Experience of 30 Nations Offer Lessons for Social Security Reform

NCPA Study Shows How to Keep Administrative Costs Low; Protect Low-Income Retirees

WASHINGTON , DC (June 15, 2005) – Thirty countries have reformed their pay-as-you-go Social Security systems with personal retirement accounts (PRAs). As a result of these changes, Britain, Chile and many others have virtually no unfunded liability. By contrast, the U.S. Social Security system is facing an unfunded liability of $11 trillion – about the size of the entire U.S. economy.

“No nation’s reform is perfect, but there is a lot we can learn from their mistakes and their successes,” said Estelle James, author of a new study about international experiences by the National Center for Policy Analysis (NCPA). “We can learn how to keep administrative costs low, reduce risk and ensure that the elderly are kept out of poverty.”

Chile , Switzerland, the Netherlands and the United Kingdom were the first countries to incorporate personal retirement accounts, in the 1980s. Most countries in Latin America, Eastern and Central Europe, as well as some in the Asian-Pacific region, created similar systems during the past 10 years. According to the study:

  • More than 75 percent of workers’ benefits in most Latin American countries and more than 50 percent in most Western European nations will come from their new personal account.
  • Funding for the accounts ranges from a low of 2.5 percent in Sweden to 14 percent of income in the Netherlands.
  • In two-thirds of the countries, the accounts are funded by taxes carved-out of payroll taxes workers are already paying into the system, similar to the approach favored by the Bush administration and most proposals before Congress.
  • Most countries that use a carve-out approach gave individuals already working a choice between the old and new systems; but practically every country (except Argentina, Colombia and the United Kingdom) requires new labor market entrants to enroll in the new systems.
  • Most countries require workers to receive their retirement benefits in the form of an annuity or gradual withdrawal from their personal retirement accounts. However, most Latin American systems allow lump-sum withdrawals once retirees have funded their retirement income.

“From the Conservative party in Great Britain, to communists in China to a fascist dictatorship in Chile to social democrats in Sweden, the impetus of reform has been the same,” said NCPA President John C. Goodman. “Ideology doesn’t matter when you can’t pay your bills.”

The NCPA study was released in anticipation of the testimony of its author, World Bank Consultant Estelle James, about international experiences with Social Security reform before the House Ways & Means Social Security sub-committee on Thursday. The NCPA study will be submitted as part of her written testimony for the Congressional record. The NCPA study can be accessed online at http://www.ncpathinktank.org/pub/st277/