Social Security Reform: Other Countries' Experiences Provide	 
Lessons for the United States (21-OCT-05, GAO-06-126).		 
                                                                 
Many countries, including the United States, are grappling with  
demographic change and its effect on their national pension	 
systems. With rising longevity and declining birthrates, the	 
number of workers for each retiree is falling in most developed  
countries, straining the finances of national pension programs,  
particularly where contributions from current workers fund	 
payments to current beneficiaries--known as a pay-as-you-go	 
(PAYG) system. Although demographic and economic challenges are  
less severe in the United States than in many other developed	 
countries, projections show that the Social Security program	 
faces a long-term financing problem. Because some countries have 
already undertaken national pension reform efforts to address	 
demographic changes similar to those occurring in the United	 
States, we may draw lessons from their experiences. The current  
and preceding Chairmen of the Subcommittee on Social Security of 
the House Committee on Ways and Means asked GAO to study lessons 
to be learned from other countries' experiences reforming	 
national pension systems. GAO focused on (1) adjustments to	 
existing PAYG national pension programs, (2) the creation or	 
reform of national pension reserve funds to partially prefund	 
PAYG pension programs, and (3) reforms involving the creation of 
individual accounts. We received technical comments from SSA,	 
Treasury, the OECD, and other external reviewers.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-126 					        
    ACCNO:   A40057						        
  TITLE:     Social Security Reform: Other Countries' Experiences     
Provide Lessons for the United States				 
     DATE:   10/21/2005 
  SUBJECT:   Budgetary reserves 				 
	     Comparative analysis				 
	     Economic analysis					 
	     Federal social security programs			 
	     Financial analysis 				 
	     Foreign governments				 
	     Individual retirement accounts			 
	     Lessons learned					 
	     Pensions						 
	     Program management 				 
	     Social security benefits				 
	     Social Security Program				 

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GAO-06-126

     

     * Results in Brief
     * Background
          * Pension and Other Social Insurance Programs in OECD Countries
          * Types of National Pension Reform
     * Adjustments to Existing PAYG Programs Show Importance of
       Sustainability, Safety Nets, and Incentives to Work and Save
          * PAYG Adjustments Prove Key to Financial Sustainability
               * Essential Reform Elements Include Maintenance of a Safety
                 Net and Work and Saving Incentives
               * Successful Reform Requires Careful Implementation,
                 Administration, and Public Education
     * Early Action and Effective Management Help Strengthen National Pension
       Reserve Funds
          * Early Action Matters
               * Effective Management Can Contribute to Financial
                 Sustainability
     * Individual Account Reforms Show the Importance of Funding Decisions
       and Benefit Adequacy
          * Approach to Funding Individual Accounts Affects Sustainability of
            National Pension System
               * Countries Balanced Opportunities to Realize High Expected
                 Returns with Provisions to Help Ensure Benefit Adequacy
               * Effective Regulation, Implementation, and Education Can
                 Protect Individuals
     * Concluding Observations
     * Agency Comments
     * Appendix I: Scope and Methodology
          * Methodology
     * Appendix II: Information on OECD Countries and Chile, Their Pension
       Systems, and Reforms
     * Appendix III: GAO Contact and Staff Acknowledgments
     * Glossary
          * 
               * Add-on
               * Adequacy
               * Annuity
               * Baby boomers
               * Carve-out
               * Consumer price index (CPI)
               * Covered worker
               * Deficit
               * Defined benefit (DB)
               * Defined contribution (DC)
               * Dependency ratio
               * Dependent
               * Early retirement age
               * Full retirement age (FRA)
               * Full funding
               * General revenue transfers
               * Gross domestic product (GDP)
               * Income adequacy
               * Indexation
               * Individual account
               * Individual equity
               * National pension reserve funds
               * National saving
               * Notional defined contribution (NDC) program
               * Old-Age, Survivors, and Disability Insurance (OASDI)
               * Pay-as-you-go (PAYG:)
               * Payroll tax
               * Price indexation (Compare with Wage indexation.)
               * Rate of return
               * Replacement rate
               * Social insurance
               * Social Security Administration (SSA)
               * Solvency
               * Sustainable solvency
               * Transition costs
               * Wage indexation
               * Order by Mail or Phone

                 United States Government Accountability Office

Report to Congressional Requesters

GAO

October 2005

SOCIAL SECURITY REFORM

       Other Countries' Experiences Provide Lessons for the United States

GAO-06-126

SOCIAL SECURITY REFORM

Other Countries' Experiences Provide Lessons for the United States

  What GAO Found

All countries in the Organisation for Economic Co-operation and
Development (OECD), as well as Chile, have, to some extent, altered their
national pension systems, consistent with their different economic and
political conditions. While changes in one country may not be easily
replicated in another, countries' experiences may nonetheless offer
potentially valuable lessons for the United States. Countries' experiences
adjusting PAYG national pension programs highlight the importance of
considering how modifications will affect the program's financial
sustainability, its distribution of benefits, and the incentives it
creates. Also, how well new provisions are implemented, administered, and
explained to the public may affect the outcome of the reform. Most of the
countries GAO studied both increased contributions and reduced benefits,
often by increasing retirement ages. Generally, countries included
provisions to help ensure adequate benefits for lower-income groups,
though these can lessen incentives to work and save for retirement.

Countries with national pension reserve funds designed to partially
pre-fund PAYG pension programs provide lessons about the importance of
early action and sound governance. Some funds that have been in place for
a long time provide significant reserves to strengthen the finances of
national pension programs. Countries that insulate national reserve funds
from being directed to meet nonretirement objectives are better equipped
to fulfill future pension commitments. In addition, regular disclosure of
fund performance supports sound management and administration and
contributes to public education and oversight.

Countries that have adopted individual account programs-which may also
help prefund future retirement income-offer lessons about financing the
existing PAYG pension program as the accounts are established. Countries
that have funded individual accounts by directing revenue away from the
PAYG program while continuing to pay benefits to PAYG program retirees
have expanded public debt, built up budget surpluses in advance, cut back
or eliminated the PAYG programs, or taken some combination of these
approaches. Because no individual account program can entirely protect
against investment risk, some countries have adopted individual accounts
as a relatively small portion of their national pension system. Others set
minimum rates of return or provide a minimum benefit, which may, however,
limit investment diversification and individuals' returns. To mitigate
high fees, which can erode small account balances, countries have for
example capped fees or centralized the processing of transactions.
Although countries have attempted to educate individuals about reforms and
how their choices may affect them, studies in some countries indicate that
many workers have limited knowledge about their retirement prospects.

                 United States Government Accountability Office

Contents

  Letter 1

Results in Brief 3 Background 5 Adjustments to Existing PAYG Programs Show
Importance of

Sustainability, Safety Nets, and Incentives to Work and Save 10 Early
Action and Effective Management Help Strengthen National

Pension Reserve Funds 16 Individual Account Reforms Show the Importance of
Funding

Decisions and Benefit Adequacy 20 Concluding Observations 30 Agency
Comments 31

Appendix I Scope and Methodology 33 Methodology 33

Appendix II Information on OECD Countries and Chile, Their Pension
Systems, and Reforms

Appendix III GAO Contact and Staff Acknowledgments

Glossary

  Tables

Table 1: Countries' National Pension Reforms-1970-2004 9 Table 2:
Countries Undertaking Selected Types of Adjustments to

their PAYG Pensions-1970-2004 12 Table 3: Background on OECD Countries and
Chile 37 Table 4: Information concerning Countries' National Pension

Systems 40 Table 5: Examples of Adjustments to PAYG Programs, 1970-2004 45
Table 6: National Pension Reserve Fund Reforms 52 Table 7: Individual
Account Reforms 54

  Figure

F igure 1: National Pension Reserve Funds as a Percentage of GDP

                                 Abbreviations

GDP           gross domestic product                                       
ILO           International Labour Organization                            
NDC           notional defined contribution                                
OECD                Organisation for Economic Co-operation and Development 
PAYG          pay-as-you-go                                                
SSA           Social Security Administration                               

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separately.

United States Government Accountability Office Washington, DC 20548

October 21, 2005

The Honorable Jim McCrery Chairman Subcommittee on Social Security
Committee on Ways and Means House of Representatives

The Honorable E. Clay Shaw, Jr. House of Representatives

Many countries, including the United States, are grappling with
demographic change and its effect on their national pension systems and
long-term fiscal posture. With increasing longevity and declining
birthrates, the number of workers for each retiree is falling in most
developed countries. These trends can strain the finances of national
pension programs, particularly those in which contributions from current
workers fund payments to current beneficiaries-a form of financing known
as pay-as-you-go (PAYG). Demographic and economic challenges are less
severe in the United States than in many other developed countries-the
birthrate is not as low, people are more likely to stay in the labor force
for a greater number of years, and immigration continues to provide young
workers. Yet projections show that the Social Security program faces a
significant long-term financing problem. Because some countries have
already undertaken national pension reform efforts to address demographic
changes similar to those occurring in the United States, their experiences
can provide lessons for U.S. policymakers.

To assist the Subcommittee in its deliberations concerning Social
Security's future, you asked us to review the experiences of other
developed nations and highlight lessons that can be learned from their
various approaches to national pension reform. Historically, developed
countries have had national pension systems that included some form of a
PAYG pension program. Countries have typically undertaken quite different
approaches to reforming their pension systems. These reforms fall into
three broad categories-adjustments to PAYG programs (decreased benefits or
increased contributions), 1 efforts to set aside funds

1

Generally, changes in contributions made to a national pension program
means changes in the tax rate on individuals or employers.

Page 1 GAO-06-126 Social Security Reforms Abroad

to help pay future benefits through a national reserve fund, and efforts
to prefund retirement income through contributions to individual accounts.
Accordingly, our objectives were to examine the lessons that can be drawn
from countries that have (1) adjusted their existing PAYG national pension
systems, (2) adopted national pension reserve funds to help finance their
national pension systems, and (3) adopted individual account reforms to
their national pension systems.

To address these objectives, we studied the experiences of the countries
that constitute the Organisation for Economic Co-operation and Development
(OECD), plus Chile, the nation that pioneered the use of individual
accounts. 2 As part of our analysis, we assessed both the extent to which
another country's circumstances are similar enough to those in the United
States to provide a useful example and the extent to which particular
approaches to pension reform were considered to be successful. 3 We
aligned our lessons with the criteria GAO developed for evaluating
domestic Social Security reform proposals-fiscal sustainability, adequacy
and equity, and implementation and administration of reform. 4 At the same
time, drawing lessons from other countries' experiences requires
recognition that countries have different starting points, including
unique economic and political environments, and that availability of other
sources of retirement income, such as occupational pensions, also varies
greatly. Therefore, reforms in one country may not be easily replicated in
another or may not lead to the same outcome.

Our review included interviews with, and analysis of materials provided
by, officials and interest group representatives in Washington, D.C.;
Paris; and London. We met with pension experts and country specialists at
the OECD as well as French and British experts. In addition, we drew from
interviews conducted by GAO with Chilean officials in 2002. We conducted

2

The OECD is a forum for the governments of 30 countries to work together
on economic, social, environmental, and governance issues through their
commitment to democratic government and the market economy. The OECD works
to promote economic growth, financial stability, trade and investment,
technology, innovation, and development cooperation.

3

For additional information concerning Social Security reform in the United
States, see GAO, Social Security Reform: Answers to Key Questions,
GAO-05-193SP (Washington, D.C.: May 17, 2005).

4

See GAO, Social Security: Criteria for Evaluating Social Security Reform
Proposals, GAO/T-HEHS-99-94 (Washington, D.C.: Mar. 25, 1999).

                                Results in Brief

our review between August 2004 and September 2005 in accordance with
generally accepted government auditing standards. For additional
discussion of our scope and methodology, see appendix I. We also include a
glossary of key terms in the back of this report.

With respect to adjustments to PAYG programs, the experiences of the
countries we studied highlight the importance of considering how
modifications will affect the program's financial sustainability, its
distribution of benefits, the incentives it creates, and the extent to
which the public understands the new provisions. To reconcile PAYG program
revenue and expenses, most OECD countries have both increased
contributions and reduced benefits, often in part by increasing retirement
ages. Although several countries have yet to make their programs
financially sustainable, some have come close to doing so. According to
OECD economists, some countries (Sweden and Italy, for example) have
succeeded in large part by automatically linking benefits to factors such
as worker contributions, changes in demographics, and growth in the
national economy. Generally, the countries that have come closest to
achieving sustainability have also undertaken other types of reform, such
as the individual account programs in Sweden and Australia. These reforms
may, however, substantially reduce benefits promised originally, leaving
future retirees with benefits that replace a lower portion of their
earnings than those provided to earlier generations or make them payable
beginning at a later age. Other countries' adjustments to their existing
PAYG programs have had mixed results for the programs' solvency, and
debate continues about additional reforms to reduce benefits or increase
revenue. This is the case in France and Germany, for example. Often
countries have included in their reforms provisions to help ensure
adequate benefits for lower-income groups. In certain cases, however, such
provisions lessen incentives to work and save for retirement, and can
weaken the country's economy over time. In addition, the way in which new
provisions are implemented, administered, and explained to the public
affects the outcome of the reform. For example, most countries phase in
changes to the national pension programs, such as changing the retirement
age over a certain period of time. Governments such as the United Kingdom
have had only limited success in efforts to educate workers about changes
in provisions that will affect their retirement income.

Where countries created national reserves to partially prefund PAYG
pension programs, many lessons can be drawn, including the importance of
early action and sound governance. In some countries where requirements
for prefunding through national reserves have been in place for a long
time and have been complemented by other reform measures, significant
amounts of money have already accumulated. 5 These are projected to help
make substantial contributions to the financial sustainability of national
pension programs. While acting early in setting up national reserve funds
helps maintain adequate benefits and distribute pension costs more
equitably across generations, governing these funds in the interest of
participants is also crucial. Countries that insulate national reserve
funds from being directed to meet nonretirement objectives are better
equipped to fulfill their future pension commitments. Some countries have
legislated specific starting dates for drawing down national funds to
resist demands for their immediate use. Effective governance of national
funds also requires that governments commit to making regular transfers
into these funds. Countries that count on budget surpluses to finance
their reserve funds will need strong and sustained budgetary discipline to
accumulate enough reserves to prepare for future pension spending
requirements. Moreover, where transfers to national funds are limited to
social security surpluses, reserve funds may not grow sufficiently to help
national pension systems become solvent. In addition, regular disclosures
of fund performance help achieve transparency in management and
administration and contribute to public education and oversight.

The countries adopting individual account reforms offer lessons about the
importance of addressing the financial solvency of existing PAYG pension
systems as the accounts are established. Countries adopting individual
accounts face the common challenge of how to pay for both a new funded
pension and an existing PAYG pension simultaneously. Some countries did
this by expanding public debt, building up budget surpluses, cutting back
or eliminating the PAYG system, or using some combination of these
approaches. Additionally, two countries, Australia and Switzerland, used
new sources of funding to add individual accounts to their existing
system. Because no individual account program can fully protect
individuals from investment risk, some countries protect the overall level
of benefits. For example, some have adopted individual accounts as a
relatively small portion of their national pension system. Others that
rely more heavily on

Asset allocation varies greatly across countries. The U.S. Social Security
Trust Fund, for example, is exclusively invested in nonmarketable
government securities; on the other hand, countries such as Canada and
Sweden invest a large fraction of their reserve fund assets in equities.
Moreover, several countries, such as New Zealand, diversify their
portfolios to include a significant portion of foreign shares.

Page 4 GAO-06-126 Social Security Reforms Abroad

                                   Background

individual accounts, including Chile and Australia, set minimum rates of
return or provide a minimum benefit. While these provisions are intended
to protect individuals, they may also have unintended consequences. For
example, guaranteed rates of return imposed on fund managers in some
countries have been done in a way that may limit investment
diversification and variation in individuals' returns (in Chile and
Switzerland, for example). In addition, important lessons can be learned
regarding the administration of individual accounts, including the need
for effective regulation and supervision of the financial industry to
minimize investment risks that individuals face. To mitigate high fees
that can erode small account balances, some countries have capped the
level of administrative fees. Information about individual accounts should
be provided to help individuals make informed decisions about their
retirement savings. Some countries have done a better job than others in
providing information about their individual account programs.
Additionally, although studies in some countries indicate that many
individuals have only limited knowledge about their retirement prospects,
several countries have programs to provide information on investment
choices and retirement income options, such as annuities. The
effectiveness of these programs is unclear, however.

We received technical comments from the Social Security Administration,
the Department of Treasury, the OECD, and other external reviewers and
incorporated them where appropriate.

The U.S. Social Security program's projected long-term financing shortfall
stems primarily from the fact that people are living longer and having
fewer children. As a result, the number of workers paying into the system
for each beneficiary is projected to decline. A similar demographic trend
is occurring or will occur in all OECD countries. (See table 3 in app. II
for demographic and other characteristics of OECD countries and Chile.)
Although the number of workers for every elderly person (aged 65 and over)
in the United States has been relatively stable over the past few decades,
this ratio has already fallen substantially in other developed countries.
The number of workers for every elderly person in the United States is
projected to fall from 4.1 in 2005 to 2.9 in 2020 and to 2.2 in 2030. In
nine of the OECD countries, this number has already fallen below the

    Pension and Other Social Insurance Programs in OECD Countries

level projected for the United States in 2020. 6 These decreases in the
projected number of workers available to support each retiree could have
significant effects on countries' economies, particularly during the
period from 2010 to 2030. These effects may slow growth in the economy and
standards of living, and increase costs for aging-related government
programs. Long run demographic projections are imprecise, however, due to
uncertainty about future changes in longevity, for example.

Although social security programs in all OECD countries and Chile provide
benefits for qualified elderly people, survivors, and the disabled, the
programs differ in many respects across the countries. In some countries,
"social security" refers to a wide range of social insurance programs,
including health care, long-term care, workers' compensation, unemployment
insurance, and so forth. To generalize across countries, we use "national
pensions" to refer to mandatory countrywide pension programs providing
old-age pensions. We use "Social Security" to refer to the U.S. Old-Age,
Survivors, and Disability Insurance Program, since that is how the program
is commonly known.

Although nearly all OECD countries use contributions from workers and
employers designated to finance pension benefits, most also use general
revenues as a funding source. Nearly all OECD countries, including the
United States, make pension benefits dependent on an individual's work
history, while several also provide benefits to all qualified residents
whether or not they have a work history. Countries' pension systems may be
financed differently, use different criteria for identifying qualified
beneficiaries, and calculate benefits in a different manner. Several OECD
countries finance benefits to the disabled or survivors with worker or
employer contributions designated for this purpose. Others use general
revenue to finance these benefits or have a single fund that provides
oldage pension benefits and benefits for the disabled and survivors. Some
OECD countries provide a universal benefit of a specified amount each week
or each month. Some adjust benefits based on time spent raising children,
or pursuing education, as well as years spent working. Some

6

The Social Security Administration (SSA) uses a somewhat different
ratio-the number of workers covered by the Social Security program for
each Social Security beneficiary. In 2004 there were 3.3 such workers for
each SSA beneficiary, and SSA projects that this ratio will decline to 2.1
in 2031, based on the intermediate assumptions of the 2005 trustees'
report. SSA's projections take into account the effects of gradual
increases in retirement age for those born after 1937, with a retirement
age of 67 for those born in 1960 or later.

Page 6 GAO-06-126 Social Security Reforms Abroad

    Types of National Pension Reform

national pension programs, identified as "defined benefit" programs,
provide retirees a pension of a set amount per week or month or an amount
calculated based on such factors specified by law as their number of years
of work and the level of their earnings or contributions, and their age at
retirement. Other national pension programs, identified as "defined
contribution" programs, provide retirees income based on the accumulated
value of contributions and investment earnings on those contributions.
Many OECD countries have a pension system that includes a combination of
pension programs rather than a single program, providing many retirees
with more than one source of income. (See table 4 in app. II for
additional information concerning countries' national pension systems.)

Voluntary occupational pension programs are common in many OECD member
countries though the aggregate accumulated value of these pension funds
exceeds 25 percent of gross domestic product (GDP) in only seven
countries, including the United States, Canada, and Denmark. These include
programs sponsored by employers, trade associations, or trade unions and
regulated by governments; in some cases, the pensions provided by these
programs are to some extent insured by governmental entities-counterparts
to the Pension Benefit Guaranty Corporation in the United States. Tax laws
in many countries encourage participation in these voluntary programs.
Germany, for example, supplements its national pension system with
voluntary individual "Riester" accounts, supported by subsidies as well as
tax incentives. Our review, however, did not include these programs,
except in the United Kingdom, where workers' contributions to PAYG
national pension programs are reduced if they choose to participate. Where
these voluntary programs are prevalent, they can affect countries'
decisions about public pension reforms.

Historically, developed countries have relied on some form of a PAYG
national pension program. 7 Over time, countries have used a variety of
approaches to respond to demographic challenges and the ensuing increases
in expenditures for these programs. In many cases, these approaches
provide a basic or minimum benefit as well as a benefit based on the level
of a worker's earnings. Several countries are preparing to pay

7

Some countries, such as Germany, originally had pre-funded national
pension programs providing modest benefits, but pension reserves
diminished as they increased the level of benefits.

Page 7 GAO-06-126 Social Security Reforms Abroad

future benefits by either supplementing or replacing their PAYG programs.
For example, some have set aside and invested current resources in a
national pension reserve fund to partially prefund their PAYG program.
Some have established fully funded individual accounts. These are not
mutually exclusive types of reform. In fact, many countries have
undertaken more than one of the following types of reform (see table 1 for
the reforms OECD countries and Chile have undertaken): 8

     o Adjustments to existing pay-as-you-go systems. Typically, these are
       designed to create a more sustainable program by increasing
       contributions or decreasing benefits, or both, while preserving the
       basic structure of the system. Measures include phasing in higher
       retirement ages, equalizing retirement ages across genders, and
       increasing the earnings period over which initial benefits are
       calculated. Some countries have created notional defined contribution
       (NDC) accounts for each worker, which tie benefits more closely to
       each worker's contributions and to factors such as life expectancy and
       the growth rate of the economy.
     o National pension reserve funds. These are set up to partially prefund
       PAYG national pension programs. 9 Governments commit to make regular
       transfers to these investment funds from, for example, budgetary
       surpluses. To the extent that these contribute to national saving,
       they reduce the need for future borrowing or for large increases in
       contributions to pay scheduled benefits. Funds can be invested in a
       combination of government securities and domestic as well as foreign
       private sector securities. Because of differences in accounting
       practices, some countries report reserve funds as part of national
       budgets while others do not include them in federal figures. 10
     o Individual accounts. These are fully funded accounts that are
       administered either by employers, the government, or designated third
       parties and are owned by the individual. The level of retirement
       benefits depends largely on the amount of contributions made by, or on
       behalf of, an individual into the account during his or her working
       life, investment earnings, and the amount of fees individuals are
       required to pay.

8

This list of types of reform is not comprehensive. Some countries, Norway,
for example, recently adopted legislation requiring employers to provide
pensions (usually defined benefit programs) for employees.

9

A fully prefunded pension program would no longer be a PAYG system.

10

The Netherlands, New Zealand, and the United States are examples of
countries that incorporate reserve funds into national budgets; Canada and
Finland, for instance, do not.

Page 8 GAO-06-126 Social Security Reforms Abroad

Table 1: Countries' National Pension Reforms-1970-2004

           Groups of countries undertaking different types of reform

Adjustments to PAYG and Adjustments to PAYG and Adjustments to PAYG,
national Only adjustments to PAYG national pension fund individual
accounts pension fund, and individual accounts

                       Austria Belgium Australia Denmark

                      Czech Republica Canada Chileb Sweden

                       Italy Finland Hungary Switzerlandc

                            Germanyd France Icelande

                              Turkey Greece Mexico

                                 Ireland Poland

        Japan                                            Slovak Republic 
        Luxembourg                                       United Kingdomf 
        Netherlands                     
        New Zealandg                    
        Norway h                        
        Portugal                        
        South Korea                     
        Spain                           

                                 United States

Source: OECD, International Social Security Association, and Social
Security Administration.

a

The Czech Republic's defined contribution account program is not included
as an individual account reform as it is a voluntary supplementary
program. For a discussion of these accounts, see GAO, Social Security
Reform: Information on Using a Voluntary Approach to Individual Accounts,
GAO-03-309 (Washington, D.C.: Mar. 10, 2003), pp. 46-54.

bChile is not an OECD country, but was included in our study because it
pioneered individual account reforms.

cSwitzerland's mandatory occupation-based pensions provide individual
accounts that accrue credits at least at a minimum prescribed interest
rate. The program's requirements are phrased in terms of individual
accounts and the consulting actuaries must make an individual account
calculation applying the differing contribution rates per age bracket in
order to determine compliance with the law. But in fact many companies
offer plans that work like defined benefit pensions. Benefits are based on
the notional balance of the account at retirement.

d

Germany's Riester pension program is not included as an individual account
reform because it is a supplement to the mandatory national pension
program, rather than an alternative. For a discussion of these accounts,
see GAO-03-309, pp. 55-63.

e

Iceland's mandatory occupation-based pension program allows for the
creation of defined contribution individual accounts as a complement to
defined benefit pensions. However, in practice, employers have not yet
established these. Voluntary supplementary individual accounts are also
available.

fThe United Kingdom requires participation in either a state
earnings-related pension program or an approved alternative, including an
individual account.

gNew Zealand's national pension is technically not a PAYG program as it is
funded with general government revenue rather than workers' or employers'
contributions to the program.

  Adjustments to Existing PAYG Programs Show Importance of Sustainability,
  Safety Nets, and Incentives to Work and Save

h

Norway's Petroleum Fund is not, by law, dedicated exclusively to future
pension expenditures, but it is regarded as a fund to meet the future
expenses of an aging society, including pensions.

The countries that have adjusted their existing PAYG national pension
programs demonstrate a broad range of approaches for both reducing
benefits and increasing contributions in order to improve the programs'
financial sustainability. Their experiences also provide lessons about the
potential effects of some adjustments on the distribution of benefits,
including the maintenance of a safety net and incentives to work and save.
They also emphasize the care required in implementing and administering
reforms and ensuring that the public understands the new provisions.

    PAYG Adjustments Prove Key to Financial Sustainability

To reconcile PAYG program revenue and expenses, nearly all the countries
we studied have decreased benefits, and most have also increased
contributions, often in part by increasing retirement ages. Generally
countries with national pension programs that are relatively financially
sustainable, based on estimated changes in spending on old-age pensions,
have undertaken a package of several far-reaching adjustments. 11 Most of
the countries we studied increased program revenue by raising contribution
rates, increasing the range of earnings or kinds of earnings subject to
contribution requirements, or increasing the retirement age. Most of these
countries increased contribution rates for some or all workers. Canada,
for example, increased contributions to its Canadian Pension Plan from a
total of 5.85 percent to 9.9 percent of wages, half paid by employers and
half by employees. Several countries, including the United Kingdom,
increased contributions by expanding the range of earnings subject to
contribution requirements.

Nearly all of the countries we studied decreased the promised level of
benefits provided to future retirees, using a wide range of techniques.
Some techniques reduce the level of initial benefits; others reduce the
rate at which benefits increase during retirement or adjust benefits based
on retirees' financial means.

11

OECD has assessed the financial sustainability of most OECD member
countries' pension systems by projecting the change in spending needed to
support the old-age pension programs through 2050. For details, see table
4 in app. II.

Page 10 GAO-06-126 Social Security Reforms Abroad

     o Increased years of earnings. To reduce initial benefits, several
       countries increased the number of years of earnings they consider in
       calculating an average lifetime earnings level. France previously
       based its calculation on 10 years but increased this to 25 years for
       its basic public program. Austria is gradually increasing the number
       of years from 15 to 40 years.
          * Increased minimum years of contributions. Another approach is to
            increase the minimum number of years of creditable service
            required to receive a benefit. France increased the required
            number of years from
          * 37.5 to 40 years. Belgium is increasing its minimum requirement
            for early retirement from 20 to 35 years.
     o Changed formula for calculating benefits. Another approach to
       decreasing the initial benefit is to change the formula for adjusting
       prior years' earnings. Countries with traditional PAYG programs all
       make some adjustment to the nominal amount of wages earned previously
       to reflect changes in prices or wages over the intervening years.
       Although most of the countries we studied use some kind of average
       wage index, others, including Belgium and France, have adopted the use
       of price indexes. The choice of a wage or price index can have quite
       different effects, depending on the rate at which wages increase in
       comparison with prices. The extent to which wages outpace prices
       varies over time and among countries.
     o Changed basis for determining year-to-year increases in benefits once
       retirement begins. In many of the countries we studied, the rate at
       which monthly retirement benefits increase from year to year during
       retirement is based on increases in prices, which generally rise more
       slowly than earnings. Others-including Denmark, Ireland, Luxembourg,
       and the Netherlands-use increases in earnings or a combination of wage
       and price indexes. Hungary, for example, changed from the use of a
       wage index to the Swiss method-an index weighted 50 percent on price
       changes and 50 percent on changes in earnings.
     o Implemented provisions that adjust benefits in response to economic
       and demographic changes. Adjustments, which link benefits to factors
       such as economic growth, longevity, or the ratio of workers to
       retirees, may contribute to the financial sustainability of national
       pension systems. 12 Finland and Germany, for example, have adopted
       adjustment mechanisms of this kind. In some countries, such as Italy
       and Sweden, this approach

Increases in life expectancy, decreases in birth rates, or decreases in
real (inflation adjusted) interest rates can reduce the level of benefits
that a pension program can provide at a given tax (contribution) rate.

Page 11 GAO-06-126 Social Security Reforms Abroad

takes the form of a notional defined contribution program. Italian and
Swedish workers have "notional" accounts in that both the incoming
contributions and the investment earnings exist only on the books of the
managing institution. At retirement, the accumulated notional capital in
each account is converted to a stream of pension payments using a formula
based on factors such as life expectancy at the time of retirement.

Most of the countries we studied undertook more than one of these types of
reforms as indicated in table 2. See table 5 in appendix II for additional
information concerning adjustments to PAYG programs.

: Countries Undertaking Selected Types of Adjustments to their PAYG
Pensions-1970-2004

Change in Other adjustment years of Change in mechanisms Increase in
earnings Change in indexation for linking initial level contribution
Increase in considered in indexation for benefits of benefits to Other
rates or retirement benefit calculation of during demographic or decrease
in

a

Country coverage age calculation initial benefit retirement economic
factors benefits

Australia X
Austria X X X
Belgium X X X
Canada X X X
Chile X X
Czech Republic X X
Denmark X
Finland X X X X
France X X X X X
Germany X X X X X
Greece X X X
Hungary X X X
Iceland
Ireland X
Italy X X X X X X X
Japan X X X X
Luxembourg X X
Mexico X X
Netherlands X X X
New Zealand X
Norway X
Poland X X

                                  Change in                        Other adjustment
                                   years of             Change in  mechanisms  
         Increase in             earnings    Change in  indexation linking initial
                                                        for        level       
        contribution Increase   considered  indexation   benefits  of benefits  Other   
                     in         in          for                        to      
            rates or retirement   benefit   calculation   during   demographic decrease 
                                            of                     or                in 
Country     coverage   age a    calculation initial     retirement economic    benefits 
                                            benefit                factors     
Portugal                 X           X                                            X     
Slovak         X         X           X                                  X      
Republic                                                                       
South Korea    X         X           X                                         
Spain          X         X           X                                            X     
Sweden                   X                                              X      
Switzerland              X                                                        X     
Turkey                   X           X                                            X     
United         X         X           X                      X                     X     
Kingdom                                                                        
United                                                                                  
States         X         X                       X          X                     X

Essential Reform Elements Include Maintenance of a Safety Net and Work and
Saving Incentives

Source: OECD, International Social Security Association, and individual
government sources.

aGenerally, increasing the retirement age both increases lifetime
contributions and decreases lifetime benefits, as people remain in the
workforce for a longer period and spend a shorter period in retirement,
without changes in monthly contribution rates or benefit amounts.

Several countries, such as Sweden and the United Kingdom, have undertaken
one or more of these adjustments to their PAYG programs and have achieved,
or are on track to achieve, relative financial sustainability. Other
countries, including France, and Germany, may need to take additional
action to finance future benefit commitments. Generally, the countries
that have come closest to achieving sustainability are those that have
undergone more than one type of national pension reform.

All of the countries we studied that reformed their PAYG pension programs
by reducing projected benefits included provisions to help ensure adequate
benefits for lower-income groups and put into place programs designed to
ensure that all qualified retirees have a minimum level of income. 13 Most
did so by providing a means-tested program that provides more benefits to
retirees with limited financial means. Two countries-Germany and
Italy-provide retirees access to general social welfare programs that are
available to people of all ages rather than providing programs with
different provisions for elderly people.

13

The adequacy of pension benefits can be evaluated both in terms of their
minimum level and the extent to which they replace earnings. For more
information on projected replacement rates for OECD pensions systems, see
table 4 in app. II.

Page 13 GAO-06-126 Social Security Reforms Abroad

Twelve countries use another approach to providing a safety net: a basic
retirement benefit. The level of the benefit is either a given amount per
month for all retirees or an amount based on years of contributions to the
program (but not the level of earnings during those years). In Ireland,
for example, workers who contribute to the program for a specified period
receive a flat-rate pension equal to about 167 euros a week in 2004-
approximately one-third of average earnings. 14 According to the Social
Security Administration (SSA), Chile set a minimum pension for those
younger than age 70 at 62.7 percent of the minimum wage in 2004. The
United Kingdom and Belgium give low-income workers credit equivalent to
the minimum level contribution even though their earnings were too low to
require a contribution. Several countries give workers credit for years in
which they were unemployed, pursued postsecondary education, or cared for
dependents. Establishing a safety net requires a careful consideration of
costs and incentives for working and saving. Costs can be high if a
generous basic pension is provided to all eligible retirees regardless of
their income. On the other hand, means-tested benefits can diminish
incentives to work and save. The United Kingdom provides both a basic
state pension and a means-tested pension benefit. Concern about the
decline in the proportion of preretirement earnings provided by the basic
state pension has led some to advocate making it more generous. Others
argue that focusing safety net spending on those in need enables the
government to alleviate pensioner poverty in a cost-effective manner.

Prior to 2003, retirees in the United Kingdom received a means-tested
benefit that brought their income up to a guaranteed minimum retirement
income level. This benefit left those retirees with low to moderate
incomes no financial incentive to work or save, because additional income
was offset by equal reductions in the means-tested benefit. 15 To help
remedy this, the United Kingdom introduced the savings credit, which
provides a supplementary benefit equal to a portion of an individual's
additional income within a range near the guaranteed retirement income
level. This new benefit increases, but does not fully restore, the
incentive to work and save because a portion of the additional income is
lost through reductions in pension income. If, for example, a retiree with
pre-benefit income of

14

This was the equivalent of about $203 a week in mid-2004. To qualify for
this basic benefit, the retiree must have 260 weeks of paid contributions,
with an annual average of at least 48 weeks of paid or credited
contributions.

15

The lack of a financial incentive applies up to the point at which the
retiree has sufficient income or assets that they no longer qualify for
the benefit.

Page 14 GAO-06-126 Social Security Reforms Abroad

Successful Reform Requires Careful Implementation, Administration, and
Public Education

$700 a month increases this income to $800 a month, his or her total
retirement income including these means-tested benefits would increase by
$60, from $892 to $952. The proportion of United Kingdom pensioners
eligible for these means-tested benefits is expected to rise. The United
Kingdom Pensions Commission projects that unless current pension rules are
changed, almost 65 percent of retiree households will be eligible for
these means-tested benefits by 2050, because the increases in the Basic
State Pension are linked to prices, but increases in other components of
the United Kingdom's pension system are linked to earnings.

The extent to which new provisions are implemented, administered, and
explained to the public may affect the outcome of the reform. Although
many adjustments to PAYG programs are not difficult to implement and
administer, some more complex reforms, such as the development of a
notional defined contribution program, can be challenging. Poland, for
example, adopted NDC reform in 1999, but the development of a data system
to track contributions has been problematic. As of early 2004, the system
generated statements documenting contributions workers made during 2002,
but there was no indication of what workers had contributed in earlier
years or to previous pension programs. Without knowing how much they have
in their notional defined accounts, workers may have a difficult time
planning for their retirement. Additionally, countries typically phase in
certain changes, such as increasing the retirement age. This could help to
provide workers with enough time to understand how the changes to the
pension program will affect their retirement income.

To educate workers about how PAYG programs and PAYG reforms affect them,
countries including Canada, Sweden, the United Kingdom, and the United
States, send workers periodic statements concerning the program, the
record of their contributions to it, and the benefits they are projected
to receive. 16 To increase the likelihood that recipients will read and
understand them, the United Kingdom provides different messages tailored
to workers of different ages. Nonetheless, the United Kingdom has had
limited success in efforts to educate workers about changes in provisions
that will affect their retirement income. For example, a survey of women
in the United Kingdom showed that only about 43 percent of women who will
be affected by an increase in the retirement age knew the

16

For a discussion of the understandability of benefit statements in Canada,
Sweden, the United Kingdom and the United States, see GAO, Social Security
Statements: Social Security Administration Should Better Evaluate Whether
Workers Understand Their Statements, GAO-05-192 (Washington, D.C.: Apr. 1,
2005).

Page 15 GAO-06-126 Social Security Reforms Abroad

  Early Action and Effective Management Help Strengthen National Pension Reserve
  Funds

age that applied to them. A large proportion (70 percent) of younger women
indicated that they expect to retire before their state pension
eligibility age-65 years. 17

Another measure often found in reform packages is the accumulation of
reserves in national pension funds with the aim of partially prefunding
PAYG pension programs. With public centralized prefunding, governments set
aside resources in the current period to safeguard the financing of their
PAYG pension programs in the future. Typically invested in various
combinations of bonds and equities, these reserve funds are in some cases
meant to remain untouched for several years before being channeled into
the public pension system, in particular to maintain adequate pension
levels for the baby boom cohort. Pension reserve funds can contribute to
the system's financial sustainability, depending on when they are created
or reformed, as well as how they are invested and managed. Countries that
took action early have had time to amass substantial reserves, reducing
the risk that they will not meet their pension obligations. Effective
management of reserve funds has also proved important, as a record of poor
fund performance has led some countries to put reserve funds under the
administration of a relatively independent manager with the mandate to
maximize returns and minimize avoidable risk. 18

                              Early Action Matters

Establishing reserve funds ahead of demographic changes-well before the
share of elderly in the population increases substantially-makes it more
likely that enough assets will accumulate to help meet future pension
obligations. In countries such as Sweden and Denmark, which have had long
experience with partial prefunding of PAYG programs, important reserves
have already built up. Combined with long-term policies aimed at ensuring
sound public finances, raising employment rates, and adjusting pension
program provisions, these resources are expected to make significant
contributions to the long-term finances of

17

In contrast only 7 percent of the women who were not affected by the
increase expected to retire before they reached the state pension age that
applied to them (60 years).

18

While some investment risks are unavoidable, other kinds of risks can be
minimized by diversifying the portfolio among asset classes, for example
stocks, bonds, and real estate, and within asset classes.

Page 16 GAO-06-126 Social Security Reforms Abroad

Effective Management Can Contribute to Financial Sustainability

public pension programs. 19 For example, Denmark's reserve fund, set up in
1964, had assets equivalent to about 25 percent of GDP in 2000. Sweden's
reserve fund, created in 1960, was around 24 percent at the end of 2003.

Other countries that have recently created pension reserve funds for their
pension programs have a shorter period in which to accumulate reserves
before population aging starts straining public finances. In particular,
the imminent retirement of the baby boom generation is likely to make it
challenging to continue channeling a substantial amount of resources to
these funds. France, for example, relies primarily on social security
surpluses to finance its pension reserve fund set up in 1999. Given its
demographic trends, however, it may be unable to do this beyond the next
few years. Similarly, Belgium and the Netherlands plan on maintaining
budget surpluses, reducing public debt and the interest payments
associated with the debt, and transferring these earmarked resources to
their reserve funds. However, maintaining a surplus will require sustained
budgetary discipline as a growing number of retirees begins putting
pressure on public finances. Some countries have set specific starting
dates for drawing down national funds to resist demands for their
immediate use.

Though the Irish National Pensions Reserve Fund was established in 2001,
as of 2004 it had already amassed substantial assets, nearly 10 percent of
GDP. Its resources are projected to support the financial sustainability
of the pension program for two main reasons. First, Ireland enjoys
relatively favorable demographics. Its aging problem is expected to
increase in severity at a later date than those of other Western European
countries; thus, it has in effect created its pension fund relatively
early, with more time for returns to accumulate. Second, Ireland provides
somewhat less generous public pensions to their beneficiaries than other
OECD countries; its pension spending is, therefore, relatively low.

Examples from several countries reveal that prefunding with national
pension reserve funds is less likely to be effective in helping assure
that national pension programs are financially sustainable if these funds
are also used for purposes other than supporting the PAYG program. Some
countries have used funds to pursue industrial, economic, or social

19

If however, policymakers increase deficit spending or decrease surpluses
in the rest of the government's budget in response to the accumulation of
pension reserves, the prefunding benefits of the reserve will be offset.

Page 17 GAO-06-126 Social Security Reforms Abroad

objectives. For example, Japan used its reserve fund to support
infrastructure projects, provide housing and education loans, and
subsidize small and medium enterprises. 20 As a result, Japan compromised
to some extent the principal goal of public prefunding, which is to save
in advance and accumulate assets so as to continue providing adequate
benefits to retirees while keeping contribution rates of workers stable.
Japan has since implemented a series of reforms. The latest wave, which
became effective in 2001, refocused the fund's objective in the interests
of participants, rather than those of the general public. Measures
introduced include management improvements and more aggressive investment
strategies with the aim of maximizing returns.

Past experiences have also highlighted the need to mitigate certain risks
that pension reserve funds face, in addition to the risks that are
inherent in investment of any pension funds. One kind of risk has to do
with the fact that asset buildup in a fund may lead to competing pressures
for tax cuts and spending increases, especially when a fund is integrated
into the national budget. 21 For instance, governments may view fund
resources as a ready source of credit. As a result, they may be inclined
to spend more than they would otherwise, potentially undermining the
purpose of prefunding. For example, according to many observers, the
United States' Social Security trust fund, which is included in the
unified budget and invested solely in U.S. Treasury securities that cannot
be bought or sold in the open market, may have facilitated larger federal
budget deficits. Ireland sought to alleviate the risk that its reserve
fund could raise government consumption by prohibiting investment of fund
assets in Irish government bonds. Some economists argue in favor of
similar limits on the share of domestic government bonds the fund
portfolio can hold.

Additionally, pension reserve fund investments in private securities can
have negative effects on corporate governance. There is the danger that if
the government owns a significant percentage of the stocks of individual
companies and as a result controls their corporate affairs, the best
interest

20

Apart from a national fund for pension reserves, with a balance equal to
about 28 percent of GDP as of 2003, Japan has accumulated savings through
Japan Post, a national corporation with a large savings program. Japan
Post's assets (50 percent of GDP in fiscal year 2003) included postal
savings and life insurance.

21

The fact that reserve funds are sometimes accumulated separately from the
budget does not entirely relieve the pressure to use them for current
consumption. So far, no country has managed to completely "wall off" its
fund from at least the pressure to divert some of the proceeds for program
priorities or tax cuts.

of shareholders may not be upheld because of potential conflicts of
interest. Limiting the government's stock voting rights by investing
national pension resources in broad index funds may provide a safeguard
against this type of risk.

Another risk is that groups may exert pressure to constrain fund managers'
investment choices, potentially lowering returns. For example, Canada and
Japan have requirements to invest a minimum share of their fund portfolios
in domestic assets, restricting holdings of foreign assets to stimulate
economic development at home. In contrast, Norway chose to invest its fund
reserves almost exclusively in foreign assets. 22 The funds of Ireland and
New Zealand also have large shares of foreign investments. 23 Investing a
significant share of reserves in foreign assets may not be a realistic or
viable option for large economies with mature financial markets, such as
the United States. Funds in several countries have also faced pressure to
adopt ethical rather than purely commercial investment criteria, with a
possibly negative impact on returns. 24 In recent years, some countries
have taken steps to help ensure that funds are managed to maximize returns
and minimize avoidable risk. Canada, for example, has put its fund under
the control of an Investment Board operating independently from the
government since the late 1990s. Several countries, including New Zealand,
have taken steps to provide regular reports and more complete disclosures
concerning pension reserve funds which may help achieve transparency in
management and administration and contribute to public education and
oversight. 25 (For additional information concerning national pension
reserve programs, see fig. 1 and table 6 in app. II.)

22

Although the Norwegian Government Petroleum Fund is not a pension fund per
se, its assets are designated to deal with the impact of population aging.

23

Investing abroad also helps lower the risk that funds will distort
domestic capital markets. On the other hand, there is a risk that changes
in exchange rates will decrease the value of foreign investments.

24

New Zealand and Sweden are examples of countries stating explicitly that
ethical considerations must be taken into account in investment policy.

25

Maintaining high standards of transparency and disseminating accurate
information contribute to public education and oversight, providing some
degree of discipline to fund management.

  Individual Account Reforms Show the Importance of Funding Decisions and
  Benefit Adequacy

Figure 1: National Pension Reserve Funds as a Percentage of GDP Percentage
of GDP Norway

                                                      Japan Sweden Luxembourg

        United States Korea Ireland Finland Portugal Spain Canada New Zealand
                                                                       France

0 10 20 30 40 50 6070

Source: OECD and individual government sources.

Note: The figure for Finland excludes the statutory pension funds (58.3%
of GDP). Figures as of 2003, except as follows: as of December 31, 2000,
for Portugal, as of December 31, 2004, for Spain, Ireland, the United
States, and Norway.

Countries that have adopted individual account reforms-which may also help
prefund future retirement income-offer lessons about financing the
existing PAYG pension program as the accounts are established. To manage
this transition period these countries have expanded public debt, built up
budget surpluses in advance of implementation, reduced or eliminated the
PAYG program, or used some combination of these approaches. Another
important consideration for countries that have individual account
programs is how to balance achieving high rates of

    Approach to Funding Individual Accounts Affects Sustainability of National
    Pension System

return while ensuring individuals receive an adequate level of benefits.
Measures such as limits on how the funds are invested and the level of
fees and charges may help to ensure that benefits will be adequate, but
should not be so restrictive that they unduly harm individuals or pension
fund managers. In addition, administering individual accounts requires
effective regulation and supervision of the financial industry to protect
individuals from avoidable investment risks. Educating the public is also
important as national pension systems become more complex.

The experiences of other countries demonstrate the importance of
considering how individual accounts may affect the long-term and shortterm
financing of the national pension system and the economy as a whole. In
the long-term, individual accounts can contribute to sustainability by
providing a mechanism to prefund retirement benefits that could be less
subject to demographic booms and busts than a PAYG approach. Individual
accounts prefund benefits in private accounts rather than government
accounts. If governments are unable to save through national pension
reserves, private accounts may facilitate pre-funding that would not occur
otherwise. 26 If, however, such accounts are funded through borrowing, no
such prefunding is achieved. In the short-term countries adopting
individual accounts face the common challenge of how to pay for both a new
funded pension and an existing PAYG pension simultaneously. The cost of
the transition from a PAYG program to individual accounts depends on
whether the individual accounts redirect revenue from the existing PAYG
program, the amount of revenue redirected, and how liabilities under the
existing PAYG program are treated.

The countries we studied vary in the amount of revenue diverted from their
PAYG programs to fund their individual accounts, resulting in a range of
related transition costs. Australia and Switzerland used new sources of
funding to add individual accounts to their existing, relatively modest,

26

The extent to which individual account programs can contribute to national
saving is not yet clear, however. Some studies of Chile's individual
account program have concluded that it has contributed to national saving
rates. Other studies provide less clear evidence that individual account
programs contribute to national saving rates, in part because saving in
individual accounts can displace other forms of saving. Accounting issues
also cloud the evidence.

Page 21 GAO-06-126 Social Security Reforms Abroad

national pension systems. 27 Transition costs were not an issue, because
no resources were diverted from paying current benefits. Nonetheless, new
financing was needed to both fund the new program and to support the
existing program. (For additional information concerning these "add-on"
programs and other countries' individual account programs, see table 7 in
app. II.) Some countries diverted revenue from the existing PAYG program
to the individual accounts, a "carve out," resulting in shortfalls that
reflect, in part, the portion of the PAYG program being replaced with
individual accounts. For example, transition costs may be less in
countries such as Sweden where the contribution to individual accounts is
2.5 percent of covered earnings, than for Poland or Hungary, which have
contribution rates of 7.3 percent and 8 percent, respectively.

In addition to the level of transition costs resulting from redirecting
PAYG revenue, how a country manages these costs also affects the success
of the reform. All of the countries we reviewed also made changes that
were meant to help finance the transition to individual accounts, such as
increasing contributions to or decreasing benefits from their PAYG
programs. In addition, Chile built a budget surplus in anticipation of
major pension reform, and Sweden had large budget surpluses in place prior
to establishing individual accounts. Some countries transferred funds from
general budget revenues to help pay benefits to current and near retirees,
expanding public borrowing. Where they financed individual accounts
through borrowing, these countries will not positively affect national
saving until the debt is repaid, as contributions to individual accounts
are offset by increased public debt. 28 For example, Poland's debt is
expected to exceed 60 percent of GDP in the next few years, in part
because of its public borrowing to pay for the movement to individual
accounts.

Countries sometimes had difficulty predicting their transition costs. In
particular, countries that allowed workers to opt in or out of individual
account programs had difficulty estimating costs. For example, more
workers in the United Kingdom, Hungary, and Poland responded to incentives
to contribute to individual accounts than originally anticipated, leaving
the existing PAYG programs with less funding than planned.

27

Australia's national PAYG program consistently replaces approximately 25
percent of average wages (23 percent in 2005); Switzerland's national PAYG
program replaced approximately 36 percent of average wages in 2005.

28

Additionally, increased government debt may crowd out private-sector
access to lending markets and dampen the economic growth individual
accounts are meant to generate.

Page 22 GAO-06-126 Social Security Reforms Abroad

Countries Balanced Opportunities to Realize High Expected Returns with
Provisions to Help Ensure Benefit Adequacy

Hungary's short-run fiscal concerns resulted in a slower increase in
contribution rates to individual accounts than originally planned.

Regardless of whether workers have a choice of participating in the
program, individual accounts may also affect the long-term costs to the
government. For example, if income from substitute accounts leaves
particular individuals with less retirement income than if they had not
participated, some may qualify for benefits from other means-tested
programs. On the other hand, to the extent that the accounts increase
retirement incomes, costs for such programs may fall. Under a voluntary
approach, such effects could depend partly on the rate of participation.
The actual effect of countries' individual account programs on other
programs as they relate to government spending will not be clear for years
to come, when cohorts of affected workers retire.

Countries adopting individual accounts as part of their national pension
systems have had to make trade-offs between giving workers the opportunity
to maximize expected returns in their accounts and helping assure that
benefits will be adequate for all participants. Some countries set a
guaranteed rate of return to reduce certain investment risks and help
ensure adequacy of benefits. Guaranteed rates of return may be relative,
that is, related to other funds' returns, as in Chile, or fixed-a
guaranteed percentage rate return, as in Switzerland. In Chile workers
with individual accounts are guaranteed a minimum rate of return set at 2
percentage points below the average return for funds of the same type
during a 3-year period. 29 In Switzerland, account holders were assured a
minimum rate of return of 2.25 percent in 2004. 30 This type of guarantee
may, however, result in limited investment diversification or conservative
investment decisions, resulting in lower rates of return overall. In
Chile, for example, the guaranteed return may have resulted in a "herding"
effect, creating an incentive for fund managers to hold similar portfolios
and reducing variation in returns. To help ensure that individuals receive
at least a benefit based on the guaranteed rate of return, several
countries require

29

Previously, Chile's rate of return guarantee was calculated over a
12-month period. The Chilean association of the fund managers reported
that the average annual real (inflationadjusted) rate of return on funds
in the individual accounts, before deducting administrative fees, was 10.3
percent during the 24 years since the inception of the program.

30

Switzerland originally set its minimum return guarantee at 4 percent.
However, because of funding problems from lower than expected yields on
investments, it gradually lowered its rate to the current 2.25 percent.

fund managers to have reserve funds to pay benefits at the guaranteed
return level. A number of these countries have further provisions that the
government will provide benefits if all of the fund reserves are used.

Another measure to ensure retirees will have at least a minimally adequate
level of income is to provide some form of minimum guaranteed benefit. All
countries with individual accounts that we reviewed provide such a
benefit. This can be increasingly important as individuals assume risks
with the investment of funds in their individual accounts. Some experts
believe that a minimum pension guarantee could encourage investors to
select riskier investments or spend their assets more quickly. For
example, in countries with a large flat-rate pension, individuals may make
risky investment decisions because they can rely on the guarantee if their
risk taking brings poor results. In countries where additional benefits
are added on to the individual account payment to meet a minimum standard
("top-up" benefits) individuals may minimize their voluntary contributions
in order to receive a higher benefit from the government. There is some
belief that this may occur in Chile, where low-income workers might try to
stop making contributions after meeting the contribution year requirement.
Individuals in countries with a means-tested benefit may spend down their
retirement assets quickly to qualify for the benefit. This has occurred in
Australia, and as result, that country plans to increase the age when
individuals can access their individual account funds from 55 to 60
between 2015 and 2025. In any of these cases, the government could incur
increased costs because it ensures that individuals have at least a
certain level of income. The financial risk to the government will be
greater in countries that have a larger guarantee. However, the protection
of individuals against poverty could also be greater in these countries.

Outside of providing a minimum pension guarantee, countries have taken
additional measures to help ensure an adequate retirement income. 31 To
prevent fees from eroding small account balances, some of these countries
also exclude low-income workers from participation requirements in the
individual account program. Another approach to help protect low-income

In addition to the measures discussed in this section, other factors, such
as regulations on investments, administrative and marketing costs, and
fees (including those during payout), can affect the amount of retirement
income individuals will receive and subsequently the adequacy of their
benefits. Countries' use of these measures is discussed in the following
section.

Page 24 GAO-06-126 Social Security Reforms Abroad

Effective Regulation, Implementation, and Education Can Protect
Individuals

workers occurs in Mexico, where the federal government provides a flatrate
contribution on behalf of workers. 32

It is important to consider the payout options available from individual
accounts, as these can also affect income adequacy throughout retirement.
For example, an annuity payout option can help to ensure that individuals
will not outlive their assets in retirement. 33 However, purchasing an
annuity can leave some people worse off if, for example, premiums are high
or inflation erodes the purchasing power of benefits. Several countries
also allow for phased withdrawals, sometimes with restrictions, helping to
mitigate the risk of individuals outliving their assets and becoming
dependent on the government's basic or safety net pension. Some countries
offer a lump-sum payment under certain circumstances. For example, Chile
and Mexico allow lump sums for persons who have account balances above a
certain amount. 34 Australia allows a full lumpsum payout for all retirees
age 55 and above (age 60 and above by 2025).

Countries also protect individuals by regulating how the funds in their
accounts can be invested. Initially, several countries offered individuals
choices among a limited number of investment funds and often restricted
the portion of assets that could be invested in certain products, such as
publicly traded equities, private equities, and foreign securities. Later,
however, the options were expanded in most countries to allow more
investment diversification, but they still include some restrictions.
Additionally, as investment options have expanded, some countries have
incorporated other protections. For example, Chile and Mexico have
incorporated investment options that take into account individuals' ages
and risk tolerance. Chile requires each pension administrator to offer
four

32

The Mexican government makes a contribution to individuals' accounts of
5.5 percent of minimum wage (a contribution of about $0.24 per workday in
Mexico City).

33

The countries we reviewed require a range of annuity options, including,
for example, inflation-indexed, joint and survivor, and gender-neutral.
Different types of annuities will help to protect against certain risks;
however, they may not be the best option for certain individuals. Certain
annuities, such as those with joint and survivor or guarantee period
provisions provide an opportunity for individuals to leave some benefits
to their heirs. Other annuities do not provide such an opportunity.

34

Chile allows a lump sum of the amount by which the account balance exceeds
a specified level-the amount needed to pay a pension equivalent to 70
percent of pensionable salary and at least 120 percent of the minimum
pension. Mexico allows a lump sum of the remaining balance if the
individual account will pay a pension at least 30 percent more than the
minimum guarantee.

types of funds with varying degrees of risk, including a higher risk fund
and a fund invested in fixed-rate instruments. Pension administrators may
offer a fifth higher risk fund, available to workers more than 10 years
from the age of retirement. Mexico recently allowed pension fund managers
to offer more than one investment fund and included options to help
provide workers with an adequate rate of return at acceptable risk. Sweden
limits individuals to selecting at most five funds from among all the
qualified investment funds that choose to participate-over 650 funds as of
2004. Some experts have suggested that having such a large number of funds
available may discourage active choice. About two-thirds of participants
made an active investment choice in 2000. Since 2001, however, about 85
percent of new entrants have left their money in the default fund-a
separate fund for those who do not wish to make a fund choice. 35 This
default option can be an important safeguard. However, depending on who
makes the default decisions, it may be open to some of the same issues as
pension fund reserves, such as political pressures for certain investment
criteria in order to meet other social objectives.

To further protect individuals, most of the countries with individual
accounts have some sort of limit on the fees that fund managers can
charge. Nonetheless, it is unclear how these restrictions may affect an
individual's account balance and returns. Chile allows funds to charge
fees on new accounts, and individual account contributions, and for phased
withdrawals of funds during retirement. In addition to imposing this type
of limit, Poland has a ceiling on the amount of some types of charges.
Sweden has variable ceilings on charges, and the United Kingdom has a
fixed ceiling charge on its stakeholder pension. 36 Sweden uses a formula
to calculate the size of fees that are permitted to help ensure that fees
are not too high. Additionally, it plans to spread certain fixed costs
over the first 15 years of the program, helping avoid high fees in the
early years. Limits on the level of fees can also affect fund managers. In
the United Kingdom, for example, regulations capping fees may have
discouraged some providers from offering pension funds.

35

Sweden is undergoing a study that may include a discussion on the idea of
decreasing the number of funds in which accounts are directed-from over
650 to about 20.

36

Stakeholder pensions provide individuals with the option of contracting
out of the national second tier social security system to participate in
the tax-relieved defined contribution individual pension accounts.

Page 26 GAO-06-126 Social Security Reforms Abroad

Countries have also taken steps to lower administrative costs that
contribute to the fees participants are charged. For example, regulations
regarding how often individuals are permitted to move assets from one
investment fund to another can also protect program participants by
helping contain program costs that arise when people switch funds
frequently. Many countries restrict the number of times an individual can
switch. Mexico reportedly has lower administrative costs than some other
Latin American countries, in part because it limits individuals to annual
switching. Chile permitted people to switch fund managers three times a
year, but later restricted switching to two times a year to help lower
costs. Poland provides an incentive for individuals to stay with a pension
fund manager for at least 2 years by requiring fund managers to charge
lower fees for these contributors. Sweden does not restrict the number of
times individuals can change their investments. To help keep costs low,
however, Sweden aggregates individuals' transactions to realize economies
of scale. 37

Some countries' experiences highlighted weaknesses in regulations on how
pension funds can market to individuals. 38 Poland's and the United
Kingdom's regulations did not prevent problems in marketing and sales.
Poland experienced sales problems, in part, because it had inadequate
training and standards for its sales agents, which may have contributed to
agents' use of questionable practices to sign up individuals. The United
Kingdom had a widely-publicized "mis-selling" scandal that resulted in
over a million investors opening individual accounts when they would more
likely have been better off retaining their occupation-based pensions.
Insurance companies were ordered to pay roughly $20 billion in
compensation. In contrast, Sweden protects individuals from excessive
marketing by not allowing pension funds access to information about
individuals' investments. Instead, funds rely on mass advertising and
provide reports and disclosures to investors through a clearinghouse.

37

Designers of an individual account program must make critical decisions
about who would assume the new administrative and recordkeeping
responsibilities, how much choice or discretion individuals would have in
selecting and changing their investment options, and how workers would
receive their benefits. For additional information concerning options for
administering individual account programs, see GAO, Social Security
Reform: Administrative Costs for Individual Accounts Depend on System
Design, GAO/HEHS-99-131 (Washington, D.C.: June 18, 1999).

38

Marketing also contributes to the overall program costs, and a portion of
these costs are often passed on to participants.

Countries' individual account experiences reveal pitfalls to be avoided
during implementation. For example, Hungary, Poland, and Sweden had
difficulty getting their data management systems to run properly and
continue to experience a substantial lag time in recording contributions
to individuals' accounts. Sweden purchased a new computer system after the
program it intended to use proved insufficient for managing individual
accounts, resulting in an unexpected cost of $25 million. Once a
recordkeeping system is in place, however, problems may persist. For
example, Poland had some difficulty matching contributions with
contributors because it allowed two different identification numbers to be
used for reporting purposes. In such cases, workers' contributions were
not being credited to their accounts. Additionally, Poland experienced
problems with its computer system that resulted in a backlog. The
government was required to make interest payments to funds for delays in
contribution transfers. According to a report from the International
Labour Organization (ILO), the government initially failed to make 95
percent of the transfers to private funds and as of 2002 was still unable
to make 20 percent to 30 percent of required monthly transfers. 39

In countries where workers have a choice of whether to participate in the
individual account program, it is important that policymakers make timely
decisions about other details concerning the administration and
implementation of the program, so that workers can make informed choices.
Hungary and Poland reportedly implemented their individual account systems
without having made such decisions, including those concerning annuities.
Both countries required annuity payouts, but the markets did not have the
appropriate type of annuity available. For example, inflation-adjusted and
gender-neutral annuities were not available in Hungary. Experts suggest
that while these decisions may not have seemed important initially, the
lack of information could make it difficult for workers to decide whether
to participate in the individual account program and to assess their
potential retirement security.

Not only is information important to help workers make initial decisions
about participation in an individual account program, but it should be
provided on an ongoing basis. It is also of increasing importance as

International Labour Organization, Pension Reform in Central and Eastern
Europe, Vol. 1: Restructuring with Privatization: Case Studies of Hungary
and Poland. (Budapest, International Labour Office, 2002). For a general
discussion of such implementation issues, see GAO, Social Security Reform:
Implementation Issues for Individual Accounts, GAO/HEHS-99-122
(Washington, D.C., June 18, 1999).

Page 28 GAO-06-126 Social Security Reforms Abroad

national pension systems become more complex. Several countries require
disclosure statements about the status of a pension fund. 40 The inclusion
of fees charged on these disclosure statements could help individuals to
make more informed decisions when choosing a fund manager. Some countries
have done a better job than others of providing fund performance
information. For example, Australia requires its fund providers to inform
members through annual reports clearly detailing benefits, fees and
charges, investment strategy, and the fund's financial position. In
contrast, Hungary reportedly did not have clear rules for disclosing
operating costs and returns, making it hard to compare funds'
performances. Other more general information about individual account
savings is also important. In the United Kingdom, individuals must decide
whether they should participate in the state earnings-related pension
program, their employer-sponsored pension plan, or an individual account.
To help individuals make this decision, the Financial Services Agency
publishes decision trees on its Web site. Decision trees in the United
Kingdom ask basic questions about pension arrangements to help individuals
make their own choices. Individuals may find that these are somewhat
complicated, however, in part because the United Kingdom's system is
complex. In Mexico, a government entity provides information to workers on
the mandatory pension system and includes information about the importance
of reviewing commissions and returns when making a pension fund choice.

While countries have made efforts to inform the public about the
individual account program and the different options they will have
available, little research on the effectiveness of these campaigns has
been conducted. There has been research, however, looking at the overall
financial literacy of individuals across many OECD countries. The OECD
recently conducted a study on financial literacy and found that most
respondents to financial literacy surveys in member countries have a very
low level of knowledge concerning finances, often seeming to think that
they know more about financial issues than they really do. 41 For example,
about two-thirds of Australian respondents to a survey indicated that they

40

Some countries also provide annual statements that include information
about different pieces of an individual's retirement benefits, such as the
PAYG and individual account benefits.

41

OECD, Directorate for Financial and Enterprise Affairs, Committee on
Financial Markets, Financial Education Report: Overview and Analysis of
Selected Non-School Financial Education Programmes: Executive Summary,
DAF/CMF(2005)6/REV2, (Paris: June 23, 2005).

  Concluding Observations

understand the concept of compound interest. However, only 28 percent
correctly answered a question using the concept. 42 Countries have
realized the growing need for more financial literacy, and several
countries provide or are planning to provide general information about
pensions and savings for retirement.

Demographic challenges and fiscal pressure have necessitated national
pension reform in many countries. Though the reform efforts we examined
all had the common goal of improving financial sustainability, countries
adopted different approaches depending on their existing national pension
systems and the prevailing economic and political conditions. That is why
reforms in one country are not easily replicated in another, or if they
are, may not lead to the same outcome. Countries have different emphases,
such as benefit adequacy or equity; as a result, what is perceived to be
successful in one place may not be viewed as a viable option somewhere
else. Although some pension reforms were undertaken too recently to
provide clear evidence of results, the experiences of other developed
countries do suggest some lessons for U.S. deliberations on Social
Security's future.

Some of these lessons are common to all types of national pension reform
and are consistent with findings in previous GAO studies. Restoring
longterm financial balance invariably involves reducing projected
benefits, raising projected revenues, or both. Additionally, with early
reform, policymakers are more likely to avoid the need for more costly and
difficult changes later. Countries that undertook important national
pension reform well before undergoing major demographic changes have
achieved or are close to achieving, financially sustainable national
pension systems. Others are likely to need more significant steps because
their populations are already aging.

No matter what type of reform is undertaken, the sustainability of a
pension system will depend, in large part, on the long-term health of the
national economy. As the number of working people for each retiree
declines, average output per worker would have to increase in order to
sustain average standards of living. Reforms that encourage employment

42

Roy Morgan Research, ANZ Survey of Adult Financial Literacy in Australia:
Final Report. (Melbourne, Australia, May 2003). This study included a
telephone survey of 3,548 adults and in-person interviews with 202, but
the report did not indicate response rates.

Page 30 GAO-06-126 Social Security Reforms Abroad

                                Agency Comments

and saving, offer incentives to postpone retirement, and promote growth
are more likely to produce a pension system that delivers adequate
retirement income and is financially sound for the long term.

Regardless of a country's approach, its institutions need to effectively
operate and supervise the different aspects of reform. A government's
capacity to implement and administer the publicly managed elements of
reform and its ability to regulate and oversee the privately managed
components are crucial. Good public understanding of pension issues is
needed to provide reasonable assurance that people plan ahead to have
adequate income in retirement and to help ensure that pension reforms have
enough public support to be sustainable. In addition, education of the
public becomes increasingly important as workers and retirees face more
choices and the national pension system becomes more complex. This is
particularly true in the case of individual account reforms, which require
high levels of financial literacy and personal responsibility.

In nearly every country we studied, debate continues about alternatives
for additional reform measures. It is clearly not a process that ends with
one reform and often requires more than one type of reform. This may in
part be true because success can only be measured over the long term, but
problems may arise and need to be dealt with in the short term. The
positive lessons from other countries' reforms may only truly be clear in
years to come.

We provided a draft of this report to the Social Security Administration,
the State Department, and the Department of the Treasury. SSA and Treasury
provided technical comments on the draft; the State Department did not
provide comments. We also provided copies of the draft to OECD staff and
other external reviewers, who provided technical comments. In response to
these technical comments, we modified the draft where appropriate.

We are sending copies of this report to the Commissioner of Social
Security, the Secretary of State, and the Secretary of the Treasury. We
will also make copies available to others on request. In addition, the
report will be available at no charge on GAO's Web site at
http://www.gao.gov/.

If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this report
are listed in appendix III.

Barbara D. Bovbjerg, Director Education, Workforce, and Income Security
Issues

                       Appendix I: Scope and Methodology

                                  Methodology

We reviewed national pension reforms that occurred since 1970 in all 30
Organisation for Economic Co-operation and Development (OECD) countries
and Chile. We included Chile in our study because it was the first country
to undertake national pension reform that resulted in individual accounts.
On the basis of our preliminary research, we identified three types of
reform-adjustments to the existing pay-as-you-go (PAYG) program, national
pension reserve funds, and individual account programs-that illustrate a
variety of circumstances and experiences with national pension reform
across these countries. 1 While we reviewed each type of reform separately
for this report, we do indicate when countries have undergone more than
one of these types of reform.

We did not conduct an evaluation or audit of any country's national
pension program or its reform efforts; rather, we relied on the work of
officials in individual countries and international organizations with
expertise in this area. We did, however, draw some lessons based on our
review, as well as including the lessons that others have drawn. We
attempted to report the most current status of a country's reform by using
the most recently available data. Some countries may have undergone
changes to their systems subsequent to the publication of the literature
we reviewed, however. In many countries reforms are implemented over an
extended period of time, so the results are yet to be apparent. We also
contacted supreme audit institutions or reviewed their Web sites to see if
they have done similar work. However, much of their work was of the audit
nature and not relevant for our study.

To obtain information on other countries' national pension reforms, we
reviewed the types of reforms undertaken in OECD countries and Chile. We
selected the OECD countries in part because they are most comparable to
the United States. Additionally, the OECD has relatively comparable data
for its member countries. We conducted background research and interviews
to identify the types of reforms, if any, the selected countries had
undertaken. We primarily used information from the following sources to
identify countries' reforms and characteristics of national pension
systems: the Social Security Programs Throughout the World publications,
provided through a cooperative effort by the Social

1

This list of types of reform is not comprehensive. Some countries, Norway,
for example, recently adopted legislation requiring employers to provide
pensions (usually defined benefit programs) for employees.

Page 33 GAO-06-126 Social Security Reforms Abroad Appendix I: Scope and
Methodology

Security Administration and the International Social Security Association;
publications from the International Social Security Association and
updates from its Social Security Worldwide database; and publications from
OECD, World Bank, International Monetary Fund, and the European Union's
Economic Policy Committee.

After identifying the countries to be reviewed and the types of reform
they had undertaken, we conducted a review of relevant literature on these
countries' national pension reforms, including the following sources:

     o OECD Economic Surveys;
     o OECD publications on national pension reform and other related issues;
     o World Bank's Pension Reform Primer;
     o Relevant government agency publications and Web sites from selected
       countries;
     o Reports from U.S. and international policy groups; and
     o Reports from U.S., international, and country-specific experts.

We also interviewed officials and interest group representatives in
Washington, D.C.; Paris; and London. We met with pension experts and
country specialists at the OECD, the World Bank, and French and British
experts, officials, and interest group representatives, as well as
international pension experts in the United States. We formulated the
lessons learned in our report from those identified by experts and
officials and based on our own analysis of countries' reforms. Generally,
we aligned our lessons with GAO's criteria for evaluating national pension
reform, identifying key lessons related to fiscal sustainability, adequacy
and equity, and implementation and administration of reform.

We relied mainly on OECD data for information on country demographics,
economics, and information related to the national pension programs. OECD
collects much of its data from its member countries and validates its
reports with these countries. For example, OECD recently published a
description of each OECD member country's mandatory pension system,
including the results of modeling that projects the net replacement rates
expected from old-age pension benefits once all reforms enacted through

Appendix I: Scope and Methodology

2002 have been fully implemented. 2 OECD has also undertaken studies of
the projected level of public spending on national old-age pension
programs through 2050 based on national estimates and common OECD economic
assumptions. 3 In cases where national governments have completed more
recent estimates, we cited those rather than the earlier OECD estimates.
Also, we do not make a link between specific national pension reforms and
changes in the economy or of any specific reform measure and the
sustainability of the program. This is because most countries have
undergone more than one type of reform at different points in time, making
causes and effects difficult to determine.

To assess the reliability of the data on countries' national pension
systems, we (1) interviewed officials at the OECD including those in the
Statistics Directorate and the Economics Department responsible for
compiling these data based on information provided by government officials
in OECD member countries, and (2) performed some basic reasonableness
checks of the data against other sources of information. We determined
that the data are sufficiently reliable for the purpose of making broad
comparisons of the United States' and other countries' pension systems. To
ensure the reliability of its data, OECD also compares and investigates
alternative sources of data, uses an internal peer and supervisory review
process, and a process through which draft reports are reviewed and
validated by member governments prior to publication. Nonetheless, OECD
officials note several limitations in the data, including the fact that
the data are largely self-reported by each country and are affected by
differences in exchange rates, methods for analyzing national account data
and tracking price inflation, as well as different methods used to predict
longevity and economic growth. OECD works to develop comparable data by,
for example, developing purchasing power parity factors, harmonized price
indexes, and projections of old-age pension spending based on common
economic assumptions. Because of, these limitations, we were unable to
determine the reliability and precision of estimates for each country. We
conducted our review from August 2004 through September 2005 in accordance
with generally accepted government auditing standards.

2

OECD, Pensions at a Glance: Public Policies across OECD Countries (Paris:
2005).

3

See, for example, Thai Than Dang, Pablo Antolin, and Howard Oxley, Fiscal
Implications of Ageing: Projections of Age-Related Spending,
ECO/WKP(2001)31 (Paris: OECD, Sept. 19, 2001), and, OECD, Sustainable
Development in OECD Countries: Getting the Policies Right, (Paris: 2004).

Page 35 GAO-06-126 Social Security Reforms Abroad

Appendix II: Information on OECD Countries and Chile, Their Pension Systems, and
Reforms

Below are tabular data concerning OECD countries and Chile. Table 3
provides background information concerning each country's demographics,
economy, and political structure. Table 4 provides basic information about
each country's national pension system, including information about
spending on mandatory old-age pension programs, contribution rates, the
extent to which mandatory pensions replace workers' earnings, and the size
of voluntary supplementary private and occupational pensions. Table 5
provides examples of various adjustments to PAYG pension programs. Table 6
provides information on national pension reserve funds for countries that
have established such funds. Table 7 provides information on individual
account programs that countries have adopted as part of their mandatory
national pension systems.

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms Appendix II: Information on OECD Countries and Chile,
Their Pension Systems, and Reforms

Table 3: Background on OECD Countries and Chile
                                                                              Percentage of
                     Number of people                    elderly people
                 in the workforce for                    receiving less than
                    every person aged                    half the median
                      65 or over                         income  
            Estimated                 Percentage         
                                              of         
           population                 population   GDP   
          in                          aged 55-64 per     Aged 66 Aged 76 and Government     
          millions,                   employeda  capitab to 75   over        structure c    
Country   July 2005     2005    2050                                         
Australia          20   3.9     1.6           50 $30,700      21          29    Democratic, 
                                                                                   federal- 
                                                                             state system   
                                                                             recognizing    
                                                                             the            
                                                                             British        
                                                                             monarch as     
                                                                             sovereign      
Austria                8   2.9   1.3          30 31,300       8           12 Federal        
                                                                             Republic       
Belgium          10        2.5   1.5          28 30,600       11          19 Federal        
                                                                             parliamentary  
                                                                                  democracy 
                                                                                    under a 
                                                                             constitutional 
                                                                             monarch        
Canada           33        4.2   1.9          53 31,500         4          5 Confederation  
                                                                             with           
                                                                             parliamentary  
                                                                             democracy      
Chile          16       Not    Not           Not 10,700        Not       Not Republic       
                  available available  available         available available 
Czech          10       3.5       1.2         42 16,800          1         4 Parliamentary  
Republic                                                                     democracy      
Denmark         5       3.4       2.0         61 32,200          4         9 Constitutional 
                                                                             monarchy       
Finland             5      3.3   1.5          50 29,000       7           16 Republic       
France             61      2.7   1.3          37 28,700       10          11 Republic       
Germany            82      2.6   1.5          39 28,700       10          11 Federal        
                                                                             republic       
Greece             11      2.0   1.2          42 21,300       22          28 Parliamentary  
                                                                             republic       
Hungary           10       2.6   1.0          29 14,900         6          5 Parliamentary  
                                                                             democracy      
Iceland         0.3        4.8   2.5         87d 31,900        Not       Not Constitutional 
                                                         available available republic       
Ireland                4   4.3   1.9          49 31,900         31        43 Republic       
Italy           58         2.2   0.9          30 27,700         15        16 Republic       
Japan           127        2.5   1.1          62 29,400         20        24 Constitutional 
                                                                             monarchy with  
                                                                             a              
                                                                             parliamentary  
                                                                             government     

                                                                            Percentage of
               Number of people                    elderly people
           in the workforce for                    receiving less than
              every person aged                    half the median
                     65 or over                    income  
            Estimated           Percentage         
                                        of         
           population           population   GDP   
            in                  aged 55-64 per     Aged 66 Aged 76 and Government         
            millions,           employeda  capitab to 75   over        structure c        
Country     July 2005 2005 2050                                        
Luxembourg        0.5  3.2 1.7         28d $58,900       4           9 Constitutional     
                                                                       monarchy           
Mexico            106  6.8  2.3         54  9,600        24         37 Federal republic   
Netherlands        16   3.8 2.2         44 29,500         2          2 Constitutional     
                                                                       monarchy           
New Zealand         4   4.2 1.7         64 23,200      0.4         0.5 Parliamentary      
                                                                       democracy          
Norway              5   3.6 2.1         69 40,000         6         20 Constitutional     
                                                                       monarchy           
Poland             39   3.1 1.0         29 12,000         4          5 Republic           
Portugal           11   3.1 1.2         51 17,900        25         35 Parliamentary      
                                                                       democracy          
Slovak              5   4.0 1.0         25 14,500        Not       Not Parliamentary      
Republic                                           available available democracy          
South Korea        48   4.5 0.9         58 19,200        Not       Not Republic           
                                                   available available 
Spain              40   2.7 1.3         41 23,300         15         9 Parliamentary      
                                                                       monarchy           
Sweden              9   2.8 2.0         69 28,400         5         12 Constitutional     
                                                                       monarchy           
Switzerland         7   3.4 2.1         66 33,800        10         13 Federal republic   
Turkey             70   5.1 1.4         33  7,400        17         15 Republican         
                                                                       parliamentary      
                                                                       democracy          
United             60   3.2 1.8         56 29,600        11         19 Constitutional     
Kingdom                                                                monarchy           
United            296   4.1 2.3         60 40,100        20         30 Constitution-based 
States                                                                  federal republic  

Source: OECD, Central Intelligence Agency (CIA), Social Security
Administration.

a

For 2003, unless otherwise noted. Amounts are rounded to the nearest whole
number.

b

For 2004, based on purchasing power parity.

cGovernment structure definitions from the United States' CIA. For
definitions of the government structures see, The World Factbook, 2005 on
the CIA's webpage,
http://www.cia.gov/cia/publications/factbook/index.html, guide to country
profi les section- government type.

d

Figure for 2002.

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms Appendix II: Information on OECD Countries and Chile,
Their Pension Systems, and Reforms

      Table 4: Information concerning Countries' National Pension Systems

               Projected funding for national pension system as a

               percentage of GDP Employee/employer contributions

                             Projected increase in

                              spending on old-age

                               pensions from 2000

to 2050 as a Average contributions as Annual ceiling for Country
percentage of GDPa 2000 2050 a percentage of earningsb contributions in
U.S. dollars

                       Australia 1.6 3.0 4.6 9.0f $87,900

                        Austria 2.2 9.5 11.7 22.8 51,800

                      Belgium 3.3 8.8 12.1 16.4 No ceiling

                         Canada 5.8 5.1 10.9 9.9 29,100

                  Chile NA NA NA 10.0 16,900 (as of Jan. 2003)

                  Czech Republic 6.8 7.8 14.6 28.0 No ceiling

                      Denmark 2.7 6.1 8.8 1.9g No ceilingg

                  Finland 4.8 8.1 12.9 22.9 to 33.0 No ceiling

                       France 3.9h 12.1 16.0h 16.4 37,100

                       Germany 5.0 11.8 16.9 19.5 77,300

                      Greece 10.0i 12.5 22.5 20.0 29,400j

            Hungary 1.2 6.0 7.2 26.5 3 times gross average earnings

                       Iceland NA NA NA 15.6k No ceiling

                       Ireland NA NA NA 16.8l No ceiling

                       Italy -0.3 14.2 13.9 32.7 105,500m

                         Japan 0.6 7.9 8.5 13.6 67,500

                     Luxembourg 1.9n 7.4n 9.3n 16.0 105,200

                        Mexico NA NA NA 11.3 No ceiling

                      Netherlands 4.8 5.2 10.0 25.8 36,900

                  New Zealand 5.7 4.8 10.5 0.0p Not applicable

                      Norway 8.0 4.9 12.9 21.9 No ceiling

                       Poland -2.5q 10.8 8.3 32.5 18,400

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms

               Projected net replacement rates as a percentagec,d

                                                          Assets of voluntary
        Half of      Average         Two times supplementary pension funds as 
average earnings  earnings average earnings     a percentage of GDP, 2002e 
          77            52                  36             Not available (NA) 
          91c          93c                 79c                            4.4 
          83            63                  43                            5.6 
          89d          57d                 31d                           47.6 
          NA            NA                  NA                             NA 
          88            58                  35                            3.3 
          96d          54d                 36d                           28.5 
          91            79                  78                             NA 
          98            69                  59                             NA 
          62            72                  67                            3.8 
          100          100                 100                             NA 
          87            90                  93                            5.2 
          96            66                  57                          100.5 
          63            37                  22                             NA 
          89            89                  89                            2.0 
          80            59                  44                             NA 
          125          110                 104                             NA 
          50c          45c                 44c                            4.9 
          82            84                  84                         106.0o 
          77            40                  22                           15.1 
          86            65                  50                            4.6 
          70c          70c                 70c                            4.4 

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms Appendix II: Information on OECD Countries and Chile,
Their Pension Systems, and Reforms

                               Projected funding
                              for national pension
                                  system as a
                          percentage of GDP  Employee/employer contributions
                  Projected                 
                 increase in                
               spending on old              
                 age pensions               
              from 2000 to 2050             
                   as a                     Average          Annual ceiling   
                   percentage of            contributions as for              
                   GDPa                     a percentage of  contributions in 
Country                       2000  2050 earnings b       U.S. dollars     
Portugal                 4.5r 8.0r 12.5r             23.1       No ceiling 
Slovak Republic            NA  NA     NA             26.0       No ceiling 
South Korea               8.0 2.1   10.1              9.0           37,100 
Spain                     8.0 9.4   17.4             28.3          41,000s 
Sweden                   1.6t 9.2   10.8             18.5          46,700u 
Switzerland                NA  NA     NA    16.8 to 27.8v       No ceiling 
Turkey                     NA  NA     NA             20.0          23,100u 
United Kingdom           -0.7  4.3   3.6       23.8 1% rate applies above
                                                       $55,300
United States             1.8  4.4   6.2       12.4                87,000w

               Projected net replacement rates as a percentagec,d

                                                          Assets of voluntary
        Half of      Average         Two times supplementary pension funds as 
average earnings  earnings average earnings     a percentage of GDP, 2002e 
          116           80                  86                           13.4 
          58            60                  66                             NA 
          65            44                  34                            2.2 
          89            88                  83                           6.0o 
          90            68                  74                            4.2 
          71c          67c                 41c                          125.5 
          113          103                  84                             NA 
          78d          48d                 30d                          73.3o 
          61d          51d                 39d                           57.2 

Source: OECD and Social Security Administration.

aNational estimate of increase needed to fund projected benefits using
national models and common OECD economic and demographic assumptions as
published by OECD in 2005, except as noted.

bTotal of employer and employee contributions for old-age, survivor, and
disability coverage, except as noted. In many cases these rates apply to a
specified range of earnings rather than all earnings. As of 2004 for
Europe, Asia, and the Pacific; as of 2003 for the Americas, except as
noted.

cIn some countries estimates for men and women differ. In these cases the
values shown are for men. Specifically, the estimates for women in Austria
are 86 percent, 85 percent, and 72 percent for half average earnings,
average earnings, and twice average earnings, respectively. The estimates
for women in Mexico are 50 percent, 30 percent, and 28 percent. The
estimates for women in Poland are 62 percent, 49 percent, and 49 percent.
The estimates for women in Switzerland are 72 percent, 68 percent, and 42
percent. The estimates for women in Turkey are 111 percent, 101 percent,
and 82 percent, respectively.

dIn some countries voluntary pension programs play an important role and
substantially increase net replacement rates. In Canada estimated net
replacement rates, including voluntary schemes, are 109 percent, 95
percent, and 69 percent for half average earnings, average earnings, and
twice average earnings, respectively. In Denmark comparable estimates are
125 percent, 82 percent, and 67 percent. In the United Kingdom the
estimates are 90 percent, 70 percent, and 58 percent. In the United States
the estimates are 106 percent, 92 percent, and 84 percent, respectively.

e

Aggregate supplementary private and occupational voluntary pension fund
assets as a percentage of GDP in 2002 unless otherwise noted.

f

Mandatory employer contribution to superannuation program. General
government revenue funds PAYG program.

gUp to 2,682 kroner per year per employee for labor-market supplementary
pension ATP plus 1 percent for Special Pension without a ceiling, but
Special Pension contributions were suspended in 2004 through 2007.

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms

hEstimate for 2040; 2050 estimate not available. In contrast, official
reports suggest a 4.4 percent increase on unchanged labor market policies
for the period 2000 to 2040.

i

National projection forecasts an increase of 12.2 percentage points.

j

No ceiling for workers first insured after January 1, 1993.

k

Includes maternity/paternity, work injury, and unemployment benefits as
well as old-age, survivor, and disability coverage.

l

For weekly earnings above 356 euros, about $445. Percentage rate depends
on level of earnings. Includes sickness, maternity, work injury,
unemployment, and adoptive benefits. mNo ceiling for workers first insured
before January 1, 1996. nFrom an estimate published by European Union's
Economic Policy Committee in 2001. oAs of 2001. pCosts of most programs
covered by general fund revenue.

qAssumes 2 percent growth in the revaluation factor. rEstimate published
by OECD in 2001, noting that this estimate is less comparable than
estimates for other countries.

sCeiling of $114 per day for some occupational classes.

t

Assumes a 1.6 percent revaluation factor. uCeiling for employee
contributions.

v

Rate depends on age and gender.

w

$90,000 as of 2005.

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms

Table 5 provides examples of adjustments to national PAYG pension programs
undertaken by OECD countries and Chile. The table primarily includes
examples of reforms that increased contributions to the programs or
decreased benefits. It does not provide a comprehensive list of such
reforms.

Table 5: Examples of Adjustments to PAYG Programs, 1970-2004
                                    Change in             Change in  
                                        years             
          Increase in             of earnings Change in   indexation Economic and
                                                          for        
          contribution Change in  considered  indexation  benefits   demographic
                                  in          for                    
          rates or     retirement benefit     calculation during     adjustment Other        
          coverage     age a      calculation of initial  retirement mechanisms decrease in  
Country                                       benefitb                          benefits     
Australia         None 60 to 65   None               None None       None       Means        
            identified for        identified   identified identified identified testing      
                       women                                                    reintroduced 
                                                                                in           
                                                                                mid 1980s    
Austria  9.0% to 9.5%  None       1993: 10 to  None       1993: new  None            Reduced 
                                  15           identified            identified       access 
         beginning in  identified years for               adjustment            to early     
                                  full                                          
          1989 and to             retirement;             formula               retirement   
                                                          based                 with         
         10.25% for               2003: 15 to             on net                later age    
         employees by             40 years by             wages                 requirement, 
         2004                     2028; 1997:                                   reduced      
                                  15 to 18                                      benefits,    
                                                                                and          
                                                                                incentives   
                                  years for                                     for delayed  
                                  early                                         retirement   
                                  retirement                                    
Belgium           None 60 to 65       20 to 35 Adoption   None       None       Minimum work 
            identified for           years for of         identified identified 
                       women      early        price                            life for     
                                  retirement   index                            early        
                                                                                retirement   
                                                                                increased    
                                                                                from         
                                                                                24 to 35     
                                                                                years;       
                                                                                   age limit 
                                                                                   for early 
                                                                                retirement   
                                                                                increased    
                                                                                from         
                                                                                55 to 58     
Canada  5.85% to None         All years    Valorization   None       None              Means 
            9.9%                less                      identified identified  testing for 
       phased in identified 15% of low    based on ratio                        basic flat   
                                                                                benefit      
       beginning            earning years of the earning                        at high      
          in                                                                    income       
       1998                               year's                                levels       
                                          maximum                               
                                              pensionable                       
                                               earnings c                       
Chile   Increased to    60 to 65  None               None None       None       None         
                        for       identified   identified identified identified identified   
         average of     men; 55                                                 
                        to                                                      
           50% of       60 for                                                  
          covered wages women                                                   
by 1974; later                                                                  
reduced to                                                                      
33%, then 20%                                                                   

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms Appendix II: Information on OECD Countries and Chile,
Their Pension Systems, and Reforms Appendix II: Information on OECD
Countries and Chile, Their Pension Systems, and Reforms Appendix II:
Information on OECD Countries and Chile, Their Pension Systems, and
Reforms Appendix II: Information on OECD Countries and Chile, Their
Pension Systems, and Reforms Appendix II: Information on OECD Countries
and Chile, Their Pension Systems, and Reforms

                               Change in   Change in   Change in             
                               years of    indexation  indexation Economic and
                               earnings    for         for        demographic
Country Increase in Change in  considered  calculation benefits   adjustment mechanisms
contribution rates  retirement in benefit  of initial  during     Other decrease in
or coverage         age a      calculation benefitb    retirement benefits
Czech    None       60 to 63   None        Move to     None       None       None       
Republic identified for men;   identified  price       identified identified identified 
                    57 to 63               indexation                        
                    for women,             plus                              
                    but lower              increases                         
                    depending              of at least                       
                    on the                 one-third                         
                    number of              of real                           
                    children               wage growth                       
                    raised                                                   
Denmark Increased by 1% of wages           None        None identified None identified
recently-other increases in past; gradual  identified  Imposed actuarially fair
increase in pension contribution rates     None        adjustment for retiring early,
from 0 to 9% from 1993 to 2004, 5% to 9%   identified  decreasing cost to government
for blue collar workers effective 2004                 and benefits to early retirees
None identified None identified Finland                From wages to 80% prices and 20%
Worker contributions to employmentbased                of wages, but no adjustment in
pensions introduced, then increased 0.7%               1994 Pension benefits linked to
to 2.2% of wages, and 3.7% of wages above              life expectancy beginning in
a set level 63 to 65 4 to 10, then to                  2009 Lower accrual rates for
whole work life                                        early retirees; and minimum age
                                                       for early retirement raised from
                                                       58 to 60, then to 62 years; flat
                                                       monthly base benefit eliminated
                                                       in favor of a pension-tested
                                                       benefit    

France  New tax  None            10 to 25 From   From wages       Point None       
          for                   years for wages  to          system for identified 
                                          to                            
       pensions: identified  calculation  prices prices; no calculating 
              1%                 and                                    
          of all            37.5 to 40           adjustment earnings    
         incomes            years                in                     
                            required             1994       related     
                                                            benefits    
                            contributions                               

                                 Change in   Change in   Change in                                 
                                 years of    indexation  indexation                                
        Increase in              earnings    for         for        Economic and    
        contribution  Change in  considered  calculation benefits   demographic     
        rates or      retirement in benefit  of initial  during     adjustment      Other decrease
Country coverage      age a      calculation benefitb    retirement mechanisms      in benefits
Germany Successive    60 to 65   None        None        From gross Point system    Adopted        
        increases,    for women  identified  identified  to net     for calculating penalties for  
        e.g., 1991    by 2004                            wages,     earningsrelated early          
        increase of                                      then       benefits in     retirement and 
        2.5% and 1.7%                                    prices     supplementary   incentives for 
        in 1994;                                                    schemes,        later          
        upper                                                       including a     retirement     
        earnings                                                    demographic     
        limit indexed                                               factor          
        to wages                                                                    
Greece  Major         60 to 65   Minimum     None        None       None identified Benefit        
        increase in   for women  years 13.5  identified  identified                 calculation    
        1992                     to 15                                              factor 80% to  
                                 years, 1990                                        60%            
Hungary          None 60 to 62   Increase in None        From wages None identified Increased      
           identified for men;   number of   identified  to half                    penalties for  
                      56 to 62   years for               wages and                  early          
                      for women  early and               half                       retirement by  
                                 full                    prices                     raising the    
                                 retirement                                         minimum age    
                                 benefit                                            and increasing 
                                                                                    the minimum    
                                                                                    number of      
                                                                                    years for      
                                                                                    early          
                                                                                    retirement     
Iceland          None None       None        None        None       None identified Flat-rate      
           identified identified identified  identified  identified                 component of   
                                                                                    the basic      
                                                                                    pension was    
                                                                                    abolished and  
                                                                                    replaced with  
                                                                                    a wholly       
                                                                                    income-related 
                                                                                    benefit        
Ireland Earnings cap  None       None        None        None       None identified None           
        on employer   identified identified  identified  identified                 identified     
        contributions                                                               
        eliminated                                                                  
        (effective                                                                  
        April 2001)                                                                 

                                            Change in years             Change in                 
            Increase in                     of earnings     Change in   indexation    Economic    
                                                                        for           and         
            contribution    Change in       considered in   indexation  benefits      demographic 
                                                            for                                   
         rates or coverage  retirement age  benefit         calculation during        adjustment  Other decrease in
                            a               calculation     of initial  retirement    mechanisms  benefits
Country                                                     benefitb                              
Italy       Increase in     60 to 65 for    Increased       Earnings    From minimum  NDC plan    Minimum years
         1995-97            men; 55 to       minimum number growth to   wage to       adopted     required for
                                                                        prices;       1995,       
            period; from    60 for          of years for    moving      partial       but to be   benefit 15 to 20
         24.5% to           women           seniority       average of  suspension of phased in   years, but reset
             32.7% of gross through         pension and     nominal GDP price         slowly      to 5 years for
                                                                        indexation                
           earnings, but    1995,           old-age         growth over                           NDC
                                                            5                                     
            in part this    under new       pension         years                                 
           reflected re-    NDC: age                                                              
           labeling other   65, but                                                               
           contributions    early                                                                 
         as social          retirement                                                            
         security           as early as                                                           
Japan             contributions      57 60 to   25 to 40            None Gross wages In 2004       Accrual rate for 
                  17.35% to 18.3% by 65 for men in 1986       identified to net      legislation   earnings-related 
                  2017 government    and 59 to  reform                   wages       introduced    pension from 1%  
                  share to increase  65 for                              (1994),     automatic     per year to      
                  from one-third to  women                               then from   adjustment to 0.7125%;         
                  one-half of cost;                                      wages to    benefits in   benefits to be   
                  also extended                                          prices,     response to   reduced 20% by   
                  contributions base                                     then prices macroeconomic 2025; increased  
                  to include bonuses                                     less        changes in    penalties for    
                  (1994)                                                 demographic the working   early            
                                                                         and         age           retirement,      
                                                                         longevity   population    incentives for   
                                                                         adjustments and life      later retirement 
                                                                         projected   expectancy    
                                                                         to be 0.6%                
                                                                         and 0.3%                  
                                                                         per annum                 
Luxembourg        Contribution rates None       None       Higher, not   None        None          Increases in     
                  are                identified identified lower,        identified  identified    benefits, not    
                  increased                                revaluation                             decreases:       
                  based on actuarial                       factors for                             supplements,     
                  review every 7                           prior years'                            higher accrual   
                  years                                    earnings                                rates            

Mexico 20% None       10 to 25            None None       None             None 
       to             years of      identified identified identified identified 
       26%                                                           
           identified contributions                                  
                      required for                                   
                      minimum                                        
                      benefit                                        

                                     Change in   Change in   Change in                                  
                                     years of    indexation  indexation                                 
            Increase in              earnings    for         for         Economic and   
            contribution  Change in  considered  calculation benefits    demographic    
            rates or      retirement in benefit  of initial  during      adjustment     Other decrease
Country     coverage      age a      calculation benefitb    retirement  mechanisms     in benefits
Netherlands Increase in   None       Shift from         None Indexing    None           Imposed taxes   
            1995-1997     identified calculation  identified suspended   identified     on              
            period and               based on                temporarily                quasimandatory  
            2002 to 2004             final                   in late                    occupationbased 
                                     salary to               1980s                      pension early   
                                     one based                                          retirement      
                                     on average                                         benefits to     
                                     salary                                             increase        
                                                                                        penalties for   
                                                                                        early           
                                                                                        retirement and  
                                                                                        achieve         
                                                                                        actuarial       
                                                                                        neutrality      
New Zealand No employer/  62 to 65   None               None None        None           The link to 80% 
            employee                 identified   identified identified  identified     of average      
            contributions                                                               wages (for      
            to PAYG                                                                     couple)         
                                                                                        abolished;      
                                                                                        relative value  
                                                                                        is now below    
                                                                                        70%             
Norway      Generally     Retirement None               None None        None           45% to 42% of   
            each May      age        identified   identified identified  identified     base times      
            Parliament    lowered                                                       average pension 
            increases     from 70 to                                                    points; maximum 
            contributions 67 in 1973                                                    points per year 
            by increasing                                                               8 1/3 to 7      
            the base                                                                    
            amount used                                                                 
            to set                                                                      
            taxable wages                                                               
            (no                                                                         
            indexation).                                                                
Poland      None          None       None               None Indexation  NDC reform     None identified 
            identified    identified identified   identified suspended   adjusts        
                                                             2005;       benefits to    
                                                             scheduled   reflect        
                                                             to be       contributions, 
                                                             adjusted    longevity, and 
                                                             every 3     growth in      
                                                             years;      wages;         
                                                             earlier if  replacement    
                                                             inflation   rate expected  
                                                             is 5% or    to drop from   
                                                             more        73% to 24% by  
                                                                         2050           

                                   Change in years             Change in  
              Increase in            of earnings   Change in   indexation Economic and   
                                                               for        
             contribution Change in  considered in indexation  benefits   demographic    
                                                   for                    
            rates or      retirement benefit       calculation during     adjustment     Other      
            coverage      age a      calculation   of initial  retirement mechanisms     decrease   
                                                   benefitb                              in         
Country                                                                                  benefits   
Portugal    None          62 to 65   From best 10         None None       None              Accrual 
            identified    for        of             identified identified identified      rate will 
                          women      last 15 years                                       be reduced 
                                     to                                                        from 
                                     entire work                                         2.2% to 2% 
                                     life;                                               
                                     Increase in                                         
                                     minimum                                             
                                     contribution                                        
                                     period                                              
Slovak      Increase in   60 to 62   Highest 5 of         None None       Adoption of a  None       
                          for        last           identified identified                identified 
Republic    1995-1997     men; 53 to 10 years to                          points system  
                                     point                                               
            period        62 for     system                               with           
                          women      considering                          adjustments    
                                                                          for            
                                     working life                         point values   
South Korea Increase in   60 to 65   15 years in          None None       None           None       
                          by         1990,          identified identified identified     identified 
            1995-1997     2033       then 10                                             
                                     years,                                              
            period and               then lifetime                                       
            continued                earnings in                                         
                                     point                                               
            gradual                  system                                              
            increases                                                                    
            through 2025                                                                 
Spain       Various       Closed     8 years of           None None       None           Reduced    
                                                    identified identified identified     early      
            ceilings on   earlier    contributions                                       retirement 
                          plan       to                                                  
            contributions with       last 15 years                                       benefits   
            raised to the retirement                                                     
            highest level age 60 to                                                      
                          new                                                            
                          entrants;                                                      
                          new                                                            
                          entrants                                                       
                          retire at                                                      
                          age 65                                                         
Sweden      None          Increase   None                 None None       NDC reform     None       
            identified               identified     identified identified                identified 
                          from 65 to                                      adjusts        
                                                                          benefits       
                          66;                                             to reflect     
                          decrease                                        contributions, 
                          to                                                             
                          61 with                                         longevity, and 
                          actuarial                                       economic       
                          penalty                                         performance    
Switzerland None          62 to 65   None                 None None       Demographic    None       
            identified    for        identified     identified identified                identified 
                          women                                           conversion     
                                                                          factor reduced 
                                                                          from 7.2% to   
                                                                          6.65% by 2016  
Turkey      None          55 to 60   Minimum              None None       None           Reduction  
            identified    for                       identified identified identified     in         
                          men; 50 to contributions                                       benefits   
                                                                                         for        
                          58 for     5,000 to                                            recipients 
                                     7,000                                               who        
                          women      days                                                work       

                                  Change in years              Change in  
          Increase in            of earnings      Change in    indexation Economic and
                                                               for        
         contribution Change in  considered in    indexation   benefits   demographic
                                                  for                     
        rates or      retirement benefit          calculation  during     adjustment Other decrease   
        coverage      age a      calculation      of initial   retirement mechanisms in benefits      
Country                                           benefitb                           
United   Employees'   60 to 65   From 20 best             None Basic      None       Earnings-related 
                      for                           identified state      identified 
Kingdom contributions women      years to all                  pension                pension reduced 
         9% to 10%;   from 2010  working years                 indexed to            from 25% of best 
                                 for                                                 
        also rates    to 2020    earnings-related              prices,               20 years         
                                                               1980                  
        increased by             pension                                             earnings to 20%  
        1 percent for                                                                of lifetime      
        employers and                                                                earnings         
        employees on                                                                 
        earnings                                                                     
        above a                                                                      
        threshold                                                                    
United  10.8% to      65 to 67   None identified  Wage index   Delayed    None       Cut windfall     
                                                               the        identified 
States  12.4%                                     amended to   June 1983                  benefits to 
                                                               cost                             those 
                                                  include      of-living             with benefits    
                                                  deferred     adjustment             from employment 
                                                               until                 
                                                  compensation December              not covered by   
                                                               1983                  
                                                  beginning in                       the program      
                                                  1991                               
                                                  (increases                         
                                                  benefits)                          

Source: OECD, International Social Security Association, SSA, World Bank,
and country publications.

a

Changes in retirement age generally both increase contributions and
decrease benefits. Workers contribute for a longer period and receive
benefits for a shorter period if they work longer.

bThis is the index used for adjusting earlier years' earnings when
calculating an initial earnings-related pension benefit. In the United
States, for example, earnings in a given year under age 60 are adjusted to
reflect the increase in average wages from that year to the year in which
the worker reaches age 60. Earnings from age 62 to age 67 are adjusted
using a price index.

cThis is indexed to growth in average earnings during the 3, then 4, then
5-year period ending at retirement.

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms Appendix II: Information on OECD Countries and Chile,
Their Pension Systems, and Reforms

Table 6: National Pension Reserve Fund Reforms
                         Reserve as                   Restrictions on
                      percentage of                   class of      De-accumulation 
Country   Year                  GDP Reserve Fund      investments   trigger or date 
                                    management                      
Belgium    Established      Not     Silver Fund       100% in       None identified 
                         available                                  
          2001                 (NA)                   government    
                                                      securities    
Canada   Established          2.3%a  Canadian Pension 30% limit on  None identified 
                                      Plan Investment foreign       
         1997                       Board (CPPIB)     securities    
                                                      beginning     
                                                      in 2001       
Denmark          Established   25%b  Arbejdsmarkedets The Board     None identified 
                                      Tillaegspension annually      
                 1964               (ATP)-corporation sets          
                                    with board        investment    
                                    appointed by      guidelines    
                                    various employee                
                                    &                               
                                    employer                        
                                    associations                    
Finland Implemented           4.5%a                   None          None identified 
                                                      Identified    
1999                                                                
France Implemented            1.2%a  Pensions Reserve Equities of   2020            
                                       Fund (Fonds de firms         
       2004                         Reserve des       headquartered 
                                    Retraites, FRR)                 
                                                      outside       
                                                      European      
                                                      Economic Area 
                                                      limited to    
                                                      25%           
Greece  Established              NA NA                None          None identified 
                                                      Identified    
2002                                                                

 Ireland   Established     9.6%c Autonomous National    None of the  2025       
                                 Pensions               assets       
           2001                  Reserve Fund           can be       
                                 Commission             invested in  
                                 (NPRFC)                Irish        
                                                        government   
                                                        securities   
 Japan     Established    28.2%a Government Pension     Minister set None       
           1942, reformed        Investment Fund        requirement  identified 
                                 (GPIF)d                that         
           2001                                          holdings of 
                                                            domestic 
                                                        bonds must   
                                                        be           
                                                        greater than 
                                                        foreign      
                                                        bonds;       
                                                        foreign      
                                                        equities     
                                                        must         
                                                        represent    
                                                        less than    
                                                        two-thirds   
                                                        of           
                                                        domestic     
                                                        equity       
                                                        investments; 
                                                        and          
                                                        holdings in  
                                                        foreign      
                                                        stocks must  
                                                        be           
                                                        greater than 
                                                        foreign      
                                                        bonds None   None       
 Korea     Established    13.0%a National Pension Fund  identified   identified 
             1988                                                
 Luxembourg  Late 1980s   23.6%a NA             None identified            None
                                                                     identified
 Netherlands Established      NA AOW-spaarfonds None identified  2020
                                 (AOWSF)                         
             1998                                                

                       Reserve as                Restrictions                 
                       percentage Reserve Fund   on class of  De-accumulation 
  Country  Year            of GDP management     investments  trigger or date
  New      Established      1.6%a Guardians of   None         2020            
  Zealand  2001                   New Zealand    legislated,  
                                  Superannuation investment   
                                  Fund           policy set   
                                                 and reviewed 
                                                 annually     
  Norway   Established       65%c Norwegian      100% in      None identified 
           1990                   Government     foreign      
                                  Petroleum Fund securities   
                                  (NGPF)c                     
  Portugal                  3.4%b Fundo de       None         None identified 
           Established            Estabilizac,ao identified   
           1989,                  Financeira da               
           reformed               Seguranc,a                  
           2002                   Social, FEFSS               

Spain  Established 1997  2.6%c               None              None        
                                                                  identified  
Sweden Established      23.6%a Autonomous    A limit of 5      None        
          1960, reformed          AP-fonden     percent in        identified  
          1999                    (APF) boards  unlisted          
                                                securities; no    
                                                one of the 4      
                                                funds can hold    
                                                  more than 2% of 
                                                              the 
                                                value of equities 
                                                in a single       
                                                company; No more  
                                                than 40% in       
                                                investments with  
                                                unhedged foreign  
                                                currency          
                                                exposure; At      
                                                least 30% in      
                                                highly rated      
                                                fixed income      
                                                securities        

United  Reformed 14.1%a           Old-Age and 100% in         Shortfall in 
States  1983             Survivor's Insurance                 
                           Trust Fund trustees   government      program cash 
                                                                        flows 
                                                 securities; no  
                                                 foreign         
                                                 securities      

Source: OECD, World Bank, and annual reports for specific funds. aAs of
2003. bAs of 2000.

c

As of December 31, 2004. dAlso known as the Investment Fund of Social
Security Reserves or (IFSSR).

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms Appendix II: Information on OECD Countries and Chile,
Their Pension Systems, and Reforms

Table 7: Individual Account Reforms
Mandatory or
                           voluntary   Funded with revenue
                           for new     
               Year                    redirected  Transition costs
                           entrants to to accounts 
                                       or          
Country     implemented workforce?  new         funding       Contribution 
                                       revenue?                         rates 
                           Mandatory               No                         
Australia   1992        employer-   New revenue transition   9% (employer)
                                                   costs        
                            based plan                          
Chile       1981       Mandatory    Redirected  Built budget           10% 
                                                   surpluses in    (employee) 
                                                     advance of 
                                                        reform: 
                                                         raised 
                                                   taxes on     
                                                   consumption, 
                                                   sold         
                                                   state-owned  
                                                   enterprises, 
                                                   and          
                                                   borrowed     
                                                   from the     
                                                   public       
Denmarkd                                        No                1% gross 
                   2002   Mandatory    New Revenue transition         income, 
                                                   costs        
                                                                          but 
                                                                contributions 
                                                                suspended for 
                                                                         2004 
                                                                 through 2007 
Hungary    1998        Mandatory    Redirected  Central      8% (employee) 
                                       revenue,    budget       
                                       parametric               
                                       changes to               
                                       decrease                 
                                       PAYG                     
                                       liabilities              
                             Mandatory             No                         
Icelande 1997             employer- New Revenue transition          Varies
                                                   costs        
                            based plan                          
Mexico       1997      Mandatory    Redirected  General              6.5%f 
                                                   government   
                                                   budget       
Poland      1999       Mandatory    Redirected  Public                7.3% 
                                                   borrowing       (employee) 
Slovak      2005       Mandatory    Redirected  Sale of              10.0% 
                                                   nationalize  
Republic                                        companies to 
                                                   the private  
                                                   sector       
                                                        In part               
Sweden    1999         Mandatory    Redirected       through          2.5%
                                                     reductions 
                                                   in PAYG      
                                                   benefits     
                                                   with         
                                                   adoption of  
                                                   NDC          
Switzerlandh              Mandatory             No                14%-36%i 
                     1985    employer- New revenue transition   
                                                   costs        
                            based plan                          
United        1988      Voluntary   Redirected  General      Varies by age 
                            opt-out                revenue               from 
Kingdom                                                      2.1% to 5.25% 
                                                                         over 
                                                                       middle 
                                                                     earnings 
                                                                        range 

                        Who                           Total      Administrative 
                                                      amount              costs 
                                                      invested   
 Who                                                  in the                    
 administers   manages the                            accounts     and charges-
 the                                                  at the     
 individual    individual   Minimum rates of              end of   reduction in 
 account                                                 2004 as          final 
 program?      accounts?    return guarantees Payout  percentage    capital and 
                            options                       of GDP      pension a 
 Centrelink                             Annuity, lump        76%                
 through 401   Employer     No              sum,       estimated            26%
                                                           as of 
 customer                                  phased      September 
 service                                 withdrawal         2004 
 centers                                                         
 Pension fund  Pension      Relative    Annuity,             59%            16% 
 managers      funds        rate of     programmed or            
                            returnb     phased                   
                                        withdrawal,              
                                   or a combination c            
 The           Board of     No           Installments         3%             NA 
 Labor-Market                            over 10                 
 Supplementary Directors                 years, lump             
 Pension       and                       sum for                 
 Institution,  Council                   small                   
 an                                      accounts                
 independent   representing                                      
 organization                                                    
 headed by a   the Social                                        
 bipartite                                                       
 board of          Partners                                      
 directors            (ATP)                                      
 Pension funds Pension      No-abolished Annuity,             2%             NA 
               funds        in           lump sum if             
                            2002         less than               
                                         180 months              
                                     of contributions            
 Independent   Pension      None        Annuity               NA             NA 
 pension       funds        Identified                           
 funds                                                           
 Social        Pension                                                          
 Insurance     funds        No       Annuity, phased          NA            22%
 Institute                                                       
                                    withdrawal (based            
                                                   on            
                                     life expectancy)            
 Social        Pension      Relative                                            
 Insurance     funds        rate of     Annuity               6%            14%
 Institute                                                       
                            returng                              
 Social        Private      Relative    Annuity,                                
 Insurance     asset        rate of     phased                NA             NA
 Institute                                                       
               managers     return      withdrawal               
 Premium       Pension      No          Annuity               7%            15% 
 Pension       funds                                             
 Agency                                                          
 Occupational  Jointly by   2.5%       Annual payment       117%             NA 
 Pension                    (reduced                      (2000) 
 Institutes    employers    from 4%)   equal to 7.2%             
               and                     of                        
               employees               accumulated               
                                       funds,                    
                                  with interest                  
 The Pensions  Variety of   No      25% can be a lump         NA           19%j 
 Regulator                                                       
               private                   sum; annuity            
                                             required            
               pension                  by age 75                
               providers                                         

            Source: OECD, SSA, World Bank, and country publications.

Appendix II: Information on OECD Countries and Chile, Their Pension
Systems, and Reforms

aEstimates include fees on investments, record-keeping services,
marketing, and profits. Data from Estelle James, Gary Ferrier, James
Smalhout, and Dimitri Vittas, Administrative Costs and the Organization of
Individual Account Systems: A Comparative Perspective, in Robert Holzmann
and Joseph Stiglitz, eds., New Ideas About Old Age Security (Washington,
D.C.: World Bank, 2001), except as noted.

bThe minimum rate of return is no less than 2 percentage points below the
average for all pension funds of the same type.

cCombinations may be a phased withdrawal with deferred annuity, or
immediate annuity with phased withdrawal.

d

This row covers Denmark's Special pension savings scheme (SP) as amended
in 2000. SP contributions in 1999 and 2000 were redistributed among
workers to help equalize benefits. Denmark also provides a Labor Market
Supplementary Plan (ATP) based on deferred annuities. The amount of
contributions is based on the number of hours worked rather than earnings.
The level of benefits is based in part on the rate of return in the
centrally managed investment fund. Since 2002 the accrual of pension
rights has been based on a guaranteed interest rate of 2 percent, but if
actual returns are higher, the level of benefits can be increased.

eIceland made its occupation-based pension system, with a defined benefit
structure, compulsory in 1974. In 1997, Iceland passed legislation that
codified the principle of a mandatory payment of at least 10 per cent of
wages and salaries in order to acquire pension rights, and it also allows
for the occupation-based pension program to create defined contribution
individual accounts as a complement to defined benefit pensions. However,
in practice, employers have not yet established these. Voluntary
supplementary individual accounts are also available. The occupation-based
pensions have a contribution rate of 10 percent of an employee's wages. A
minimum pension of at least 56% of lifetime average salary is paid for a
contribution period of 40 years (equivalent to 1.4% of average lifetime
salary per contribution year) and is paid for life.

f

The employer, employee, and government together contribute 6.5 percent,
and the employee contributes an additional 5 percent contribution to an
individual housing account (a scheme known as Infonavit) which reverts to
the retirement account when it is not used.

gThe minimum rate of return is either 50 percent of the average rate or 4
percent lower than the average for all funds during 24 consecutive months,
whichever is lower.

h

The 1985 mandatory employer-based pensions built upon the pre-existing
voluntary occupational plans.

i

Employee contributions vary based on age and gender, ranging from 7
percent to 18 percent on earnings between about $19,900 and $59,800.
Employers have to at least match these contributions.

j

Estimate from OECD, OECD Economic Surveys 2004: Poland (Paris: June 2004).

Appendix III: GAO Contact and Staff Acknowledgments

Barbara D. Bovbjerg (202) 512-7215 or [email protected]

  GAO Contact

In addition to the contact named above, Alicia Puente Cackley, Assistant

Director; Benjamin P. Pfeiffer; Joseph Applebaum; Thomas A. Moscovitch;
Nhi Nguyen; Nyree M. Ryder; Roger Thomas; Seyda G. Wentworth; Corinna A.
Nicolaou; Lise Levie; and Pat Elston made key contributions to this
report.

Glossary

Add-on Individual accounts supplement Social Security benefits and would
draw contributions from new revenue streams.

                        Adequacy (See Income adequacy.)

Annuity An insurance product that provides a stream of payments for a
preestablished amount of time in return for a premium payment-the amount
being converted into any annuity. For example, a life annuity provides
payments for as long as the annuitant lives. Only insurance companies can
underwrite life annuities in the United States. Other financial
intermediaries, such as banks and stock brokerage firms, may sell
annuities issued by insurance companies.

Baby boomers Cohort of people born after World War II. This includes
Americans born from 1946 through 1964; 76 million strong, they represent
the longest sustained population growth in U.S. history. Other countries
generally use the term "baby boomers" to describe this generation.

Carve-out Individual accounts that would result in some reduction of or
offset to Social Security benefits because contributions to those accounts
would draw on existing Social Security revenues.

Consumer price index A measure of the change over time in the prices,
inclusive of sales and

(CPI) excise taxes, paid by urban households for a representative market
basket of consumer goods and services. The CPI is prepared by the U. S.
Department of Labor and used to compute Social Security cost of living
adjustment (COLA) increases.

Covered worker A worker in covered employment, that is, a job through
which the worker has made contributions to Social Security.

Deficit The amount by which the government's spending exceeds its revenues
in a given period, usually a fiscal year. The federal deficit is the
shortfall created when the federal government spends more in a fiscal year
than it receives in revenues. To cover the shortfall, the government sells
bonds to the public.

Page 58 GAO-06-126 Social Security Reforms Abroad Glossary

                              Defined benefit (DB)

A type of retirement plan that guarantees a specified retirement payment
and in which the plan's sponsor assumes the risk of providing these
benefits. Defined benefit plans promise their participants a steady
lifetime retirement income, generally based on years of service, age at
retirement, and salary averaged over some number of years. Defined benefit
plans express benefits as an annuity but may offer departing participants
the opportunity to receive lump-sum distributions. Defined benefit plans
are one of two basic types of employer-sponsored pension plans.

Defined contribution (DC) A type of retirement plan that establishes
individual accounts for employees to which the employer, participants, or
both make periodic contributions. Defined contribution plan benefits are
based on employer and participant contributions to and investment returns
(gains and losses) on the individual accounts. Employees bear the
investment risk and often control, at least in part, how their individual
account assets are invested.

Dependency ratio An estimate of the number of dependents per worker,
generally defined as the ratio of the elderly (ages 65 and older) and/or
the young (under age 15) to the population in the working ages (ages
15-64) or to the projected size of the labor force.

Dependent A person who is eligible for benefits or care because of his or
her relationship to an individual. Under the Social Security Act,
"dependent" means the same as it does for federal income tax purposes;
i.e., someone for whom the individual is entitled to take a deduction on
his personal income tax return, generally an individual supported by a tax
filer for over half of a calendar year.

Early retirement age The age at which individuals qualify for reduced
retirement benefits if they choose to collect benefits before the normal
retirement age; the current early retirement age for Social Security is
62. Individuals who choose to take retirement benefits early will have
their monthly benefits permanently reduced, based on the number of months
they receive checks before they reach full retirement age.

Full retirement age (FRA) (Also called normal or statutory retirement
age.) The age at which individuals qualify for full, or unreduced,
retirement benefits from Social Security and employer-sponsored pension
plans. The normal retirement

Page 59 GAO-06-126 Social Security Reforms Abroad Glossary

age for Social Security was 65 for many years. For workers and spouses
born in 1938 or later and widows/widowers born in 1940 or later, the
normal retirement age increases gradually from age 65 until it reaches age
67 in the year 2022. Among OECD countries, based on full implementation of
laws enacted as of 2002, the retirement age ranges from 60 (in France and
Korea) to 67 (in Iceland, Norway, and the United States).

Full funding A pension system that is fully funded is one in which
sufficient contributions have been put aside so that assets accumulated to
date are equal to the value of benefits accrued to date. Defined
contribution pensions and individual retirement accounts are fully funded
by definition.

General revenue transfers Funds moved from the General Fund of the
Treasury to other programs that are usually funded with earmarked revenue,
sometimes to maintain the solvency of those programs. General funds,
constituting about twothirds of the budget, have no direct link between
how they are raised and how they are spent. General fund receipts include
income and excise taxes.

  Gross domestic product (GDP)

A commonly used measure of domestic national income. GDP measures the
market value of output of final goods and services produced within a
country's territory, regardless of the ownership of the factors of
production involved, i.e., local or foreign, during a given time period,
usually a year. Earnings from capital invested abroad (mostly interest and
dividend receipts) are not counted, while earnings on capital owned by
foreigners but located in the country in question are included. GDP may be
expressed in terms of product-consumption, investment, government
purchases of goods and services, and net exports-or it may be expressed in
terms of income earned-wages, interest, and profits. It is a rough
indicator of the economic earnings base from which government draws its
revenues.

                                Income adequacy

Helping workers maintain living standards during retirement by replacing
income from work at an adequate level and to prevent destitution in old
age. The U.S. Congress expected that Social Security benefits would
eventually provide more than a "minimal subsistence" in retirement for
full-time, full-career workers. Various measures help examine different
aspects of this concept, but no single measure can provide a complete

Page 60 GAO-06-126 Social Security Reforms Abroad Glossary

    picture. Such measures include poverty rates, replacement rates, and the
    proportion of the population that depends on others for income support.

              Indexation (See Price indexation, Wage indexation.)

Individual account These are fully funded accounts that are administered
by either employers, the government, or designated third parties and are
owned by the individual. The level of retirement benefits depends largely
on the amount of contributions made by, or on behalf of, an individual
into the account during his or her working life, investment earnings, and
the amount of fees the individual is required to pay.

Individual equity The relationship of benefits to contributions-for
example, implicit rates of return on Social Security contributions or
money's worth ratios.

National pension reserve funds These are set up to partially prefund PAYG  
                                  national pension programs. Governments      
                                  commit to make regular transfers to these   
                                  investment funds                            
                                  from, for example, budgetary surpluses. To  
                                  the extent that these                       
                                  contribute to national saving, they reduce  
                                  the need for future borrowing or            
                                  for large increases in contributions to pay 
                                  scheduled benefits. Funds can               
                                  be invested in a combination of government  
                                  securities and domestic as                  
                                  well as foreign private sector securities.  
                                  Because of differences in                   
                                  accounting practices, some countries report 
                                  reserve funds as part of                    
                                  national budgets, while others do not       
                                  include them in federal figures             

National saving Total saving by all sectors of the economy: personal
saving, business saving (corporate after-tax profits not paid as
dividends), and government saving (the budget surplus or
deficit-indicating dissaving-of all government entities). National saving
represents all income not consumed, publicly or privately, during a given
period. Net national saving is gross national saving less consumption of
fixed capital (depreciation).

Notional defined PAYG pension programs in which "notional" accounts track
both incoming contribution (NDC) contributions and investment earnings,
but these exist only on the books program of the managing institution. At
retirement, the accumulated notional capital in each account is converted
to a stream of pension payments using

Page 61 GAO-06-126 Social Security Reforms Abroad Glossary

a formula based on factors such as life expectancy at the time of
retirement.

Old-Age, Survivors, and The two U.S. Social Security programs-Old-Age and
Survivors Insurance Disability Insurance (OASI) and Disability Insurance
(DI)-that provide monthly cash benefits (OASDI) to beneficiaries and their
dependents when the beneficiaries retire, to

beneficiaries' surviving dependents, and to disabled worker beneficiaries

and their dependents.

Pay-as-you-go (PAYG:) System of financing in which contributions that
workers and/or employers make in a given year are used to fund the
payments to beneficiaries in that same year, and the system's trust funds
are kept to a relatively small contingency reserve. 1

  Payroll tax

Tax imposed on some or all of workers' earnings that can be imposed on
employers, employees, or both. In the United States, payroll taxes are
used to finance the Social Security and Medicare programs. Employers and
employees each pay Social Security taxes equal to 6.2 percent of all
employee earnings up to a cap and pay Medicare taxes of 1.45 percent, with
no cap. Payroll taxes are also known as FICA (Federal Insurance
Contributions Act) taxes or SECA (Self-Employment Contributions Act), if
the taxpayer is self-employed. All OECD countries except New Zealand levy
payroll taxes to support their pension programs, though the rates and the
shares borne by employers and employees vary, as do the minimum and
maximum level of earnings subject to the tax and the kinds of programs
funded.

  Price indexation (Compare with Wage indexation.)

A method by which benefits are adjusted at periodic intervals by a factor
derived from an index of prices; some Social Security reform proposals in
the United States would price-index earnings to compute benefits, instead
of using wage indexing. Over time, increases in wages have been greater
and are expected to continue to be greater than increases in prices.
Indexing earnings to prices instead of wages would, therefore, reduce the

1

By comparison, the federal budgetary term "pay-as-you-go" (PAYGO) refers
to a requirement that all direct spending and tax legislation for a fiscal
year must be deficitneutral in the aggregate.

Page 62 GAO-06-126 Social Security Reforms Abroad Glossary

average lifetime earnings used in the formula, which, in turn, would
reduce benefits.

Rate of return Usually expressed annually, the rate of return is the gain
or loss generated from an investment, expressed as a percentage of the
value at the time of the initial investment.

Replacement rate The ratio of retirement benefits (from Social Security or
employersponsored plans) to preretirement earnings. Analysts often compare
current benefits with a recipient's previous wages to judge the adequacy
of Social Security payments.

Social insurance Under a social insurance program, the society as a whole
insures its members against various risks they all face, and members pay
for that insurance at least in part through contributions to the system.
Social insurance programs, including Social Security, are designed to
achieve certain social goals.

Social Security The federal agency that administers all Social Security
related programs, Administration (SSA) including the Supplemental Security
Income (SSI) and the Disability Insurance (DI) programs.

Solvency For Social Security, a condition of financial viability in which
the program can meet its full financial obligations as they come due.
Specifically, the ability to pay full benefits using existing revenue
sources and trust fund balances. When a program does not meet these
conditions, it is said to be insolvent.

                              Sustainable solvency

For Social Security, sustainable solvency means the ability to pay
benefits, based on current law projections of revenue and outlays, beyond
Social Security's Board of Trustees' 75-year forecast and make Social
Security permanently solvent. Also defined as having a stable and growing
trust fund ratio with program revenues increasing faster than outlays at
the end of the 75-year period. The European Union and OECD have examined
the fiscal sustainability of national pension systems based in part on
projections of the change in the percentage of countries' GDP to be spent
on old-age pensions from 2000 to 2050 under current law.

Glossary

                                Transition costs

Refers to the additional revenue required to implement substitute
individual account plans. Under some individual account plans, portions of
Social Security contributions would be diverted to the accounts. However,
under Social Security's pay-as-you-go financing, some of those
contributions would also be needed to pay for current benefits. Making
account deposits while also meeting current benefit costs requires
additional revenue, which we refer to as transition costs.

Wage indexation (Compare Price indexation.) A method by which benefits are
adjusted at periodic intervals. Under its current formula, SSA uses the
national average wage indexing series to index a person under age 60's
lifetime earnings when computing that person's Social Security benefits.
Earnings from age 62 to age 67 are adjusted using a price index.

(130403)

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