[Congressional Record Volume 144, Number 98 (Tuesday, July 21, 1998)]
[Senate]
[Pages S8653-S8655]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            RETIREMENT SYSTEM: THE INTERNATIONAL EXPERIENCE

  Mr. GRAMS. Mr. President, in my most recent statements before this 
Chamber about the Social Security system, I have taken time to discuss 
its history and the looming crisis, that it will shatter the retirement 
dreams of our hard-working Americans.
  Mr. President, in my most recent statements before this chamber about 
the Social Security system, I discussed its history and the looming 
crisis that will shatter the retirement dreams of hard-working 
Americans. Tonight, I would like to discuss Social Security from a 
different perspective, by turning our focus away from the coming crisis 
to look at the steps other nations have taken to improve their own 
retirement systems. I realize that it may be hard to look outside 
ourselves for possible solutions to the problems our Social Security 
system is facing--after all, we are a nation that is typically at the 
forefront of innovation. But if we set aside our pride, we can learn 
volumes about the viable international options before us.
  Retirement security programs throughout the world will face a serious 
challenge in the 21st century due to a massive demographic change that 
is now taking place. The World Bank recently warned that, across the 
globe, ``old-age systems are in serious financial trouble and are not 
sustainable in their present form.'' Europe, Japan, and the U.S. share 
the identical problem of postwar demographic shifts that cannot sustain 
massively expensive social welfare programs. How to meet this challenge 
is critical to providing retirement security while maintaining 
sustainable, global, economic growth.
  The crisis awaiting our Social Security system is nearly as serious 
as that faced by the European Union and Japan. What is equally serious 
is that, while many other countries have moved far ahead of us in 
taking steps to reform their old-age retirement systems, Congress has 
yet to focus on this problem. Some of the international efforts are 
extremely successful; those reforms may offer useful models as we 
explore solutions to our Social Security system.
  Currently, there are three basic models being implemented abroad that 
deserve our attention. The ``Latin American'' model primarily follows 
Chile's experience. The Organization for Economic Cooperation and 
Development model, or ``OECD,'' is underway in the United Kingdom, 
Australia, Switzerland, and Denmark. There is even a third model--the 
``Notional Account" model--that has been adopted in countries such as 
Sweden, Italy, Latvia, China, and is on the verge of adoption in 
Poland.
  These models have differences, and the nations implementing them have 
differences as well--economic, political, and demographic. But they all 
share a common theme and were born out of the same fiscal crisis that 
is facing the United States within the next decade. Like the U.S., each 
of these countries has an aging population, and--before the reforms--
had an inability to meet the future retirement needs of their 
workforce. So in an effort to avoid economic devastation for their 
people and their nation as a whole, they undertook various reforms that 
are proving to be a win-win for both current and future retirees.
  How did they do it? And what lessons can we--as policy leaders--take 
from their experiences and apply here at home as we grapple with the 
shortcomings of our own retirement system? These are some of the 
questions I will address today in my remarks. The bottom line is that 
each nation faced the key challenges of taking care of those already 
retired or about to reach retirement age, ensuring that future retirees 
benefitted from the changes, and finding an affordable means of funding 
the transition from a pay-as-you-go government retirement system to a 
future financing mechanism.
  Mr. President, I'll begin with the Latin American model and in 
particular, focus on Chile's experiences. Back in the late 1970s, Chile 
realized that its publicly financed pay-as-you-go retirement system 
would soon be unable to meet its retirement promises. After a national 
debate and extensive outreach, the Chilean government approved a law to 
fully replace its system with a system of personalized Pension Savings 
Accounts by 1980. Nearly two decades later, pensions in Chile are 
between 50 to 100 percent higher than they were under the old 
government system. Real wages have increased, personal savings rates 
have nearly tripled, and the economy has grown at a rate nearly double 
what it had prior to the change.
  Under the Chilean plan, Pension Savings Accounts, or PSAs, were 
created to replace the old system and operate much like a mutual fund. 
Like the old government plan, PSAs were to provide workers with 
approximately 70 percent of their lifetime working income. That is 
where the similarities between Chile's old and improved retirement 
programs ends.
  When Chile created the PSA system, the existing system of having 
workers and employers pay social security taxes to the government was 
completely eliminated. Instead, workers began to make a mandatory 
contribution in the amount of 10 percent of their income to their own 
PSA. The old employer taxes were then available to workers in the form 
of higher wages. Through this evolution from the old, hidden labor tax 
on workers to the new PSA system, workers saw real gross wages increase 
by five percent. Furthermore, it reduced the cost of labor--and the 
economy prospered.
  Under the PSA system, a worker has great control over his or her 
retirement savings account. First, the worker has the ability to choose 
who will manage their fund from a pool of government-regulated 
companies known as ``AFPs.'' This provides the worker with the ability 
to move between managers, while maintaining protections from serious 
losses resulting from undiversified risk portfolios, theft, or fraud. 
The resulting competition between AFPs results in lower fees for 
workers, higher returns averaging 12 percent annually, and better 
service --something that rarely occurs with government plans.
  Second, each worker is empowered to ensure the level of retirement 
income they desire. Armed with a passbook and account statements, these 
workers have the information necessary to follow their earnings growth 
and decide how to adjust their tax-free voluntary contributions in 
order to yield a specific annual income upon their retirement. For 
example, the Chilean system was established to provide an annual income 
equivalent to 70 percent of lifetime income. However, under the PSA 
system, income is averaging 78 percent.
  Third, workers can choose from two payout options upon retirement. A 
worker can leave his or her funds in the PSA and take programmed 
withdrawals from the account with the only limitation based upon 
projected lifetime expectancy. Should the retiree die prior to 
exhausting the PSA fund, any excess amount is transferred to his or her 
estate. The other scenario allows a worker to use the PSA funds to 
purchase an annuity from a private insurance company. These annuities 
guarantee a monthly income as well, and is indexed for inflation. In 
the event of death, survivor benefits are provided to the workers' 
dependents. They build an estate for their heirs.
  And finally, PSA accounts are not automatically forfeited to the 
government in the case of premature death or

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disability of a worker. Under the Chilean system, the fund managers 
provide an insurance protection through private insurance companies. 
The fee is in addition to the 10 percent mandatory savings 
contribution, and ensures the PSA funds are not lost should a worker 
not reach full retirement age.
  Personal accounts have brought personal freedom to Chile's retirement 
system. Today, more than 93 percent of the workforce participates in 
the PSAs, which boast an accumulated investment fund of $30 billion. 
This is remarkable when you consider Chile is a developing nation of 14 
million people with a GDP of $70 billion. Chile's success has paved the 
way for other Latin American countries such as Argentina, Peru, and 
Columbia and has sparked the momentum for reform in Mexico, Bolivia, 
and El Salvador.
  While individual accounts are proving successful in Latin America, 
the OECD model utilizes a ``group'' choice approach as a key element. 
Rather than allowing an individual to choose his or her own fund 
manager, the employer or union trustee chooses for the company or 
occupational group as a whole. This approach most likely developed from 
the fact that these reforms were politically easier to ``add-on'' to 
the existing government pay-as-you-go pension tier. Furthermore, reform 
leaders worked closely with union leaders when they began to implement 
the next tier of private plans, and then moved the reform sector by 
sector.
  The movement began during the 1980s in the United Kingdom. Since the 
end of World War II, the British had a basic, flat rate, non-means 
tested government pension for all who paid into the national insurance 
plan. By the 1970s, a new tier was added to bridge a gap between those 
covered by private pensions and those without them. This State Earnings 
Related Pension Scheme, or SERPS, promised--in exchange for a payroll 
tax--an earnings-based pension of 25 percent of the best 20 years of 
earnings, in addition to the Basic State Pension.
  However, like other nations, the government pension plan was facing 
bankruptcy and reform was critical to the future security of its 
workers and of the nation as a whole. Under the leadership of Social 
Security Secretary Peter Lilley, the British system evolved and began 
to enable individuals to choose the option of a new, self-financing 
private pension plan.

  Under the British plan, current retirees were protected, but current 
workers were given a choice of pension plans. Those workers had the 
option of either staying in the SERPS program or contracting out to a 
private fund. If a worker chose to remain within SERPS, they would 
receive a reduced pension amounting to 20 percent of their best 20 
years of earnings. However, if a worker contracted out of the SERPS, 
they were given the opportunity to participate in an occupational 
pension plan, and were eventually allowed to take part in a new 
private, portable pension plan much like a 401(k).
  To pay for the plan, a worker who chooses to contract out receives a 
rebate equivalent to a portion of their payroll taxes. This rebate 
amounts to about 4.6 percent of earnings and must be invested in an 
approved plan. Additional contributions can be made--tax free--by 
employers and employees up to a combined total limit of 17.5 percent of 
the individual's income. As a safety net, companies are required to 
guarantee that workers who contract out will receive a pension at least 
equivalent to what they would have under SERPS, and are limited as to 
the amount that can be invested in the employer's own company.
  To address changing workforce trends and not hold workers captive to 
employer plans, the British government created the ``appropriate 
personal pension,'' or APP, plan which would be available to workers, 
as well as to the self-employed or unemployed. These fully portable 
plans are much like the employer plans, funded by the 4.6 percent 
rebate in payroll taxes, and are an alternative to the occupational 
plan or the SERPS. As an incentive, the British government offered an 
additional ``payroll tax rebate'' above the standard rebate during the 
APPs infancy. This made these fully portable APPs attractive options 
for younger workers.
  While there are many safeguards--including the ability for former 
SERPS workers to opt back into the government-run program--the success 
of the English system has been overwhelming. When the transformation 
began, analysts expected a participation rate of a half million 
workers, growing to 1.75 million over time. Today, nearly 73 percent of 
the workforce participates in private plans, boasting a total pool 
worth more than $1 trillion. The resulting economic growth and ability 
to control entitlement spending has analysts predicting the United 
Kingdom will pay off its national debt by 2030. In case any of my 
colleagues have forgotten, that is about the same time our Social 
Security trust fund is anticipated to go bankrupt.

  Similarly, Australia has found much success in transforming its 
government pay-as-you-go pension plan to a more self-directed plan. By 
the 1980s, its existing retirement plan offered a full pension for all 
Australians over age 69, although most qualified to begin drawing 
benefits by age 60 for women and 65 for men. Like its international 
neighbors, Australia was facing a future financial situation that 
threatened worker retirement security and Australia's standing in the 
global economy.
  As Australia began to review its options, three goals emerged. 
Whatever changes were made, the new system had to provide more benefits 
for future retirees than they would receive under the current plan; it 
had to increase national savings, and any new plan had to reduce 
budgetary pressures facing the system. By the mid-1980s, the Australian 
government instituted a mandatory savings plan called ``superannuation 
funds.'' In 1992, the program matured into a new Superannuation 
Guarantee that is still a work in progress.
  During the transformation process, the Australian government took key 
steps to change its course. First, it strengthened the income means-
testing for the old age pension. In doing so, the government also added 
an asset test in the calculations process. This was critical since the 
dependence on Social Security had contributed to the decline in 
national savings. Second, the government made the new superannuation 
savings portable, and instituted a penalty for withdrawals before age 
55. This provided new incentives for savings since workers could take 
their funds with them, and disincentives for spending one's nest egg 
prior to retirement. Third, the government took steps to build union 
investment into the savings program. Rather than giving workers wage 
increases, negotiators reached an agreement to provide a 3-percent 
contribution into a superannuation fund for all employees and called 
for such guarantees to be built into all future labor contracts. 
Fourth, the government expanded coverage of the superannuation fund to 
virtually all workers, and every employer is required to contribute a 
set amount to the fund on the employees' behalf. The required amount is 
currently 3 percent and will grow to 9 percent by 2002.

  Since the beginning of the Australian reform, additional changes have 
occurred. Today, workers have more choices between which superannuation 
fund their mandatory savings can be invested in. Additional tax relief 
has been provided for voluntary savings, but savings are not tax-free 
when invested. As Australia reviews its overall tax structure, however, 
there have been discussions about making contributions tax-free and 
deferring taxation until the funds are withdrawn. Another key issue was 
the total elimination of early withdrawal. Because a retirement safety 
net remains in place, the goal here was to eliminate a worker from 
``double dipping''--collecting from the savings fund, then coming back 
to the government for a pension at age 65.
  The Australian reforms are considered a successful example of the 
OECD model. And as more initiatives are implemented, it will likely 
continue to prove profitable for future retirees ``down under.''
  The final example I would like to touch upon is the ``notional 
account'' model--like the system in Sweden. Under this plan, workers 
receive a passbook that reflects their defined contributions and the 
interest being accumulated over time, but there are no real assets in 
the account. The fund is just a ``notion'' of what it would be if it 
were funded. In some respects, it

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might be compared to the Personal Earnings Benefit Statements U.S. 
workers receive from the Social Security Administration. The up-side is 
there is no transition cost for a nation to move from a government-run, 
pay-as-you-go system to a notional pay-as-you-go system. The downside 
is that the funds remain at risk, as do future retirees. The bottom 
line here is that reforms have to be real if we are going to see any 
long-term benefit for workers.
  Mr. President, it is clear that whatever the specifics, reforms are 
being implemented abroad that are proving to be a great success for 
both today's retirees and tomorrow's. I hope we have learned that we 
are not operating in a vacuum here--that there are real models out 
there for us to review and consider.
  For the United States to be successful in the reforms it undertakes 
to ensure retirement security, there are four key principles we must 
uphold. First, we must protect all current and near-term retirees. Our 
government made a promise to them, and we must ensure any 
transformation we pursue does not impact the decisions they have made 
for their golden years.

  Second, we must ensure that any proposal holds the promise of 
improved benefits--and greater retirement security--for future 
retirees.
  Today's younger generations have every right to be skeptical about 
government promises to revamp a system they expect to go bankrupt. They 
need to know there is a solution that provides retirement security for 
them.
  Third, any proposal should encourage personal choice by allowing 
individuals to establish personal retirement accounts.
  Fourth, the government must not turn to tax increases to fund our 
pursuit of retirement security.
  Finally, we must recognize that any change will require courage. We 
must admit to ourselves we have a system that is fine today but is a 
time bomb waiting to explode. The decisions ahead will not be easy; if 
they were, they would have been made already. But the debate must begin 
somewhere.
  On August 14, this nation will recognize the 63rd anniversary of 
Congress' approval of the Social Security system. It is my hope that we 
will mark the occasion by engaging in a national debate over how we can 
transform our ailing system into a vibrant retirement program for 
generations to come.
  I thank the Chair. I yield the floor.
  Mr. GREGG. Mr. President, even though it has nothing to do with this 
bill, I would like to congratulate the Senator from Minnesota for his 
truly superb analysis of the Social Security issue and especially the 
information he brings to this Senate relative to other countries that 
have pursued reform of their pension programs.
  There is no question but if there is a single issue of fiscal policy 
which most threatens this country's economic well-being in the future 
and, as a result, threatens our well-being today, it is the Social 
Security crisis. That occurs as a function of demographics; beginning 
in the year 2008, the Social Security system in this country pays more 
out than it is taking in. It begins that cost expansion dramatically as 
it moves into the period 2015, and by the year 2029-2030 the system is 
bankrupt and the Nation is unable to afford the costs of it.
  It is absolutely essential that we guarantee our children and the 
postwar baby-boom generation which is about to go into the system a 
chance to have a viable Social Security system.
  Some of the ideas the Senator from Minnesota has outlined are 
excellent approaches to this. I congratulate him, obviously, for the 
intensity of thought and energy he has put into this issue. I hope he 
will take an opportunity to review a bill which I have cosponsored 
along with Senator Breaux from Louisiana to try to address this, which 
bill provides long-term solvency for the next 100 years. I include some 
of the ideas outlined by the Senator from Minnesota.
  In any event, the thoughts of the Senator from Minnesota were 
extremely insightful and very appropriate, and I hope people have a 
chance to read them and review them as we go forward.
  I yield the floor.

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