Reforming Social Security: Lessons from Thirty Countries

Policy Reports | Social Security

No. 277
Thursday, June 09, 2005
by Estelle James


Although workers will “own” the money in their accounts, it is clear that ownership comes with many strings attached, regarding allowable investments and withdrawals. The reason for having a mandatory system in the first place is that some people won’t save enough or will make extremely poor investments, if given unfettered choice. The mandatory system should avoid this outcome, for the sake of the individuals directly concerned as well as the rest of society. Also, properly constructed rules should result in lower costs for a mandatory program than is available to individuals on a voluntary basis.

The way we design the personal account system will determine reform’s winners and losers, the economic status of the elderly as a group as well as the cost to the coming generations, and its impact on the broader economy. Other countries’ experiences don’t give us answers to all the design issues, but they do show the variety of options available and some of their effects. Administrative costs and risk vary widely across plans, depending on their particular design features; low cost, low risk options are available — and they imply limited choice. The most important commonalities among all these systems involve the creation of a minimum pension and strong restrictions on payouts, both consistent with the original purpose of Social Security — to ensure that the elderly remain above a reasonable income level throughout their retirement years.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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