Social Security: Reform, Refund or Opt-Out? (Part 3)

Lessons from the World

One of the most interesting things about the large number of countries reforming their public pension programs is how dissimilar many are to the United States.  A large number are in Latin America or are Asia countries that are not experiencing the demographic challenges faced by the United States.  Instead, they reform their systems because the old systems have lost their store of value function.  Privatization is required because the trust between recipients and their governments has broken down.  Chile (1981), Columbia (1993), Peru (1993), Mexico (1997), Bolivia (1997), El Salvador (1998) and Kazakhstan (1998)  have the least future demographic problems, are not developed countries, and have had the largest reforms.[1]  The expected retirement benefits in these countries are now derived from the income produced by an asset portfolio in individual accounts.

The most moderate reforms have happened in countries with high per capita incomes and severe demographic problems.  These countries include Switzerland (1985), the United Kingdom (1986), Denmark (1990), Australia (1992), Argentina (1994), China (1995), Uruguay (1996), Hungary (1998), Sweden (1998) and Poland (1999).  These developed countries have adopted systems that blend defined contribution accounts with a defined benefit.  Germany and Japan have serious demographic problems.  They are also highly developed countries.  They—like the United States—have passed minor reforms.  These countries have less suspicion that their government will not provide secure retirement resources somehow.  Traditional PAYG systems require a “social contract.”  Trust between workers of different generations is higher developed countries than in developing countries.  Trust between households and government is also higher.

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