Pension Reform Around the World

November 25, 2002

Japan: The National Bureau of Economic Research released "The Deteriorating Fiscal Situation And An Aging Population," a study by Robert Dekle of the University of Southern California. Dekle shows that Japan faces a true crisis should it not address the economic effects of the rapid aging of its population. Dekle writes:

"Japan's deteriorating fiscal situation has attracted international attention. I assess what current Japanese government policies mean for the future of public debt and the economy in general, given the inevitable aging of the population. I review how Japan got into this current fiscal mess, and then perform an analysis of some debt dynamics. With unchanged fiscal policies, Japan's public debt will rise to between 260% and 380% of GDP in 2030, and to between 700% and 1300% in 2040 -- clearly unsustainable levels. For the debt to be sustainable, significant increases in taxes, or cuts in government spending are necessary."

One difficulty Japan has faced, Dekle shows, is that long-term policies to address population aging are based on increased national saving, while the short-term policies Japan has undertaken to move itself out of its present economic slump are based upon increasing consumption and reducing saving.

United Kingdom/United States: In an article for UPI, Martin Hutchinson compares the original United Kingdom pension system with the modern American Social Security program. Hutchinson writes, "It was all so easy in 1908. Herbert Asquith introduced the British Old Age Pension, at 5 shillings (25 pence) a week, in the 1908 Budget, and didn't even have to raise taxes to pay for it. It helped of course that the pension was payable from age 70, at a time when British life expectancy was under 50. If Asquith's actuarial principles were followed, in the richer, longer lived United States of today, social security would pay around $100 per week, from the age of 90 -- it would thus be entirely sound."

Hutchinson acknowledges the political unfeasibility of such a radical change. He contends, however, that the structure of the American system is the root cause of the actuarial problems it faces: "The Social Security funds were originally funded on a 'pay as you go' basis, and are thus in substantial actuarial deficit, compared with the benefits currently promised."

Hutchinson's solution to the funding problems facing the Social Security system is three-fold. The structural problems, "can be solved fairly easily, at moderate cost, by a scheme … that separates clearly the two rationales for the system, while giving even those worst affected (those unlucky enough to have been born in the early days of January 1946) the benefit of their past contributions, plus the ability to invest future contributions productively, plus a bare minimum payment in their old age. Or the problem can be allowed to fester, resulting in the bankruptcy of the entire system, and severe destitution, some time before 2040."

Hutchinson concludes, "The solution requires a President and Congress that can work together, and who have the political courage to withstand the inevitable howls from those adversely affected by the change. Hopefully, we currently have such a combination."

China: From Jiang Zemin's presentation to the 16th Congress of the Communist Party of China:

"Establishing and improving a social security system compatible with the level of economic development constitutes an important guarantee for social stability and long-term peace and order in the country. We should stick to and improve the basic old-age pension and medical insurance systems for urban workers, combining socially pooled funds with personal contributions."

Finland: According to Helsingin Sanomat, two recent reports indicate that "the level of social security in Finland no longer lives up to its reputation… The relatively small social security spending in Finland can be witnessed both in the percentage of gross domestic product spent on the social sector, as well as in the euro sum per capita of social benefits paid out… Finland spent 6,383 euros (about $6394) per capita on social security."

South Korea: With the presidential campaign "reaching a fever pitch," Moon Ihlwan of Business Week reports that the only issue not being discussed is "the country's looming pension debacle." The lack of debate is "too bad, because South Korea's pension dilemma could prove to be the most pernicious in Asia." The South Korean pension system faces problems similar to those of any other pay-as-you-go system: payroll taxes that do not cover benefit amounts, a looming demographic problem, and sluggish economic growth. The funds in the social security trust fund are invested "entirely in South Korea, largely in government and corporate bonds… The fund is managed by a committee led by the Health & Welfare Minister, and critics say it lacks the expertise to diversify the fund by investing overseas." The best solution to these problems is the implementation of a personal account system where each individual directs the investment of their funds through professional investment managers. Unfortunately for South Korean workers, "No one expects the system to be fixed anytime soon."

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