[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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