, individuals must decide whether they should
participate in the state earnings-related pension program, their
employer-sponsored pension plan, or an individual account. To help
individuals make this decision, the Financial Services Agency publishes
decision trees on its Web site. Decision trees in the United Kingdom
ask basic questions about pension arrangements to help individuals make
their own choices. Individuals may find that these are somewhat
complicated, however, in part because the United Kingdom's system is
complex. In Mexico, a government entity provides information to workers
on the mandatory pension system and includes information about the
importance of reviewing commissions and returns when making a pension
fund choice.
While countries have made efforts to inform the public about the
individual account program and the different options they will have
available, little research on the effectiveness of these campaigns has
been conducted. There has been research, however, looking at the
overall financial literacy of individuals across many OECD countries.
The OECD recently conducted a study on financial literacy and found
that most respondents to financial literacy surveys in member countries
have a very low level of knowledge concerning finances, often seeming
to think that they know more about financial issues than they really
do.[Footnote 41] For example, about two-thirds of Australian
respondents to a survey indicated that they understand the concept of
compound interest. However, only 28 percent correctly answered a
question using the concept.[Footnote 42] Countries have realized the
growing need for more financial literacy, and several countries provide
or are planning to provide general information about pensions and
savings for retirement.
Concluding Observations:
Demographic challenges and fiscal pressure have necessitated national
pension reform in many countries. Though the reform efforts we examined
all had the common goal of improving financial sustainability,
countries adopted different approaches depending on their existing
national pension systems and the prevailing economic and political
conditions. That is why reforms in one country are not easily
replicated in another, or if they are, may not lead to the same
outcome. Countries have different emphases, such as benefit adequacy or
equity; as a result, what is perceived to be successful in one place
may not be viewed as a viable option somewhere else. Although some
pension reforms were undertaken too recently to provide clear evidence
of results, the experiences of other developed countries do suggest
some lessons for U.S. deliberations on Social Security's future.
Some of these lessons are common to all types of national pension
reform and are consistent with findings in previous GAO studies.
Restoring long-term financial balance invariably involves reducing
projected benefits, raising projected revenues, or both. Additionally,
with early reform, policymakers are more likely to avoid the need for
more costly and difficult changes later. Countries that undertook
important national pension reform well before undergoing major
demographic changes have achieved or are close to achieving,
financially sustainable national pension systems. Others are likely to
need more significant steps because their populations are already
aging.
No matter what type of reform is undertaken, the sustainability of a
pension system will depend, in large part, on the long-term health of
the national economy. As the number of working people for each retiree
declines, average output per worker would have to increase in order to
sustain average standards of living. Reforms that encourage employment
and saving, offer incentives to postpone retirement, and promote growth
are more likely to produce a pension system that delivers adequate
retirement income and is financially sound for the long term.
Regardless of a country's approach, its institutions need to
effectively operate and supervise the different aspects of reform. A
government's capacity to implement and administer the publicly managed
elements of reform and its ability to regulate and oversee the
privately managed components are crucial. Good public understanding of
pension issues is needed to provide reasonable assurance that people
plan ahead to have adequate income in retirement and to help ensure
that pension reforms have enough public support to be sustainable. In
addition, education of the public becomes increasingly important as
workers and retirees face more choices and the national pension system
becomes more complex. This is particularly true in the case of
individual account reforms, which require high levels of financial
literacy and personal responsibility.
In nearly every country we studied, debate continues about alternatives
for additional reform measures. It is clearly not a process that ends
with one reform and often requires more than one type of reform. This
may in part be true because success can only be measured over the long
term, but problems may arise and need to be dealt with in the short
term. The positive lessons from other countries' reforms may only truly
be clear in years to come.
Agency Comments:
We provided a draft of this report to the Social Security
Administration, the State Department, and the Department of the
Treasury. SSA and Treasury provided technical comments on the draft;
the State Department did not provide comments. We also provided copies
of the draft to OECD staff and other external reviewers, who provided
technical comments. In response to these technical comments, we
modified the draft where appropriate.
We are sending copies of this report to the Commissioner of Social
Security, the Secretary of State, and the Secretary of the Treasury. We
will also make copies available to others on request. In addition, the
report will be available at no charge on GAO's Web site at
http://www.gao.gov/.
If you or your staff have any questions about this report, please
contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix III.
Signed by:
Barbara D. Bovbjerg, Director:
Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
We reviewed national pension reforms that occurred since 1970 in all 30
Organisation for Economic Co-operation and Development (OECD) countries
and Chile. We included Chile in our study because it was the first
country to undertake national pension reform that resulted in
individual accounts. On the basis of our preliminary research, we
identified three types of reform--adjustments to the existing pay-as-
you-go (PAYG) program, national pension reserve funds, and individual
account programs--that illustrate a variety of circumstances and
experiences with national pension reform across these
countries.[Footnote 43] While we reviewed each type of reform
separately for this report, we do indicate when countries have
undergone more than one of these types of reform.
We did not conduct an evaluation or audit of any country's national
pension program or its reform efforts; rather, we relied on the work of
officials in individual countries and international organizations with
expertise in this area. We did, however, draw some lessons based on our
review, as well as including the lessons that others have drawn. We
attempted to report the most current status of a country's reform by
using the most recently available data. Some countries may have
undergone changes to their systems subsequent to the publication of the
literature we reviewed, however. In many countries reforms are
implemented over an extended period of time, so the results are yet to
be apparent. We also contacted supreme audit institutions or reviewed
their Web sites to see if they have done similar work. However, much of
their work was of the audit nature and not relevant for our study.
Methodology:
To obtain information on other countries' national pension reforms, we
reviewed the types of reforms undertaken in OECD countries and Chile.
We selected the OECD countries in part because they are most comparable
to the United States. Additionally, the OECD has relatively comparable
data for its member countries. We conducted background research and
interviews to identify the types of reforms, if any, the selected
countries had undertaken. We primarily used information from the
following sources to identify countries' reforms and characteristics of
national pension systems: the Social Security Programs Throughout the
World publications, provided through a cooperative effort by the Social
Security Administration and the International Social Security
Association; publications from the International Social Security
Association and updates from its Social Security Worldwide database;
and publications from OECD, World Bank, International Monetary Fund,
and the European Union's Economic Policy Committee.
After identifying the countries to be reviewed and the types of reform
they had undertaken, we conducted a review of relevant literature on
these countries' national pension reforms, including the following
sources:
* OECD Economic Surveys;
* OECD publications on national pension reform and other related
issues;
* World Bank's Pension Reform Primer;
* Relevant government agency publications and Web sites from selected
countries;
* Reports from U.S. and international policy groups; and:
* Reports from U.S., international, and country-specific experts.
We also interviewed officials and interest group representatives in
Washington, D.C; Paris; and London. We met with pension experts and
country specialists at the OECD, the World Bank, and French and British
experts, officials, and interest group representatives, as well as
international pension experts in the United States. We formulated the
lessons learned in our report from those identified by experts and
officials and based on our own analysis of countries' reforms.
Generally, we aligned our lessons with GAO's criteria for evaluating
national pension reform, identifying key lessons related to fiscal
sustainability, adequacy and equity, and implementation and
administration of reform.
We relied mainly on OECD data for information on country demographics,
economics, and information related to the national pension programs.
OECD collects much of its data from its member countries and validates
its reports with these countries. For example, OECD recently published
a description of each OECD member country's mandatory pension system,
including the results of modeling that projects the net replacement
rates expected from old-age pension benefits once all reforms enacted
through 2002 have been fully implemented.[Footnote 44] OECD has also
undertaken studies of the projected level of public spending on
national old-age pension programs through 2050 based on national
estimates and common OECD economic assumptions.[Footnote 45] In cases
where national governments have completed more recent estimates, we
cited those rather than the earlier OECD estimates. Also, we do not
make a link between specific national pension reforms and changes in
the economy or of any specific reform measure and the sustainability of
the program. This is because most countries have undergone more than
one type of reform at different points in time, making causes and
effects difficult to determine.
To assess the reliability of the data on countries' national pension
systems, we (1) interviewed officials at the OECD including those in
the Statistics Directorate and the Economics Department responsible for
compiling these data based on information provided by government
officials in OECD member countries, and (2) performed some basic
reasonableness checks of the data against other sources of information.
We determined that the data are sufficiently reliable for the purpose
of making broad comparisons of the United States' and other countries'
pension systems. To ensure the reliability of its data, OECD also
compares and investigates alternative sources of data, uses an internal
peer and supervisory review process, and a process through which draft
reports are reviewed and validated by member governments prior to
publication. Nonetheless, OECD officials note several limitations in
the data, including the fact that the data are largely self-reported by
each country and are affected by differences in exchange rates, methods
for analyzing national account data and tracking price inflation, as
well as different methods used to predict longevity and economic
growth. OECD works to develop comparable data by, for example,
developing purchasing power parity factors, harmonized price indexes,
and projections of old-age pension spending based on common economic
assumptions. Because of, these limitations, we were unable to determine
the reliability and precision of estimates for each country. We
conducted our review from August 2004 through September 2005 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms:
Below are tabular data concerning OECD countries and Chile. Table 3
provides background information concerning each country's demographics,
economy, and political structure. Table 4 provides basic information
about each country's national pension system, including information
about spending on mandatory old-age pension programs, contribution
rates, the extent to which mandatory pensions replace workers'
earnings, and the size of voluntary supplementary private and
occupational pensions. Table 5 provides examples of various adjustments
to PAYG pension programs. Table 6 provides information on national
pension reserve funds for countries that have established such funds.
Table 7 provides information on individual account programs that
countries have adopted as part of their mandatory national pension
systems.
Table 3: Background on OECD Countries and Chile:
Country: Australia;
Estimated population in millions, July 2005: 20;
Number of people in the workforce for every person aged 65 or over:
2005: 3.9;
Number of people in the workforce for every person aged 65 or over:
2050: 1.6;
Percentage of population aged 55- 64 employed[A]: 50;
GDP per capita[B]: $30,700;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 21;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 29;
Government structure[C]: Democratic, federal-state system recognizing
the British monarch as sovereign.
Country: Austria;
Estimated population in millions, July 2005: 8;
Number of people in the workforce for every person aged 65 or over:
2005: 2.9;
Number of people in the workforce for every person aged 65 or over:
2050: 1.3;
Percentage of population aged 55- 64 employed[A]: 30;
GDP per capita[B]: 31,300;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 8;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 12;
Government structure[C]: Federal Republic.
Country: Belgium;
Estimated population in millions, July 2005: 10;
Number of people in the workforce for every person aged 65 or over:
2005: 2.5;
Number of people in the workforce for every person aged 65 or over:
2050: 1.5;
Percentage of population aged 55- 64 employed[A]: 28;
GDP per capita[B]: 30,600;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 11;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 19;
Government structure[C]: Federal parliamentary democracy under a
constitutional monarch.
Country: Canada;
Estimated population in millions, July 2005: 33;
Number of people in the workforce for every person aged 65 or over:
2005: 4.2;
Number of people in the workforce for every person aged 65 or over:
2050: 1.9;
Percentage of population aged 55- 64 employed[A]: 53;
GDP per capita[B]: 31,500;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 4;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 5;
Government structure[C]: Confederation with parliamentary democracy.
Country: Chile;
Estimated population in millions, July 2005: 16;
Number of people in the workforce for every person aged 65 or over:
2005: Not available;
Number of people in the workforce for every person aged 65 or over:
2050: Not available;
Percentage of population aged 55-64 employed[A]: Not available;
GDP per capita[B]: 10,700;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: Not available;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: Not available;
Government structure[C]: Republic.
Country: Czech Republic;
Estimated population in millions, July 2005: 10;
Number of people in the workforce for every person aged 65 or over:
2005: 3.5;
Number of people in the workforce for every person aged 65 or over:
2050: 1.2;
Percentage of population aged 55- 64 employed[A]: 42;
GDP per capita[B]: 16,800;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 1;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 4;
Government structure[C]: Parliamentary democracy.
Country: Denmark;
Estimated population in millions, July 2005: 5;
Number of people in the workforce for every person aged 65 or over:
2005: 3.4;
Number of people in the workforce for every person aged 65 or over:
2050: 2.0;
Percentage of population aged 55- 64 employed[A]: 61;
GDP per capita[B]: 32,200;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 4;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 9;
Government structure[C]: Constitutional monarchy.
Country: Finland;
Estimated population in millions, July 2005: 5;
Number of people in the workforce for every person aged 65 or over:
2005: 3.3;
Number of people in the workforce for every person aged 65 or over:
2050: 1.5;
Percentage of population aged 55- 64 employed[A]: 50;
GDP per capita[B]: 29,000;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 7;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 16;
Government structure[C]: Republic.
Country: France;
Estimated population in millions, July 2005: 61;
Number of people in the workforce for every person aged 65 or over:
2005: 2.7;
Number of people in the workforce for every person aged 65 or over:
2050: 1.3;
Percentage of population aged 55- 64 employed[A]: 37;
GDP per capita[B]: 28,700;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 10;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 11;
Government structure[C]: Republic.
Country: Germany;
Estimated population in millions, July 2005: 82;
Number of people in the workforce for every person aged 65 or over:
2005: 2.6;
Number of people in the workforce for every person aged 65 or over:
2050: 1.5;
Percentage of population aged 55- 64 employed[A]: 39;
GDP per capita[B]: 28,700;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 10;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 11;
Government structure[C]: Federal republic.
Country: Greece;
Estimated population in millions, July 2005: 11;
Number of people in the workforce for every person aged 65 or over:
2005: 2.0;
Number of people in the workforce for every person aged 65 or over:
2050: 1.2;
Percentage of population aged 55- 64 employed[A]: 42;
GDP per capita[B]: 21,300;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 22;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 28;
Government structure[C]: Parliamentary republic.
Country: Hungary;
Estimated population in millions, July 2005: 10;
Number of people in the workforce for every person aged 65 or over:
2005: 2.6;
Number of people in the workforce for every person aged 65 or over:
2050: 1.0;
Percentage of population aged 55- 64 employed[A]: 29;
GDP per capita[B]: 14,900;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 6;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 5;
Government structure[C]: Parliamentary democracy.
Country: Iceland;
Estimated population in millions, July 2005: 0.3;
Number of people in the workforce for every person aged 65 or over:
2005: 4.8;
Number of people in the workforce for every person aged 65 or over:
2050: 2.5;
Percentage of population aged 55- 64 employed[A]: 87[D];
GDP per capita[B]: 31,900;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: Not available;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: Not available;
Government structure[C]: Constitutional republic.
Country: Ireland;
Estimated population in millions, July 2005: 4;
Number of people in the workforce for every person aged 65 or over:
2005: 4.3;
Number of people in the workforce for every person aged 65 or over:
2050: 1.9;
Percentage of population aged 55- 64 employed[A]: 49;
GDP per capita[B]: 31,900;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 31;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 43;
Government structure[C]: Republic.
Country: Italy;
Estimated population in millions, July 2005: 58;
Number of people in the workforce for every person aged 65 or over:
2005: 2.2;
Number of people in the workforce for every person aged 65 or over:
2050: 0.9;
Percentage of population aged 55- 64 employed[A]: 30;
GDP per capita[B]: 27,700;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 15;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 16;
Government structure[C]: Republic.
Country: Japan;
Estimated population in millions, July 2005: 127;
Number of people in the workforce for every person aged 65 or over:
2005: 2.5;
Number of people in the workforce for every person aged 65 or over:
2050: 1.1;
Percentage of population aged 55- 64 employed[A]: 62;
GDP per capita[B]: 29,400;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 20;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 24;
Government structure[C]: Constitutional monarchy with a parliamentary
government.
Country: Luxembourg;
Estimated population in millions, July 2005: 0.5;
Number of people in the workforce for every person aged 65 or over:
2005: 3.2;
Number of people in the workforce for every person aged 65 or over:
2050: 1.7;
Percentage of population aged 55- 64 employed[A]: 28[D];
GDP per capita[B]: $58,900;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 4;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 9;
Government structure[C]: Constitutional monarchy.
Country: Mexico;
Estimated population in millions, July 2005: 106;
Number of people in the workforce for every person aged 65 or over:
2005: 6.8;
Number of people in the workforce for every person aged 65 or over:
2050: 2.3;
Percentage of population aged 55- 64 employed[A]: 54;
GDP per capita[B]: 9,600;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 24;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 37;
Government structure[C]: Federal republic.
Country: Netherlands;
Estimated population in millions, July 2005: 16;
Number of people in the workforce for every person aged 65 or over:
2005: 3.8;
Number of people in the workforce for every person aged 65 or over:
2050: 2.2;
Percentage of population aged 55- 64 employed[A]: 44;
GDP per capita[B]: 29,500;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 2;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 2;
Government structure[C]: Constitutional monarchy.
Country: New Zealand;
Estimated population in millions, July 2005: 4;
Number of people in the workforce for every person aged 65 or over:
2005: 4.2;
Number of people in the workforce for every person aged 65 or over:
2050: 1.7;
Percentage of population aged 55- 64 employed[A]: 64;
GDP per capita[B]: 23,200;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 0.4;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 0.5;
Government structure[C]: Parliamentary democracy.
Country: Norway;
Estimated population in millions, July 2005: 5;
Number of people in the workforce for every person aged 65 or over:
2005: 3.6;
Number of people in the workforce for every person aged 65 or over:
2050: 2.1;
Percentage of population aged 55- 64 employed[A]: 69;
GDP per capita[B]: 40,000;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 6;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 20;
Government structure[C]: Constitutional monarchy.
Country: Poland;
Estimated population in millions, July 2005: 39;
Number of people in the workforce for every person aged 65 or over:
2005: 3.1;
Number of people in the workforce for every person aged 65 or over:
2050: 1.0;
Percentage of population aged 55- 64 employed[A]: 29;
GDP per capita[B]: 12,000;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 4;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 5;
Government structure[C]: Republic.
Country: Portugal;
Estimated population in millions, July 2005: 11;
Number of people in the workforce for every person aged 65 or over:
2005: 3.1;
Number of people in the workforce for every person aged 65 or over:
2050: 1.2;
Percentage of population aged 55- 64 employed[A]: 51;
GDP per capita[B]: 17,900;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 25;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 35;
Government structure[C]: Parliamentary democracy.
Country: Slovak Republic;
Estimated population in millions, July 2005: 5;
Number of people in the workforce for every person aged 65 or over:
2005: 4.0;
Number of people in the workforce for every person aged 65 or over:
2050: 1.0;
Percentage of population aged 55- 64 employed[A]: 25;
GDP per capita[B]: 14,500;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: Not available;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: Not available;
Government structure[C]: Parliamentary democracy.
Country: South Korea;
Estimated population in millions, July 2005: 48;
Number of people in the workforce for every person aged 65 or over:
2005: 4.5;
Number of people in the workforce for every person aged 65 or over:
2050: 0.9;
Percentage of population aged 55- 64 employed[A]: 58;
GDP per capita[B]: 19,200;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: Not available;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: Not available;
Government structure[C]: Republic.
Country: Spain;
Estimated population in millions, July 2005: 40;
Number of people in the workforce for every person aged 65 or over:
2005: 2.7;
Number of people in the workforce for every person aged 65 or over:
2050: 1.3;
Percentage of population aged 55- 64 employed[A]: 41;
GDP per capita[B]: 23,300;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 15;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 9;
Government structure[C]: Parliamentary monarchy.
Country: Sweden;
Estimated population in millions, July 2005: 9;
Number of people in the workforce for every person aged 65 or over:
2005: 2.8;
Number of people in the workforce for every person aged 65 or over:
2050: 2.0;
Percentage of population aged 55- 64 employed[A]: 69;
GDP per capita[B]: 28,400;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 5;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 12;
Government structure[C]: Constitutional monarchy.
Country: Switzerland;
Estimated population in millions, July 2005: 7;
Number of people in the workforce for every person aged 65 or over:
2005: 3.4;
Number of people in the workforce for every person aged 65 or over:
2050: 2.1;
Percentage of population aged 55- 64 employed[A]: 66;
GDP per capita[B]: 33,800;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 10;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 13;
Government structure[C]: Federal republic.
Country: Turkey;
Estimated population in millions, July 2005: 70;
Number of people in the workforce for every person aged 65 or over:
2005: 5.1;
Number of people in the workforce for every person aged 65 or over:
2050: 1.4;
Percentage of population aged 55- 64 employed[A]: 33;
GDP per capita[B]: 7,400;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 17;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 15;
Government structure[C]: Republican parliamentary democracy.
Country: United Kingdom;
Estimated population in millions, July 2005: 60;
Number of people in the workforce for every person aged 65 or over:
2005: 3.2;
Number of people in the workforce for every person aged 65 or over:
2050: 1.8;
Percentage of population aged 55- 64 employed[A]: 56;
GDP per capita[B]: 29,600;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 11;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 19;
Government structure[C]: Constitutional monarchy.
Country: United States;
Estimated population in millions, July 2005: 296;
Number of people in the workforce for every person aged 65 or over:
2005: 4.1;
Number of people in the workforce for every person aged 65 or over:
2050: 2.3;
Percentage of population aged 55-64 employed[A]: 60;
GDP per capita[B]: 40,100;
Percentage of elderly people receiving less than half the median
income: Aged 66 to 75: 20;
Percentage of elderly people receiving less than half the median
income: Aged 76 and over: 30;
Government structure[C]: Constitution-based federal republic.
Source: OECD, Central Intelligence Agency (CIA), Social Security
Administration.
[A] For 2003, unless otherwise noted. Amounts are rounded to the
nearest whole number.
[B] For 2004, based on purchasing power parity.
[C] Government structure definitions from the United States' CIA. For
definitions of the government structures see, The World Factbook, 2005
on the CIA's webpage,
http://www.cia.gov/cia/publications/factbook/index.html, guide to
country profiles section--government type.
[D] Figure for 2002.
[End of table]
Table 4: Information concerning Countries' National Pension Systems:
[See PDF for image]
Source: OECD and Social Security Administration.
[A] National estimate of increase needed to fund projected benefits
using national models and common OECD economic and demographic
assumptions as published by OECD in 2005, except as noted.
[B] Total of employer and employee contributions for old-age, survivor,
and disability coverage, except as noted. In many cases these rates
apply to a specified range of earnings rather than all earnings. As of
2004 for Europe, Asia, and the Pacific; as of 2003 for the Americas,
except as noted.
[C] In some countries estimates for men and women differ. In these
cases the values shown are for men. Specifically, the estimates for
women in Austria are 86 percent, 85 percent, and 72 percent for half
average earnings, average earnings, and twice average earnings,
respectively. The estimates for women in Mexico are 50 percent, 30
percent, and 28 percent. The estimates for women in Poland are 62
percent, 49 percent, and 49 percent. The estimates for women in
Switzerland are 72 percent, 68 percent, and 42 percent. The estimates
for women in Turkey are 111 percent, 101 percent, and 82 percent,
respectively.
[D] In some countries voluntary pension programs play an important role
and substantially increase net replacement rates. In Canada estimated
net replacement rates, including voluntary schemes, are 109 percent, 95
percent, and 69 percent for half average earnings, average earnings,
and twice average earnings, respectively. In Denmark comparable
estimates are 125 percent, 82 percent, and 67 percent. In the United
Kingdom the estimates are 90 percent, 70 percent, and 58 percent. In
the United States the estimates are 106 percent, 92 percent, and 84
percent, respectively.
[E] Aggregate supplementary private and occupational voluntary pension
fund assets as a percentage of GDP in 2002 unless otherwise noted.
[F] Mandatory employer contribution to superannuation program. General
government revenue funds PAYG program.
[G] Up to 2,682 kroner per year per employee for labor-market
supplementary pension ATP plus 1 percent for Special Pension without a
ceiling, but Special Pension contributions were suspended in 2004
through 2007.
[H] Estimate for 2040; 2050 estimate not available. In contrast,
official reports suggest a 4.4 percent increase on unchanged labor
market policies for the period 2000 to 2040.
[I] National projection forecasts an increase of 12.2 percentage
points.
[J] No ceiling for workers first insured after January 1, 1993.
[K] Includes maternity/paternity, work injury, and unemployment
benefits as well as old-age, survivor, and disability coverage.
[L] For weekly earnings above 356 euros, about $445. Percentage rate
depends on level of earnings. Includes sickness, maternity, work
injury, unemployment, and adoptive benefits.
[M] No ceiling for workers first insured before January 1, 1996.
[N] From an estimate published by European Union's Economic Policy
Committee in 2001.
[O] As of 2001.
[P] Costs of most programs covered by general fund revenue.
[Q] Assumes 2 percent growth in the revaluation factor.
[R] Estimate published by OECD in 2001, noting that this estimate is
less comparable than estimates for other countries.
[S] Ceiling of $114 per day for some occupational classes.
[T] Assumes a 1.6 percent revaluation factor.
[U] Ceiling for employee contributions.
[V] Rate depends on age and gender.
[W] $90,000 as of 2005.
[End of table]
Table 5 provides examples of adjustments to national PAYG pension
programs undertaken by OECD countries and Chile. The table primarily
includes examples of reforms that increased contributions to the
programs or decreased benefits. It does not provide a comprehensive
list of such reforms.
Table 5: Examples of Adjustments to PAYG Programs, 1970-2004:
Country: Australia;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: 60 to 65 for women;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Means testing reintroduced in mid 1980s.
Country: Austria;
Increase in contribution rates or coverage: 9.0% to 9.5% beginning in
1989 and to 10.25% for employees by 2004;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: 1993: 10
to 15 years for full retirement; 2003: 15 to 40 years by 2028; 1997: 15
to 18 years for early retirement;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: 1993: new
adjustment formula based on net wages;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Reduced access to early retirement with
later age requirement, reduced benefits, and incentives for delayed
retirement.
Country: Belgium;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: 60 to 65 for women;
Change in years of earnings considered in benefit calculation: 20 to 35
years for early retirement;
Change in indexation for calculation of initial benefit[B]: Adoption of
price index;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Minimum work life for early retirement
increased from 24 to 35 years; age limit for early retirement increased
from 55 to 58.
Country: Canada;
Increase in contribution rates or coverage: 5.85% to 9.9% phased in
beginning in 1998;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: All
years less 15% of low-earning years;
Change in indexation for calculation of initial benefit[B]:
Valorization based on ratio of the earning year's maximum pensionable
earnings[C];
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Means testing for basic flat benefit at
high income levels.
Country: Chile;
Increase in contribution rates or coverage: Increased to average of 50%
of covered wages by 1974; later reduced to 33%, then 20%;
Change in retirement age[A]: 60 to 65 for men; 55 to 60 for women;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: None identified.
Country: Czech Republic;
Increase in contribution rates or coverage:
None identified;
Change in retirement age[A]: 60 to 63 for men; 57 to 63 for women, but
lower depending on the number of children raised;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: Move to
price indexation plus increases of at least one-third of real wage
growth;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: None identified.
Country: Denmark;
Increase in contribution rates or coverage: Increased by 1% of wages
recently--other increases in past; gradual increase in pension
contribution rates from 0 to 9% from 1993 to 2004, 5% to 9% for blue
collar workers effective 2004;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Imposed actuarially fair adjustment for
retiring early, decreasing cost to government and benefits to early
retirees.
Country: Finland;
Increase in contribution rates or coverage: Worker contributions to
employment-based pensions introduced, then increased 0.7% to 2.2% of
wages, and 3.7% of wages above a set level;
Change in retirement age[A]: 63 to 65;
Change in years of earnings considered in benefit calculation: 4 to 10,
then to whole work life;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: From wages to 80%
prices and 20% of wages, but no adjustment in 1994;
Economic and demographic adjustment mechanisms: Pension benefits linked
to life expectancy beginning in 2009;
Other decrease in benefits: Lower accrual rates for early retirees; and
minimum age for early retirement raised from 58 to 60, then to 62
years; flat monthly base benefit eliminated in favor of a pension-
tested benefit.
Country: France;
Increase in contribution rates or coverage: New tax for pensions: 1% of
all incomes;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: 10 to 25
years for calculation and 37.5 to 40 years required contributions;
Change in indexation for calculation of initial benefit[B]: From wages
to prices;
Change in indexation for benefits during retirement: From wages to
prices; no adjustment in 1994;
Economic and demographic adjustment mechanisms: Point system for
calculating earnings-related benefits;
Other decrease in benefits: None identified.
Country: Germany;
Increase in contribution rates or coverage: Successive increases, e.g.,
1991 increase of 2.5% and 1.7% in 1994; upper earnings limit indexed to
wages;
Change in retirement age[A]: 60 to 65 for women by 2004;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: From gross to net
wages, then prices;
Economic and demographic adjustment mechanisms: Point system for
calculating earnings-related benefits in supplementary schemes,
including a demographic factor;
Other decrease in benefits: Adopted penalties for early retirement and
incentives for later retirement.
Country: Greece;
Increase in contribution rates or coverage: Major increase in 1992;
Change in retirement age[A]: 60 to 65 for women;
Change in years of earnings considered in benefit calculation: Minimum
years 13.5 to 15 years, 1990;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Benefit calculation factor 80% to 60%.
Country: Hungary;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: 60 to 62 for men; 56 to 62 for women;
Change in years of earnings considered in benefit calculation: Increase
in number of years for early and full retirement benefit;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: From wages to half
wages and half prices;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Increased penalties for early retirement by
raising the minimum age and increasing the minimum number of years for
early retirement.
Country: Iceland;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Flat-rate component of the basic pension
was abolished and replaced with a wholly income-related benefit.
Country: Ireland;
Increase in contribution rates or coverage: Earnings cap on employer
contributions eliminated (effective April 2001);
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: None identified.
Country: Italy;
Increase in contribution rates or coverage: Increase in 1995-97 period;
from 24.5% to 32.7% of gross earnings, but in part this reflected re-
labeling other contributions as social security contributions;
Change in retirement age[A]: 60 to 65 for men; 55 to 60 for women
through 1995, under new NDC: age 65, but early retirement as early as
57;
Change in years of earnings considered in benefit calculation:
Increased minimum number of years for seniority pension and old-age
pension;
Change in indexation for calculation of initial benefit[B]: Earnings
growth to moving average of nominal GDP growth over 5 years;
Change in indexation for benefits during retirement: From minimum wage
to prices; partial suspension of price indexation;
Economic and demographic adjustment mechanisms: NDC plan adopted 1995,
but to be phased in slowly;
Other decrease in benefits: Minimum years required for benefit 15 to 20
years, but reset to 5 years for NDC.
Country: Japan;
Increase in contribution rates or coverage: 17.35% to 18.3% by 2017
government share to increase from one-third to one-half of cost; also
extended contributions base to include bonuses (1994);
Change in retirement age[A]: 60 to 65 for men and 59 to 65 for women;
Change in years of earnings considered in benefit calculation: 25 to 40
in 1986 reform;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: Gross wages to net
wages (1994), then from wages to prices, then prices less demographic
and longevity adjustments projected to be 0.6% and 0.3% per annum;
Economic and demographic adjustment mechanisms: In 2004 legislation
introduced automatic adjustment to benefits in response to
macroeconomic changes in the working age population and life
expectancy;
Other decrease in benefits: Accrual rate for earnings-related pension
from 1% per year to 0.7125%; benefits to be reduced 20% by 2025;
increased penalties for early retirement, incentives for later
retirement.
Country: Luxembourg;
Increase in contribution rates or coverage: Contribution rates are
increased based on actuarial review every 7 years;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: Higher, not
lower, revaluation factors for prior years' earnings;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Increases in benefits, not decreases:
supplements, higher accrual rates.
Country: Mexico;
Increase in contribution rates or coverage: 20% to 26%;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: 10 to 25
years of contributions required for minimum benefit;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: None identified.
Country: Netherlands;
Increase in contribution rates or coverage: Increase in 1995-1997
period and 2002 to 2004;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: Shift
from calculation based on final salary to one based on average salary;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: Indexing suspended
temporarily in late 1980s;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Imposed taxes on quasi-mandatory occupation-
based pension early retirement benefits to increase penalties for early
retirement and achieve actuarial neutrality.
Country: New Zealand;
Increase in contribution rates or coverage: No employer/employee
contributions to PAYG;
Change in retirement age[A]: 62 to 65;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: The link to 80% of average wages (for
couple) abolished; relative value is now below 70%.
Country: Norway;
Increase in contribution rates or coverage: Generally each May
Parliament increases contributions by increasing the base amount used
to set taxable wages (no indexation);
Change in retirement age[A]: Retirement age lowered from 70 to 67 in
1973;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: 45% to 42% of base times average pension
points; maximum points per year 8 1/3 to 7.
Country: Poland;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: None identified;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: Indexation
suspended 2005; scheduled to be adjusted every 3 years; earlier if
inflation is 5% or more;
Economic and demographic adjustment mechanisms: NDC reform adjusts
benefits to reflect contributions, longevity, and growth in wages;
replacement rate expected to drop from 73% to 24% by 2050;
Other decrease in benefits: None identified.
Country: Portugal;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: 62 to 65 for women;
Change in years of earnings considered in benefit calculation: From
best 10 of last 15 years to entire work life;
Increase in minimum contribution period;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Accrual rate will be reduced from 2.2% to
2%.
Country: Slovak Republic;
Increase in contribution rates or coverage: Increase in 1995-1997
period;
Change in retirement age[A]: 60 to 62 for men; 53 to 62 for women;
Change in years of earnings considered in benefit calculation: Highest
5 of last 10 years to point system considering working life;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: Adoption of a points
system with adjustments for point values;
Other decrease in benefits: None identified.
Country: South Korea;
Increase in contribution rates or coverage: Increase in 1995-1997
period and continued gradual increases through 2025;
Change in retirement age[A]: 60 to 65 by 2033;
Change in years of earnings considered in benefit calculation: 15 years
in 1990, then 10 years, then lifetime earnings in point system;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: None identified.
Country: Spain;
Increase in contribution rates or coverage: Various ceilings on
contributions raised to the highest level;
Change in retirement age[A]: Closed earlier plan with retirement age 60
to new entrants; new entrants retire at age 65;
Change in years of earnings considered in benefit calculation: 8 years
of contributions to last 15 years;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Reduced early retirement benefits.
Country: Sweden;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: Increase from 65 to 66; decrease to 61
with actuarial penalty;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: NDC reform adjusts
benefits to reflect contributions, longevity, and economic performance;
Other decrease in benefits: None identified.
Country: Switzerland;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: 62 to 65 for women;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: Demographic conversion
factor reduced from 7.2% to 6.65% by 2016;
Other decrease in benefits: None identified.
Country: Turkey;
Increase in contribution rates or coverage: None identified;
Change in retirement age[A]: 55 to 60 for men; 50 to 58 for women;
Change in years of earnings considered in benefit calculation: Minimum
contributions 5,000 to 7,000 days;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: None identified;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Reduction in benefits for recipients who
work.
Country: United Kingdom;
Increase in contribution rates or coverage: Employees' contributions 9%
to 10%; also rates increased by 1 percent for employers and employees
on earnings above a threshold;
Change in retirement age[A]: 60 to 65 for women from 2010 to 2020;
Change in years of earnings considered in benefit calculation: From 20
best years to all working years for earnings-related pension;
Change in indexation for calculation of initial benefit[B]: None
identified;
Change in indexation for benefits during retirement: Basic state
pension indexed to prices, 1980;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Earnings-related pension reduced from 25%
of best 20 years earnings to 20% of lifetime earnings.
Country: United States;
Increase in contribution rates or coverage: 10.8% to 12.4%;
Change in retirement age[A]: 65 to 67;
Change in years of earnings considered in benefit calculation: None
identified;
Change in indexation for calculation of initial benefit[B]: Wage index
amended to include deferred compensation beginning in 1991 (increases
benefits);
Change in indexation for benefits during retirement: Delayed the June
1983 cost-of-living adjustment until December 1983;
Economic and demographic adjustment mechanisms: None identified;
Other decrease in benefits: Cut windfall benefits to those with
benefits from employment not covered by the program.
Source: OECD, International Social Security Association, SSA, World
Bank, and country publications.
[A] Changes in retirement age generally both increase contributions and
decrease benefits. Workers contribute for a longer period and receive
benefits for a shorter period if they work longer.
[B] This is the index used for adjusting earlier years' earnings when
calculating an initial earnings-related pension benefit. In the United
States, for example, earnings in a given year under age 60 are adjusted
to reflect the increase in average wages from that year to the year in
which the worker reaches age 60. Earnings from age 62 to age 67 are
adjusted using a price index.
[C] This is indexed to growth in average earnings during the 3, then 4,
then 5-year period ending at retirement.
[End of table]
Table 6: National Pension Reserve Fund Reforms:
Country: Belgium;
Year: Established 2001;
Reserve as percentage of GDP: Not available (NA);
Reserve Fund management: Silver Fund;
Restrictions on class of investments: 100% in government securities;
De-accumulation trigger or date: None identified.
Country: Canada;
Year: Established 1997;
Reserve as percentage of GDP: 2.3%[A];
Reserve Fund management: Canadian Pension Plan Investment Board
(CPPIB);
Restrictions on class of investments: 30% limit on foreign securities
beginning in 2001;
De-accumulation trigger or date: None identified.
Country: Denmark;
Year: Established 1964;
Reserve as percentage of GDP: 25%[B];
Reserve Fund management: Arbejdsmarkedets Tillaegspension (ATP)--
corporation with board appointed by various employee & employer
associations;
Restrictions on class of investments: The Board annually sets
investment guidelines;
De-accumulation trigger or date: None identified.
Country: Finland;
Year: Implemented 1999;
Reserve as percentage of GDP: 4.5%[A];
Reserve Fund management: ;
Restrictions on class of investments: None Identified;
De-accumulation trigger or date: None identified.
Country: France;
Year: Implemented 2004;
Reserve as percentage of GDP: 1.2%[A];
Reserve Fund management: Pensions Reserve Fund (Fonds de Reserve des
Retraites, FRR);
Restrictions on class of investments: Equities of firms headquartered
outside European Economic Area limited to 25%;
De-accumulation trigger or date: 2020.
Country: Greece;
Year: Established 2002;
Reserve as percentage of GDP: NA;
Reserve Fund management: NA;
Restrictions on class of investments: None Identified;
De-accumulation trigger or date: None identified.
Country: Ireland;
Year: Established 2001;
Reserve as percentage of GDP: 9.6%[C];
Reserve Fund management: Autonomous National Pensions Reserve Fund
Commission (NPRFC);
Restrictions on class of investments: None of the assets can be
invested in Irish government securities;
De-accumulation trigger or date: 2025.
Country: Japan;
Year: Established 1942, reformed 2001;
Reserve as percentage of GDP: 28.2%[A];
Reserve Fund management: Government Pension Investment Fund (GPIF)[D];
Restrictions on class of investments: Minister set requirement that
holdings of domestic bonds must be greater than foreign bonds; foreign
equities must represent less than two-thirds of domestic equity
investments; and holdings in foreign stocks must be greater than
foreign bonds;
De-accumulation trigger or date: None identified.
Country: Korea;
Year: Established 1988;
Reserve as percentage of GDP: 13.0%[A];
Reserve Fund management: National Pension Fund;
Restrictions on class of investments: None identified;
De-accumulation trigger or date: None identified.
Country: Luxembourg;
Year: Late 1980s;
Reserve as percentage of GDP: 23.6%[A];
Reserve Fund management: NA;
Restrictions on class of investments: None identified;
De-accumulation trigger or date: None identified.
Country: Netherlands;
Year: Established 1998;
Reserve as percentage of GDP: NA;
Reserve Fund management: AOW-spaarfonds (AOWSF);
Restrictions on class of investments: None identified;
De-accumulation trigger or date: 2020.
Country: New Zealand;
Year: Established 2001;
Reserve as percentage of GDP: 1.6%[A];
Reserve Fund management: Guardians of New Zealand Superannuation Fund;
Restrictions on class of investments: None legislated, investment
policy set and reviewed annually;
De-accumulation trigger or date: 2020.
Country: Norway;
Year: Established 1990;
Reserve as percentage of GDP: 65%[C];
Reserve Fund management: Norwegian Government Petroleum Fund (NGPF)[C];
Restrictions on class of investments: 100% in foreign securities;
De-accumulation trigger or date: None identified.
Country: Portugal;
Year: Established 1989, reformed 2002;
Reserve as percentage of GDP: 3.4%[B];
Reserve Fund management: Fundo de Estabilização Financeira da Segurança
Social, FEFSS;
Restrictions on class of investments: None identified;
De-accumulation trigger or date: None identified.
Country: Spain;
Year: Established 1997;
Reserve as percentage of GDP: 2.6%[C];
Restrictions on class of investments: None;
De-accumulation trigger or date: None identified.
Country: Sweden;
Year: Established 1960, reformed 1999;
Reserve as percentage of GDP: 23.6%[A];
Reserve Fund management: Autonomous AP-fonden (APF) boards;
Restrictions on class of investments: A limit of 5 percent in unlisted
securities; no one of the 4 funds can hold more than 2% of the value of
equities in a single company; No more than 40% in investments with
unhedged foreign currency exposure; At least 30% in highly rated fixed
income securities;
De-accumulation trigger or date: None identified.
Country: United States;
Year: Reformed 1983;
Reserve as percentage of GDP: 14.1%[A];
Reserve Fund management: Old-Age and Survivor's Insurance Trust Fund
trustees;
Restrictions on class of investments: 100% in government securities; no
foreign securities;
De-accumulation trigger or date: Shortfall in program cash flows.
Source: OECD, World Bank, and annual reports for specific funds.
[A] As of 2003.
[B] As of 2000.
[C] As of December 31, 2004.
[D] Also known as the Investment Fund of Social Security Reserves or
(IFSSR).
[End of table]
Table 7: Individual Account Reforms:
[See PDF for image]
Source: OECD, SSA, World Bank, and country publications.
[A] Estimates include fees on investments, record-keeping services,
marketing, and profits. Data from Estelle James, Gary Ferrier, James
Smalhout, and Dimitri Vittas, Administrative Costs and the Organization
of Individual Account Systems: A Comparative Perspective, in Robert
Holzmann and Joseph Stiglitz, eds., New Ideas About Old Age Security
(Washington, D.C.: World Bank, 2001), except as noted.
[B] The minimum rate of return is no less than 2 percentage points
below the average for all pension funds of the same type.
[C] Combinations may be a phased withdrawal with deferred annuity, or
immediate annuity with phased withdrawal.
[D] This row covers Denmark's Special pension savings scheme (SP) as
amended in 2000. SP contributions in 1999 and 2000 were redistributed
among workers to help equalize benefits. Denmark also provides a Labor
Market Supplementary Plan (ATP) based on deferred annuities. The amount
of contributions is based on the number of hours worked rather than
earnings. The level of benefits is based in part on the rate of return
in the centrally managed investment fund. Since 2002 the accrual of
pension rights has been based on a guaranteed interest rate of 2
percent, but if actual returns are higher, the level of benefits can be
increased.
[E] Iceland made its occupation-based pension system, with a defined
benefit structure, compulsory in 1974. In 1997, Iceland passed
legislation that codified the principle of a mandatory payment of at
least 10 per cent of wages and salaries in order to acquire pension
rights, and it also allows for the occupation-based pension program to
create defined contribution individual accounts as a complement to
defined benefit pensions. However, in practice, employers have not yet
established these. Voluntary supplementary individual accounts are also
available. The occupation-based pensions have a contribution rate of 10
percent of an employee's wages. A minimum pension of at least 56% of
lifetime average salary is paid for a contribution period of 40 years
(equivalent to 1.4% of average lifetime salary per contribution year)
and is paid for life.
[F] The employer, employee, and government together contribute 6.5
percent, and the employee contributes an additional 5 percent
contribution to an individual housing account (a scheme known as
Infonavit) which reverts to the retirement account when it is not used.
[G] The minimum rate of return is either 50 percent of the average rate
or 4 percent lower than the average for all funds during 24 consecutive
months, whichever is lower.
[H] The 1985 mandatory employer-based pensions built upon the pre-
existing voluntary occupational plans.
[I] Employee contributions vary based on age and gender, ranging from 7
percent to 18 percent on earnings between about $19,900 and $59,800.
Employers have to at least match these contributions.
[J] Estimate from OECD, OECD Economic Surveys 2004: Poland (Paris: June
2004).
[End of table]
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara D. Bovbjerg (202) 512-7215 or bovbjergb@gao.gov:
Acknowledgments:
In addition to the contact named above, Alicia Puente Cackley,
Assistant Director; Benjamin P. Pfeiffer; Joseph Applebaum; Thomas A.
Moscovitch; Nhi Nguyen; Nyree M. Ryder; Roger Thomas; Seyda G.
Wentworth; Corinna A. Nicolaou; Lise Levie; and Pat Elston made key
contributions to this report.
[End of section]
Glossary:
Add-on:
Individual accounts supplement Social Security benefits and would draw
contributions from new revenue streams.
Adequacy:
(See Income adequacy.)
Annuity:
An insurance product that provides a stream of payments for a pre-
established amount of time in return for a premium payment--the amount
being converted into any annuity. For example, a life annuity provides
payments for as long as the annuitant lives. Only insurance companies
can underwrite life annuities in the United States. Other financial
intermediaries, such as banks and stock brokerage firms, may sell
annuities issued by insurance companies.
Baby boomers:
Cohort of people born after World War II. This includes Americans born
from 1946 through 1964; 76 million strong, they represent the longest
sustained population growth in U.S. history. Other countries generally
use the term "baby boomers" to describe this generation.
Carve-out:
Individual accounts that would result in some reduction of or offset to
Social Security benefits because contributions to those accounts would
draw on existing Social Security revenues.
Consumer price index (CPI):
A measure of the change over time in the prices, inclusive of sales and
excise taxes, paid by urban households for a representative market
basket of consumer goods and services. The CPI is prepared by the U. S.
Department of Labor and used to compute Social Security cost of living
adjustment (COLA) increases.
Covered worker:
A worker in covered employment, that is, a job through which the worker
has made contributions to Social Security.
Deficit:
The amount by which the government's spending exceeds its revenues in a
given period, usually a fiscal year. The federal deficit is the
shortfall created when the federal government spends more in a fiscal
year than it receives in revenues. To cover the shortfall, the
government sells bonds to the public.
Defined benefit (DB):
A type of retirement plan that guarantees a specified retirement
payment and in which the plan's sponsor assumes the risk of providing
these benefits. Defined benefit plans promise their participants a
steady lifetime retirement income, generally based on years of service,
age at retirement, and salary averaged over some number of years.
Defined benefit plans express benefits as an annuity but may offer
departing participants the opportunity to receive lump-sum
distributions. Defined benefit plans are one of two basic types of
employer-sponsored pension plans.
Defined contribution (DC):
A type of retirement plan that establishes individual accounts for
employees to which the employer, participants, or both make periodic
contributions. Defined contribution plan benefits are based on employer
and participant contributions to and investment returns (gains and
losses) on the individual accounts. Employees bear the investment risk
and often control, at least in part, how their individual account
assets are invested.
Dependency ratio:
An estimate of the number of dependents per worker, generally defined
as the ratio of the elderly (ages 65 and older) and/or the young (under
age 15) to the population in the working ages (ages 15-64) or to the
projected size of the labor force.
Dependent:
A person who is eligible for benefits or care because of his or her
relationship to an individual. Under the Social Security Act,
"dependent" means the same as it does for federal income tax purposes;
i.e., someone for whom the individual is entitled to take a deduction
on his personal income tax return, generally an individual supported by
a tax filer for over half of a calendar year.
Early retirement age:
The age at which individuals qualify for reduced retirement benefits if
they choose to collect benefits before the normal retirement age; the
current early retirement age for Social Security is 62. Individuals who
choose to take retirement benefits early will have their monthly
benefits permanently reduced, based on the number of months they
receive checks before they reach full retirement age.
Full retirement age (FRA):
(Also called normal or statutory retirement age.) The age at which
individuals qualify for full, or unreduced, retirement benefits from
Social Security and employer-sponsored pension plans. The normal
retirement age for Social Security was 65 for many years. For workers
and spouses born in 1938 or later and widows/widowers born in 1940 or
later, the normal retirement age increases gradually from age 65 until
it reaches age 67 in the year 2022. Among OECD countries, based on full
implementation of laws enacted as of 2002, the retirement age ranges
from 60 (in France and Korea) to 67 (in Iceland, Norway, and the United
States).
Full funding:
A pension system that is fully funded is one in which sufficient
contributions have been put aside so that assets accumulated to date
are equal to the value of benefits accrued to date. Defined
contribution pensions and individual retirement accounts are fully
funded by definition.
General revenue transfers:
Funds moved from the General Fund of the Treasury to other programs
that are usually funded with earmarked revenue, sometimes to maintain
the solvency of those programs. General funds, constituting about two-
thirds of the budget, have no direct link between how they are raised
and how they are spent. General fund receipts include income and excise
taxes.
Gross domestic product (GDP):
A commonly used measure of domestic national income. GDP measures the
market value of output of final goods and services produced within a
country's territory, regardless of the ownership of the factors of
production involved, i.e., local or foreign, during a given time
period, usually a year. Earnings from capital invested abroad (mostly
interest and dividend receipts) are not counted, while earnings on
capital owned by foreigners but located in the country in question are
included. GDP may be expressed in terms of product--consumption,
investment, government purchases of goods and services, and net
exports--or it may be expressed in terms of income earned-wages,
interest, and profits. It is a rough indicator of the economic earnings
base from which government draws its revenues.
Income adequacy:
Helping workers maintain living standards during retirement by
replacing income from work at an adequate level and to prevent
destitution in old age. The U.S. Congress expected that Social Security
benefits would eventually provide more than a "minimal subsistence" in
retirement for full-time, full-career workers. Various measures help
examine different aspects of this concept, but no single measure can
provide a complete picture. Such measures include poverty rates,
replacement rates, and the proportion of the population that depends on
others for income support.
Indexation:
(See Price indexation, Wage indexation.)
Individual account:
These are fully funded accounts that are administered by either
employers, the government, or designated third parties and are owned by
the individual. The level of retirement benefits depends largely on the
amount of contributions made by, or on behalf of, an individual into
the account during his or her working life, investment earnings, and
the amount of fees the individual is required to pay.
Individual equity:
The relationship of benefits to contributions--for example, implicit
rates of return on Social Security contributions or money's worth
ratios.
National pension reserve funds:
These are set up to partially prefund PAYG national pension programs.
Governments commit to make regular transfers to these investment funds
from, for example, budgetary surpluses. To the extent that these
contribute to national saving, they reduce the need for future
borrowing or for large increases in contributions to pay scheduled
benefits. Funds can be invested in a combination of government
securities and domestic as well as foreign private sector securities.
Because of differences in accounting practices, some countries report
reserve funds as part of national budgets, while others do not include
them in federal figures:
National saving:
Total saving by all sectors of the economy: personal saving, business
saving (corporate after-tax profits not paid as dividends), and
government saving (the budget surplus or deficit--indicating dissaving-
-of all government entities). National saving represents all income not
consumed, publicly or privately, during a given period. Net national
saving is gross national saving less consumption of fixed capital
(depreciation).
Notional defined contribution (NDC) program:
PAYG pension programs in which "notional" accounts track both incoming
contributions and investment earnings, but these exist only on the
books of the managing institution. At retirement, the accumulated
notional capital in each account is converted to a stream of pension
payments using a formula based on factors such as life expectancy at
the time of retirement.
Old-Age, Survivors, and Disability Insurance (OASDI):
The two U.S. Social Security programs--Old-Age and Survivors Insurance
(OASI) and Disability Insurance (DI)--that provide monthly cash
benefits to beneficiaries and their dependents when the beneficiaries
retire, to beneficiaries' surviving dependents, and to disabled worker
beneficiaries and their dependents.
Pay-as-you-go (PAYG:):
System of financing in which contributions that workers and/or
employers make in a given year are used to fund the payments to
beneficiaries in that same year, and the system's trust funds are kept
to a relatively small contingency reserve.[Footnote 46]
Payroll tax:
Tax imposed on some or all of workers' earnings that can be imposed on
employers, employees, or both. In the United States, payroll taxes are
used to finance the Social Security and Medicare programs. Employers
and employees each pay Social Security taxes equal to 6.2 percent of
all employee earnings up to a cap and pay Medicare taxes of 1.45
percent, with no cap. Payroll taxes are also known as FICA (Federal
Insurance Contributions Act) taxes or SECA (Self-Employment
Contributions Act), if the taxpayer is self-employed. All OECD
countries except New Zealand levy payroll taxes to support their
pension programs, though the rates and the shares borne by employers
and employees vary, as do the minimum and maximum level of earnings
subject to the tax and the kinds of programs funded.
Price indexation (Compare with Wage indexation.)
A method by which benefits are adjusted at periodic intervals by a
factor derived from an index of prices; some Social Security reform
proposals in the United States would price-index earnings to compute
benefits, instead of using wage indexing. Over time, increases in wages
have been greater and are expected to continue to be greater than
increases in prices. Indexing earnings to prices instead of wages
would, therefore, reduce the average lifetime earnings used in the
formula, which, in turn, would reduce benefits.
Rate of return:
Usually expressed annually, the rate of return is the gain or loss
generated from an investment, expressed as a percentage of the value at
the time of the initial investment.
Replacement rate:
The ratio of retirement benefits (from Social Security or employer-
sponsored plans) to preretirement earnings. Analysts often compare
current benefits with a recipient's previous wages to judge the
adequacy of Social Security payments.
Social insurance:
Under a social insurance program, the society as a whole insures its
members against various risks they all face, and members pay for that
insurance at least in part through contributions to the system. Social
insurance programs, including Social Security, are designed to achieve
certain social goals.
Social Security Administration (SSA):
The federal agency that administers all Social Security related
programs, including the Supplemental Security Income (SSI) and the
Disability Insurance (DI) programs.
Solvency:
For Social Security, a condition of financial viability in which the
program can meet its full financial obligations as they come due.
Specifically, the ability to pay full benefits using existing revenue
sources and trust fund balances. When a program does not meet these
conditions, it is said to be insolvent.
Sustainable solvency:
For Social Security, sustainable solvency means the ability to pay
benefits, based on current law projections of revenue and outlays,
beyond Social Security's Board of Trustees' 75-year forecast and make
Social Security permanently solvent. Also defined as having a stable
and growing trust fund ratio with program revenues increasing faster
than outlays at the end of the 75-year period. The European Union and
OECD have examined the fiscal sustainability of national pension
systems based in part on projections of the change in the percentage of
countries' GDP to be spent on old-age pensions from 2000 to 2050 under
current law.
Transition costs:
Refers to the additional revenue required to implement substitute
individual account plans. Under some individual account plans, portions
of Social Security contributions would be diverted to the accounts.
However, under Social Security's pay-as-you-go financing, some of those
contributions would also be needed to pay for current benefits. Making
account deposits while also meeting current benefit costs requires
additional revenue, which we refer to as transition costs.
Wage indexation:
(Compare Price indexation.) A method by which benefits are adjusted at
periodic intervals. Under its current formula, SSA uses the national
average wage indexing series to index a person under age 60's lifetime
earnings when computing that person's Social Security benefits.
Earnings from age 62 to age 67 are adjusted using a price index.
FOOTNOTES
[1] Generally, changes in contributions made to a national pension
program means changes in the tax rate on individuals or employers.
[2] The OECD is a forum for the governments of 30 countries to work
together on economic, social, environmental, and governance issues
through their commitment to democratic government and the market
economy. The OECD works to promote economic growth, financial
stability, trade and investment, technology, innovation, and
development cooperation.
[3] For additional information concerning Social Security reform in the
United States, see GAO, Social Security Reform: Answers to Key
Questions, GAO-05-193SP (Washington, D.C.: May 17, 2005).
[4] See GAO, Social Security: Criteria for Evaluating Social Security
Reform Proposals, GAO/T-HEHS-99-94 (Washington, D.C.: Mar. 25, 1999).
[5] Asset allocation varies greatly across countries. The U.S. Social
Security Trust Fund, for example, is exclusively invested in
nonmarketable government securities; on the other hand, countries such
as Canada and Sweden invest a large fraction of their reserve fund
assets in equities. Moreover, several countries, such as New Zealand,
diversify their portfolios to include a significant portion of foreign
shares.
[6] The Social Security Administration (SSA) uses a somewhat different
ratio--the number of workers covered by the Social Security program for
each Social Security beneficiary. In 2004 there were 3.3 such workers
for each SSA beneficiary, and SSA projects that this ratio will decline
to 2.1 in 2031, based on the intermediate assumptions of the 2005
trustees' report. SSA's projections take into account the effects of
gradual increases in retirement age for those born after 1937, with a
retirement age of 67 for those born in 1960 or later.
[7] Some countries, such as Germany, originally had pre-funded national
pension programs providing modest benefits, but pension reserves
diminished as they increased the level of benefits.
[8] This list of types of reform is not comprehensive. Some countries,
Norway, for example, recently adopted legislation requiring employers
to provide pensions (usually defined benefit programs) for employees.
[9] A fully prefunded pension program would no longer be a PAYG system.
[10] The Netherlands, New Zealand, and the United States are examples
of countries that incorporate reserve funds into national budgets;
Canada and Finland, for instance, do not.
[11] OECD has assessed the financial sustainability of most OECD member
countries' pension systems by projecting the change in spending needed
to support the old-age pension programs through 2050. For details, see
table 4 in app. II.
[12] Increases in life expectancy, decreases in birth rates, or
decreases in real (inflation adjusted) interest rates can reduce the
level of benefits that a pension program can provide at a given tax
(contribution) rate.
[13] The adequacy of pension benefits can be evaluated both in terms of
their minimum level and the extent to which they replace earnings. For
more information on projected replacement rates for OECD pensions
systems, see table 4 in app. II.
[14] This was the equivalent of about $203 a week in mid-2004. To
qualify for this basic benefit, the retiree must have 260 weeks of paid
contributions, with an annual average of at least 48 weeks of paid or
credited contributions.
[15] The lack of a financial incentive applies up to the point at which
the retiree has sufficient income or assets that they no longer qualify
for the benefit.
[16] For a discussion of the understandability of benefit statements in
Canada, Sweden, the United Kingdom and the United States, see GAO,
Social Security Statements: Social Security Administration Should
Better Evaluate Whether Workers Understand Their Statements, GAO-05-192
(Washington, D.C.: Apr. 1, 2005).
[17] In contrast only 7 percent of the women who were not affected by
the increase expected to retire before they reached the state pension
age that applied to them (60 years).
[18] While some investment risks are unavoidable, other kinds of risks
can be minimized by diversifying the portfolio among asset classes, for
example stocks, bonds, and real estate, and within asset classes.
[19] If however, policymakers increase deficit spending or decrease
surpluses in the rest of the government's budget in response to the
accumulation of pension reserves, the prefunding benefits of the
reserve will be offset.
[20] Apart from a national fund for pension reserves, with a balance
equal to about 28 percent of GDP as of 2003, Japan has accumulated
savings through Japan Post, a national corporation with a large savings
program. Japan Post's assets (50 percent of GDP in fiscal year 2003)
included postal savings and life insurance.
[21] The fact that reserve funds are sometimes accumulated separately
from the budget does not entirely relieve the pressure to use them for
current consumption. So far, no country has managed to completely "wall
off" its fund from at least the pressure to divert some of the proceeds
for program priorities or tax cuts.
[22] Although the Norwegian Government Petroleum Fund is not a pension
fund per se, its assets are designated to deal with the impact of
population aging.
[23] Investing abroad also helps lower the risk that funds will distort
domestic capital markets. On the other hand, there is a risk that
changes in exchange rates will decrease the value of foreign
investments.
[24] New Zealand and Sweden are examples of countries stating
explicitly that ethical considerations must be taken into account in
investment policy.
[25] Maintaining high standards of transparency and disseminating
accurate information contribute to public education and oversight,
providing some degree of discipline to fund management.
[26] The extent to which individual account programs can contribute to
national saving is not yet clear, however. Some studies of Chile's
individual account program have concluded that it has contributed to
national saving rates. Other studies provide less clear evidence that
individual account programs contribute to national saving rates, in
part because saving in individual accounts can displace other forms of
saving. Accounting issues also cloud the evidence.
[27] Australia's national PAYG program consistently replaces
approximately 25 percent of average wages (23 percent in 2005);
Switzerland's national PAYG program replaced approximately 36 percent
of average wages in 2005.
[28] Additionally, increased government debt may crowd out private-
sector access to lending markets and dampen the economic growth
individual accounts are meant to generate.
[29] Previously, Chile's rate of return guarantee was calculated over a
12-month period. The Chilean association of the fund managers reported
that the average annual real (inflation-adjusted) rate of return on
funds in the individual accounts, before deducting administrative fees,
was 10.3 percent during the 24 years since the inception of the program.
[30] Switzerland originally set its minimum return guarantee at 4
percent. However, because of funding problems from lower than expected
yields on investments, it gradually lowered its rate to the current
2.25 percent.
[31] In addition to the measures discussed in this section, other
factors, such as regulations on investments, administrative and
marketing costs, and fees (including those during payout), can affect
the amount of retirement income individuals will receive and
subsequently the adequacy of their benefits. Countries' use of these
measures is discussed in the following section.
[32] The Mexican government makes a contribution to individuals'
accounts of 5.5 percent of minimum wage (a contribution of about $0.24
per workday in Mexico City).
[33] The countries we reviewed require a range of annuity options,
including, for example, inflation-indexed, joint and survivor, and
gender-neutral. Different types of annuities will help to protect
against certain risks; however, they may not be the best option for
certain individuals. Certain annuities, such as those with joint and
survivor or guarantee period provisions provide an opportunity for
individuals to leave some benefits to their heirs. Other annuities do
not provide such an opportunity.
[34] Chile allows a lump sum of the amount by which the account balance
exceeds a specified level--the amount needed to pay a pension
equivalent to 70 percent of pensionable salary and at least 120 percent
of the minimum pension. Mexico allows a lump sum of the remaining
balance if the individual account will pay a pension at least 30
percent more than the minimum guarantee.
[35] Sweden is undergoing a study that may include a discussion on the
idea of decreasing the number of funds in which accounts are directed--
from over 650 to about 20.
[36] Stakeholder pensions provide individuals with the option of
contracting out of the national second tier social security system to
participate in the tax-relieved defined contribution individual pension
accounts.
[37] Designers of an individual account program must make critical
decisions about who would assume the new administrative and
recordkeeping responsibilities, how much choice or discretion
individuals would have in selecting and changing their investment
options, and how workers would receive their benefits. For additional
information concerning options for administering individual account
programs, see GAO, Social Security Reform: Administrative Costs for
Individual Accounts Depend on System Design, GAO/HEHS-99-131
(Washington, D.C.: June 18, 1999).
[38] Marketing also contributes to the overall program costs, and a
portion of these costs are often passed on to participants.
[39] International Labour Organization, Pension Reform in Central and
Eastern Europe, Vol. 1: Restructuring with Privatization: Case Studies
of Hungary and Poland. (Budapest, International Labour Office, 2002).
For a general discussion of such implementation issues, see GAO, Social
Security Reform: Implementation Issues for Individual Accounts,
GAO/HEHS-99-122 (Washington, D.C., June 18, 1999).
[40] Some countries also provide annual statements that include
information about different pieces of an individual's retirement
benefits, such as the PAYG and individual account benefits.
[41] OECD, Directorate for Financial and Enterprise Affairs, Committee
on Financial Markets, Financial Education Report: Overview and Analysis
of Selected Non-School Financial Education Programmes: Executive
Summary, DAF/CMF(2005)6/REV2, (Paris: June 23, 2005).
[42] Roy Morgan Research, ANZ Survey of Adult Financial Literacy in
Australia: Final Report. (Melbourne, Australia, May 2003). This study
included a telephone survey of 3,548 adults and in-person interviews
with 202, but the report did not indicate response rates.
[43] This list of types of reform is not comprehensive. Some countries,
Norway, for example, recently adopted legislation requiring employers
to provide pensions (usually defined benefit programs) for employees.
[44] OECD, Pensions at a Glance: Public Policies across OECD Countries
(Paris: 2005).
[45] See, for example, Thai Than Dang, Pablo Antolin, and Howard Oxley,
Fiscal Implications of Ageing: Projections of Age-Related Spending,
ECO/WKP(2001)31 (Paris: OECD, Sept. 19, 2001), and, OECD, Sustainable
Development in OECD Countries: Getting the Policies Right, (Paris:
2004).
[46] By comparison, the federal budgetary term "pay-as-you-go" (PAYGO)
refers to a requirement that all direct spending and tax legislation
for a fiscal year must be deficit-neutral in the aggregate.
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