Entitlement Reform Process: Other Countries' Experiences Provide 
Useful Insights for the United States (18-JAN-08, GAO-08-372).	 
                                                                 
Looking to the future, our nation faces large and growing	 
structural deficits and escalating federal debt due primarily to 
rising health care costs and known demographic trends. Slowing	 
the growth of entitlements is an essential part of the solution  
to these challenges. GAO was asked to identify useful insights	 
from the entitlement reform processes in other countries.	 
Specifically, GAO was asked to analyze (1) other countries' major
efforts to reform entitlement programs, (2) the pressure(s) that 
led countries to undertake the reforms, (3) how reform proposals 
were developed, and (4) to what extent enacted reforms built in  
triggers requiring future actions under certain conditions; and  
where such trigger mechanisms did not exist, whether some	 
adjustments nonetheless occurred. GAO conducted a literature	 
review focusing on developed, high-income Organisation for	 
Economic Co-Operation and Development (OECD) countries facing	 
similar fiscal challenges. To gain a more in-depth understanding 
of reform process, GAO selected three efforts for further study: 
Sweden's pension reform in 1998, Germany's pension reform in	 
2004, and the Netherlands' disability reform in 2005. For these  
cases GAO interviewed government officials, reform participants, 
and experts knowledgeable about the reforms. GAO is making no new
recommendations in this report. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-372 					        
    ACCNO:   A79936						        
  TITLE:     Entitlement Reform Process: Other Countries' Experiences 
Provide Useful Insights for the United States			 
     DATE:   01/18/2008 
  SUBJECT:   Entitlement programs				 
	     Foreign governments				 
	     Foreign policies					 
	     International law					 
	     International relations				 
	     Planning						 
	     Policy evaluation					 
	     Procurement planning				 
	     Program evaluation 				 
	     Strategic planning 				 

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GAO-08-372

   

     * [1]Background
     * [2]Results in Brief
     * [3]Many Countries Have Reformed Entitlement Programs and Reform
     * [4]A Variety of Pressures Have Led to Entitlement Reform in Oth
     * [5]How Reform Proposals Were Developed in Other Countries

          * [6]Stage 1 of Reform: Framing the Problem
          * [7]Stage 2: Proposal Development
          * [8]The Process of Reform Is Complex and Not Sequential

     * [9]The Reform Process May Continue Following Enactment of Legis
     * [10]Implications for the United States
     * [11]Reform Overview: Significance of the Reform
     * [12]Origins of Reform
     * [13]The Reform Process
     * [14]Post-Reform Implementation and Adjustments
     * [15]Legacy of the Reform
     * [16]Reform Overview: Significance of the Reform
     * [17]Disability in the Netherlands Differs from that in the Unite
     * [18]Origins and History of Reform
     * [19]Structural Reform Implemented in 2006, Prompted by the Donne
     * [20]Expectations: The Future of Reform
     * [21]Reform Overview: Significance of the Reforms
     * [22]Origins and History of the Reforms
     * [23]The Reforms and the Public
     * [24]Expectations: The Future of Reform
     * [25]GAO Contact
     * [26]Acknowledgments
     * [27]GAO's Mission
     * [28]Obtaining Copies of GAO Reports and Testimony

          * [29]Order by Mail or Phone

     * [30]To Report Fraud, Waste, and Abuse in Federal Programs
     * [31]Congressional Relations
     * [32]Public Affairs

Report to the Committee on the Budget, U.S. Senate

United States Government Accountability Office

GAO

January 2008

ENTITLEMENT REFORM PROCESS

Other Countries' Experiences Provide Useful Insights for the United States

GAO-08-372

Contents

Letter 1

Background 4
Results in Brief 9
Many Countries Have Reformed Entitlement Programs and Reform Efforts
Continue 11
A Variety of Pressures Have Led to Entitlement Reform in Other Countries
15
How Reform Proposals Were Developed in Other Countries 18
The Reform Process May Continue Following Enactment of Legislation 24
Implications for the United States 28
Appendix I Scope and Methodology 31
Appendix II Summary of Selected U.S. Commissions 33
Appendix III Summary of Selected Reform Efforts 36
Appendix IV Pension Reform in Sweden 40
Reform Overview: Significance of the Reform 40
Origins of Reform 41
The Reform Process 42
Post-Reform Implementation and Adjustments 44
Legacy of the Reform 45
Appendix V Disability Reform in the Netherlands 47
Reform Overview: Significance of the Reform 47
Disability in the Netherlands Differs from that in the United States 48
Origins and History of Reform 50
Structural Reform Implemented in 2006, Prompted by the Donner Commission
53
Expectations: The Future of Reform 55
Appendix VI Pension Reform in Germany 56
Reform Overview: Significance of the Reforms 56
Origins and History of the Reforms 56
The Reforms and the Public 61
Expectations: The Future of Reform 61
Appendix VII GAO Contact and Staff Acknowledgments 63

Table

Table 1: Sweden's Public Pension System, Pre- and Post-Reform 41

Figures

Figure 1: Elderly Dependency Ratio for Selected High-Income Countries,
1980 to 2020 5
Figure 2: Public Spending on Old-Age and Survivors' Pensions in Selected
High-Income Countries, 1990 and 2003 6
Figure 3: Spending on Health Care as a Percent of GDP for Selected
High-Income Countries in 2005 8
Figure 4: Key Events in Sweden's Pension Reform, 1982 through 2001 46
Figure 5: Key Events in the Netherlands Disability Reform Process 48
Figure 6: Disability Beneficiaries in the Netherlands: 1968 through 2007
50
Figure 7: Key Events in German Pension Reform Process 62

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United States Government Accountability Office
Washington, DC 20548

January 18, 2008

The Honorable Kent Conrad
Chairman
The Honorable Judd Gregg
Ranking Member
Committee on the Budget
	
Our nation faces a future fiscal challenge that poses severe and
unacceptable risks to the federal budget and our economy. Absent policy
change, in the future we face large and growing structural deficits and
escalating federal debt due primarily to rising health care costs and
known demographic trends. Continuing on this imprudent and unsustainable
fiscal path will gradually erode, if not suddenly damage, our economy, our
standard of living, and ultimately our national security. Unless action is
taken, our current path will increasingly constrain our ability to address
emerging and unexpected budgetary needs and increase the burdens that will
be faced by our children, grandchildren, and future generations of
Americans. Our nation faces a future fiscal challenge that poses severe
and unacceptable risks to the federal budget and our economy. Absent
policy change, in the future we face large and growing structural deficits
and escalating federal debt due primarily to rising health care costs and
known demographic trends. Continuing on this imprudent and unsustainable
fiscal path will gradually erode, if not suddenly damage, our economy, our
standard of living, and ultimately our national security. Unless action is
taken, our current path will increasingly constrain our ability to address
emerging and unexpected budgetary needs and increase the burdens that will
be faced by our children, grandchildren, and future generations of
Americans.

Taken together, Social Security, Medicare, and Medicaid are the major
drivers of our future fiscal challenge. While the appropriate level of
revenues will be part of the debate about our fiscal future, making no
changes to spending on Social Security, Medicare, Medicaid, and other
drivers of the long-term fiscal gap would require ever-increasing tax
levels--something that seems both inappropriate and implausible.
Substantive reform of Social Security and our major health programs
remains critical to recapturing our future fiscal flexibility. Taken
together, Social Security, Medicare, and Medicaid are the major drivers of
our future fiscal challenge. While the appropriate level of revenues will
be part of the debate about our fiscal future, making no changes to
spending on Social Security, Medicare, Medicaid, and other drivers of the
long-term fiscal gap would require ever-increasing tax levels--something
that seems both inappropriate and implausible. Substantive reform of
Social Security and our major health programs remains critical to
recapturing our future fiscal flexibility.

Last year several proposals were made to establish special groups to help
develop proposals for entitlement reforms to address the long-term fiscal
challenge. On September 18, 2007, you jointly introduced a bill to
establish a Bipartisan Task Force for Responsible Fiscal Action. Composed
of Members of Congress and Administration officials, this group would be
asked to make recommendations on how to significantly improve the Last
year several proposals were made to establish special groups to help
develop proposals for entitlement reforms to address the long-term fiscal
challenge. On September 18, 2007, you jointly introduced a bill to
establish a Bipartisan Task Force for Responsible Fiscal Action. Composed
of Members of Congress and Administration officials, this group would be
asked to make recommendations on how to significantly improve the
government's long-term fiscal imbalances.^1 Others have also introduced
proposals to establish special groups with similar aims.^2 At the Senate
Budget Committee's October 31, 2007, hearing on the Bipartisan Task Force
proposal, I testified that this approach offers one potential means to
achieve the objective of taking steps to make the tough choices that will
be necessary to address the long-term fiscal challenge.^3 As I have noted,
revenues will also have to be on the table as we address the long-term
fiscal challenge, but slowing the growth of entitlements is a necessary
component of the solution. Accordingly, I have called for the
establishment of a commission that would address the long-term fiscal
challenge by developing proposals to put Social Security on a sustainable
path and begin the reform of health care and the tax system.^4

You asked us to look at entitlement reforms in other countries with an eye
to identifying useful insights and possible "lessons learned" from their
reform process.

Specifically, you requested that we analyze

(1) other countries' major efforts to reform entitlement programs,

^1S. 2063 would establish a Bipartisan Task Force for Responsible Fiscal
Action. A supermajority approval of the task force's report by 12 of its
16 members is needed for the task force to make recommendations. A
companion bill, HR 3655, was introduced in the House of Representatives on
September 25, 2007. Securing America's Future Economy Commission Act, or
SAFE Commission Act, S. 304, introduced on January 16, 2007, would
establish a commission to--among other things--develop legislation to
address the imbalance between long-term federal spending commitments and
projected revenues. A companion bill, HR 3654, was introduced in the House
on September 25, 2007. This proposal would establish a commission composed
of 14 Congressional appointees, the Secretary of the Treasury and the
Director of the Office of Management and Budget.

^2On January 22, 2007, Senators Feinstein and Domenici introduced the
Social Security and Medicare Solvency Commission Act (S. 355) that would
establish the National Commission on Entitlement Solvency to review and
report to the President and the Congress on the Social Security and
Medicare programs every 5 years with respect to their financial condition
and long-term sustainability. On April 24, 2007, Senators Hagel and Webb,
and Representatives Tanner and Castle introduced the Comprehensive
Entitlement Reform Commission Act of 2007 (S. 1195, HR 2024). On January
16, 2007, Representative McHenry introduced the Commission on Reforming
Entitlement (CORE) Spending Act (HR 489).

^3GAO, The Long-Term Fiscal Challenge: Comments on the Bipartisan Task
Force for Responsible Fiscal Action Act, [33]GAO-08-238T (Washington,
D.C.: Oct. 31, 2007).

^4See GAO, A Call for Stewardship: Enhancing the Federal Government's
Ability to Address Key Fiscal and Other 21 Century Challenges^st,
[34]GAO-08-93SP (Washington, D.C.: December 2007).

(2) the pressure(s) that led countries to undertake the reforms,

(3) how reform proposals were developed (the structure or process
used--e.g., commissions or special groups within the government), and

(4) to what extent enacted reforms built in triggers requiring future
actions under certain conditions; and where such trigger mechanisms did
not exist, whether some adjustments nonetheless occurred.

We looked at the reform process in selected developed countries with a
focus on instances where the reform process had included commissions or
other special groups. We limited our review to developed, high-income
Organization for Economic Co-operation and Development (OECD) countries
facing similar but even more daunting long-term challenges and demographic
changes than the United States. From our literature review we identified
instances in other countries where enacted reforms to programs such as
pension or other social welfare programs were expected or intended to slow
cost growth and increase fiscal sustainability. Although OECD countries
have made many reforms to their health care systems since the 1980s, and
reform efforts continue, we found no country that has been able to
optimize the multiple goals of cost containment, access, and quality over
time. Some countries have already undertaken national pension reform
efforts to address demographic changes similar to those occurring in the
United States, and in a previously issued report we drew lessons from
their experiences.^5 Based on this, we selected three reform efforts for
further study, including examples of both iterative and noniterative types
of process: Sweden's pension reform in 1998; Germany's pension reform in
2004; and the Netherlands' disability reform in 2005. In these three cases
we consulted with government officials, reform participants, and others
knowledgeable about the specifics of the reform process.

We did not evaluate the effect of reforms on beneficiaries or on program
effectiveness. Consideration of any entitlement reform process should not
be taken to imply approval of the specifics of any given reform. We
limited our review to documents available in English. (For more
information on our scope and methodology, see app. I.) We conducted this
work in accordance with generally accepted government auditing standards
from July 2007 through January 2008.

^5See GAO, Social Security Reform: Other Countries' Experiences Provide
Lessons for the United States, [35]GAO-06-126 (Washington, D.C.: Oct. 21,
2005).

Background

In all countries, entitlement programs such as public pension programs and
disability programs are politically sensitive and difficult to change. The
hard choices needed to change the path of these programs include
trade-offs that are likely to result in redistribution, creating "winners"
and "losers." Such choices raise issues of fairness and access, embodying
varying views about the appropriate roles of government and individuals in
society. Reform may entail short-term sacrifice for long-term gain. Some
experts have expressed the view that entitlement reform in the United
States faces unique challenges due to the existence of multiple program
constituencies combined with a complex legislative process with many
hurdles to enactment.

Since the early 1990s, several commissions have been established to
develop entitlement reform proposals, and considerable public debate,
especially on Social Security reform, has taken place. (See app. II for
more information on historical U.S. commissions on entitlement reform.)
Both the current President and his predecessor discussed the need for
Social Security reform and participated in related town meetings on Social
Security, raising public awareness of the need for change. We have
developed criteria to help Congress evaluate Social Security reform
proposals.^6 These criteria reflect the multiple and conflicting goals
that will have to be balanced in any reform package. To date, major
structural change to the entitlement programs that drive the long-term
fiscal challenge has not been enacted.

With regard to both Social Security and Medicare, consensus on the need
for reform and reform approaches remains elusive. For example, some do not
believe fundamental structural change to Social Security is necessary.
Among those who have developed proposals, some include individual accounts
and others do not. No major changes have been enacted to Social Security
since 1983, when reform legislation based on a proposal developed by the
Greenspan Commission was enacted in response to a near-term crisis in
program financing. In contrast, Medicare has been modified frequently, but
the most significant change was a 2003 expansion of benefits to include
prescription drugs. This step served to significantly increase the fiscal
imbalance in the Medicare program.

^6See GAO, Social Security Reform: Analysis of Reform Models Developed by
the President's Commission to Strengthen Social Security, [36]GAO-03-310
(Washington, D.C.: Jan. 15, 2003); Social Security: Evaluating Reform
Proposals, [37]AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999); and
Social Security: Criteria for Evaluating Social Security Reform Proposals,
[38]T-HEHS-99-94 (Washington, D.C.: Mar. 25, 1999).

Challenges posed by the growth path of entitlement spending are not unique
to the U.S. Other developed countries have faced and continue to face the
challenges of unsustainable social welfare programs including public
pensions and health care. Moreover, many developed countries, especially
in Western Europe, face more daunting demographic shifts due to population
aging than the U.S. Figure 1 shows changes in the elderly dependency
ratio-the number of older people relative to those of working age. As
figure 1 shows, population aging in France, Germany, Italy, Japan, Sweden,
and the United Kingdom is already as advanced today as is projected for
the U.S. in 2020.

Figure 1: Elderly Dependency Ratio for Selected High-Income Countries,
1980 to 2020

Note: The number of individuals over age 59 for each 100 persons of
working age, defined as age 15 to 59.

Spending on public pensions has presented major challenges in many
countries where such spending generally represents a larger share of the
total economy than in the U.S. Figure 2 shows this spending as a share of
gross domestic product (GDP) in selected high-income countries in 1990 and
2003.

Figure 2: Public Spending on Old-Age and Survivors' Pensions in Selected
High-Income Countries, 1990 and 2003

As in the U.S., health care cost growth presents challenges in OECD
countries, with total healthcare spending, both public and private,
generally rising as a share of GDP in the last 10 years.^7 Although total
health care spending in other countries is smaller as a share of the
economy than in the United States, a larger share of that spending is
public. On average, the public share of health spending in OECD countries
was 73 percent in 2005.^8 For example, in 2005 public health spending as a
share of GDP in Germany was 8.2 percent, or 77 percent of total health
spending; in France 8.9 percent, or 80 percent of total health spending;
and in the U.K. 7.2 percent, or 87 percent of total health spending. In
the U.S., public health spending was 6.9 percent of GDP, or 45 percent of
total health spending in 2005.^9 Figure 3 shows public and private health
spending in 2005 for selected countries.

^7See OECD's Health at a Glance 2007--OECD Indicators. See also European
Commission, The Impact of Ageing on Public Expenditure: Projections for
the EU-25 Member States on Pensions, Healthcare, Long-Term Care, Education
and Unemployment Transfers (2004-50) (European Commission
Directorate-General for Economic and Financial Affairs, 2006). According
to the European Commission, health care grew faster than GDP in all member
countries of the European Union in the 1990s except Finland, Luxembourg,
Denmark, and Sweden. In most EU countries spending on health care
accounted for a growing share of total public spending in the past several
decades, especially in the 1990s.

^8The public sector continued to be the main source of health financing in
all OECD countries in 2005 except Mexico, the United States, and Greece.

^9Total U.S. health spending was 15.3 percent of GDP in 2005. The relative
shares of public and private spending do not reflect government tax
subsidies for private health care spending. In the United States, federal
revenue losses due to health care-related tax preferences amounted to more
than 1.5 percent of U.S. GDP in 2005. As a result, for the U.S., the
private share is somewhat overstated and the public support understated.
Health tax preferences also exist in some other countries, but information
about these preferences is not readily available.

Figure 3: Spending on Health Care as a Percent of GDP for Selected
High-Income Countries in 2005

Notes:

Public expenditures include those incurred by public funds including
state, regional and local government bodies and social security
insurances. Private expenditures include out-of-pocket payments, payments
by private insurances, charities and for occupational health care. For
more information on OECD's methodology, see
http://www.ecosante.org/OCDEENG/411000.html

The relative shares of public and private spending do not reflect
government tax subsidies for private health care spending. In the United
States, federal revenue losses due to health care-related tax preferences
amounted to more than 1.5 percent of U.S. GDP in 2005. As a result, for
the U.S., the private share is somewhat overstated and the public support
understated. Health tax preferences also exist in some other countries,
but information about these preferences is not readily available.

Data for Australia and Japan are from 2004. The United Kingdom uses a
different methodology to collect their data. Data are not available for
the Netherlands after 2002.

Health care cost containment is expected to continue to pose challenges in
other countries as well as in the U.S. Projections developed by the
Commission of the European Communities show that the management and
control of health care spending will be a critical part of overall efforts
in European Union (EU) countries to ensure progress towards more
sustainable public finances. This is also true outside the EU. For
example, in our recent study of accrual budgeting,^10 we found that
Australia projects that health care spending will nearly double as a share
of GDP by 2046-2047. Similarly, the United Kingdom projects that its
health spending will increase from around 7  1/2 percent of GDP in
2005-2006 to around 10 percent of GDP by 2055-2056. New Zealand projects a
rise in the ratio of health spending to GDP of 6.6 percentage points
between 2005 and 2050 resulting in health spending of about 12 percent of
GDP.

Results in Brief

Since the 1980s, many OECD countries have enacted reforms to politically
sensitive and popular entitlement programs such as public pensions,
disability, unemployment, welfare (social assistance), and health care
programs. Since the early 1990s, almost all of the 30 OECD countries have
restructured their pension programs, with a clear trend toward reduced
benefits. Disability benefit reform has also been widely undertaken, with
changes made to reduce costs and achieve better integration of the
disabled into society. Between 1985 and 2000, 14 OECD countries reduced
disability benefits, with the Netherlands undertaking one of the largest
reductions as well as policy changes to promote integration of the
disabled. Reforms to unemployment programs, with an emphasis on cost
containment, took place in several countries in the early 1990s. As in the
U.S., growth in spending for public health programs in many counties
continues to be a major concern despite efforts to constrain it. In some
countries entitlement reform efforts addressed multiple programs
simultaneously.

Several kinds of pressures have been cited as prompting entitlement reform
efforts. Many reform efforts began or accelerated in an environment of
economic and fiscal crisis. In the early 1990s, for example, the Swedish
pension reform process took on urgency as Sweden experienced its worst
recession since the 1930s. Long-term concerns about population aging and
economic competitiveness in an age of globalization also have prompted
reforms. Supranational factors, such as a desire to meet the fiscal
criteria required for entry into the European Monetary Union, have also
been cited as motivating reform.

^10GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but Does
Not Provide Sufficient Information for Reporting on Our Nation's
Longer-Term Fiscal Challenge, [39]GAO-08-206 (Washington, D.C.: Dec. 20,
2007).

Reform is difficult. Commissions can help, but they are a tool in a larger
process, not a guarantee of reform success.

           o Before reform can be enacted and implemented, policymakers and
           the public generally need a shared understanding of the size,
           scope, and nature of the problem. This understanding can emerge
           from the work of a commission, as it did in Sweden's pension
           reform; or from political leaders who define and communicate a
           problem, as in the Netherlands' disability reform.
           o In the three case study reform efforts we reviewed, once reform
           was on the agenda proposals were developed by commissions--usually
           small--established by governments with a strong commitment to
           reform. Although composition and charters varied, leadership was
           important in these commissions. Standing commissions can also have
           a role in reform by coordinating stakeholders or by monitoring and
           providing consultations. Whether ad hoc or standing, commissions
           or other groups can take divisive and controversial issues out of
           the usual political process, facilitate the consultation and
           negotiation necessary for coalition building, and help insulate
           policymakers from political risks. Reform has also been undertaken
           without major efforts to build coalitions and reach consensus, but
           to a lesser extent.
           o In the reforms we examined, the process did not proceed in a
           simple or straightforward manner. Reform processes were generally
           complex and often conflict-ridden before they ultimately succeeded
           in enacting legislation.
           o Each country's reform process was unique, but some re-adjustment
           or fine-tuning often occurred over time. In some cases, unexpected
           challenges emerged as reforms were implemented that required
           adjustments including due to unintended consequences. In other
           changes new rounds of reform were enacted as the reform process
           became iterative.
           o Given that there is uncertainty about the future, some reforms
           foresee that re-adjustment will be necessary and put in mechanisms
           to do this. Although assuming and structuring an iterative reform
           process may be politically necessary, this can undermine public
           trust in a program. Automatic mechanisms (or triggers) have been
           included in some recent pension reforms including those in Sweden
           and Germany. These mechanisms require benefit adjustments without
           policy changes under specified demographic or economic conditions.
			  
			  Many Countries Have Reformed Entitlement Programs and Reform Efforts
			  Continue

           Since the 1980s, many OECD countries have enacted reforms to
           politically sensitive and popular entitlement programs such as
           public pensions, disability, unemployment, social welfare (social
           assistance) programs, and health care. Like the U.S., many other
           developed countries have experienced and expect to continue to
           experience a rate of cost growth in their public health programs
           that exceeds the growth rates of their economies. Unlike the
           United States, however, many other countries have made major
           changes to their public pension programs in the last two decades.
           (For a summary of selected reform efforts, see app. III.)

           In the 1980s, some countries sought to address future financial
           shortfalls in their public pension programs by increasing
           contributions, but since the early 1990s many pension reform
           efforts have sought to reduce future public finance commitments.
           As shown in figure 2, spending on public pensions in some other
           developed countries is much larger than in the United States.
           Contribution rates are also higher. In the U.S., contribution
           rates for Social Security are 12.4 percent of taxable income. In
           Sweden and Germany, rates in 2006 were over 18 percent; in the
           Netherlands over 25 percent; and in Italy over 30 percent.^11
           Governments have either undertaken far-reaching, structural
           pension reforms or adopted a series of smaller reforms which,
           taken together, affect future pension entitlements substantially.
           Although Sweden undertook a single major overhaul; more typically,
           several rounds of reform took place as in Italy, France, Germany,
           and Japan.

           Since the early 1990s almost all the 30 OECD countries have made
           changes to restructure their public pension programs with a clear
           trend toward reduced benefit promises.^12 In 16 OECD countries
           that implemented significant reform in the last 10 years, OECD
           estimates that the benefit promise was reduced by 22 percent.^13
           Italy, Sweden, France, Austria, Germany, and Japan reduced
           replacement rates for workers with average earnings by at least 6
           percent.^14 In assessing future fiscal risk of individual European
           Union member countries, a 2007 European Commission report cited
           pension reforms in Italy, Sweden, France, Austria, Denmark, and
           Germany as having contributed to increased sustainability of
           public finances.^15
			  
^11GAO, Social Security Reform: Implications of Different Indexing
Choices, [41]GAO-06-804 (Washington, D.C.: Sept. 14, 2006). It is
important to note that the structure of public pension programs differs
across countries, and hence may not be not strictly comparable. For
example, contributions in some cases help finance maternity/paternity and
unemployment benefits in addition to old age benefits.

^12For more information, see OECD, Pensions at a Glance: Public Policies
Across OECD Countries (OECD, 2007 edition). In our 2005 report, we noted
that all OECD countries have made changes to their national pension
systems, as did Chile. See [42]GAO-06-126.

^13For women the reduction was 25 percent.

^14Gross replacement rate for male workers with average earnings. See
table II.1.4 in OECD's 2007 Pensions at a Glance. For Sweden the estimated
reduction was 17 percent; for Germany, 9 percent.

^15See European Commission, Directorate-General for Economic and Financial
Affairs, Public Finances in EMU- 2007 (2007).			  

           Efforts to reform pensions are continuing. For example, in France
           the current government is seeking changes including reductions to
           pension benefits for certain civil servants; reform of civil
           service pensions was previously attempted in 1995.^16 The U.K.,
           which restructured its public pension program in the 1980s and has
           made numerous changes since then, has recently enacted a new major
           reform following the work of the Turner Commission.^17 Among other
           changes, this reform combines an increase in the retirement age
           with higher promised benefits to address an emerging problem of
           poverty among the elderly. This tension between reducing costs and
           the need to avoid increasing the number of elderly poor is
           reflected in the OECD's 2007 report on the status of pension
           reforms. This report noted that in some countries further reforms
           are needed to ensure fiscal sustainability while in others
           previous enacted reforms may have to be revisited given the risk
           of old-age poverty for low-income workers.

           Non-pension social welfare programs have also been subject to
           change, with many reforms reducing benefits.^18 For example, in 14
           of 20 OECD countries changes in disability policy between 1985 and
           2000 included reductions in compensation, with the Netherlands
           undertaking the largest reductions.^19 The Netherlands also
           undertook the largest policy change with respect to increased
           integration of disabled people. More recent disability reforms in
           the Netherlands were cited as contributing to curbing long-term
           public spending in the European Commission's 2006 report assessing
           the sustainability of public finances.^20 Since the early 1990s,
           concerns about cost containment have played a role in reforms of
           unemployment programs in countries such as Canada, France (2001),
           and Germany (2003-2005).^21 Reforms of social assistance (welfare)
           programs were enacted in the Netherlands (2004). Efforts to reform
           other types of programs continue as well. For example, Sweden is
           seeking further reform of its sickness benefit, under which
           general tax revenue and employer and employee contributions pay
           employees for sick days.^22
			  
^16See Giuliano Bonoli, The Politics of Pension Reform: Institutions and
Policy Change in Western Europe (Cambridge: Cambridge University Press,
2000).

^17In its 2007 assessment of the long-term sustainability of public
finances in the U.K., the European Commission stated that the U.K.'s
proposed reforms to pensions addressed the concern of potentially
inadequate provision in the future by strengthening the incentives for
private savings for retirement and by increasing provision of public
pensions, thus involving a slightly higher increase in public pension
expenditure than previously projected; the reform also incorporates a
planned gradual increase in the statutory state pension age.

^18For studies of recent reforms to European entitlement programs, see
[43]http://www.ces.fas.harvard.edu/conferences/bismarck/papers.html .

^19See OECD, Transforming Disability Into Ability: Policies to Promote
Work and Income Security for Disabled People (2003), Table 7.1.

^20European Commission, Directorate-General for Economic and Financial
Affairs, European Economy: The Long-term Sustainability of Public Finance
in The European Union (2006).

^21See Daniel Clegg, "Unemployment Policy Reform in `Bismarckian' Welfare
States: The Cases of Belgium, France, Germany and the Netherlands," paper
prepared for the conference "A Long Goodbye to Bismarck? The Politics of
Welfare Reforms in Continental Europe," Minda De Gunzburg Centre for
European Studies, Harvard University, June 16 and 17, 2006.

^22According to Swedish government officials, a negative correlation has
existed in recent years between trends in unemployment and sickness
receipt. Officials emphasized the importance of looking at the number of
all those who are supported by government programs rather than being
active in the labor force.

           In some countries, reforms sought to make changes to related
           programs at the same time. For example, the Hartz reforms in
           Germany integrated unemployment and social assistance. In recent
           years the Netherlands has undertaken reform of unemployment,
           social assistance, and health care as well as disability. In
           Denmark a 2006 comprehensive reform package known as the "Welfare
           Agreement" included changes to unemployment policy, increases in
           the retirement age, and provisions for increased investment in
           education. The Danish government described the Welfare Agreement
           as part of a national reform strategy building on two decades of
           reforms and was based in part on the work of a 2003 expert
           commission.^23
			  
^23See Denmark's National Reform Programme: First Progress Report (October
2006). The European Commission cited the Welfare Agreement in its 2007
assessment of Denmark as a country with low risk with respect to the
long-term sustainability of its public finances.

           In our 2003 report on strategies to increase labor force
           participation among older workers, we studied policies in three
           countries with high levels of older worker participation and
           recent reforms--Japan, Sweden, and the United Kingdom. All three
           countries had made changes to their pension systems. Sweden and
           the United Kingdom had also tightened eligibility requirements for
           disability insurance to reduce its use as a path to early
           retirement. Officials in these countries agreed on the need for
           comprehensive reforms, e.g., changes to national pension reforms
           should be accompanied by reforms in the employer-provided pension
           system, in related social insurance programs such as disability,
           and in labor market policies.^24

           OECD countries have made many reforms to their health care systems
           since the 1980s, and reform efforts continue.^25 For example, the
           Netherlands has recently restructured its health system with a
           stated aim of containing health care cost increases.^26 We found
           no country that has been able to optimize the multiple goals of
           cost containment, access, and quality over time. As has been noted
           by the Deputy Head of OECD's Health Division, the challenge for
           OECD countries today is how to ensure their health systems will be
           sustainable given population aging and a rate of health care cost
           growth faster than the economy.

           As in the United States, structural reform of health systems is
           highly controversial, and the reform process may take time. The
           2002 Rurup Commission in Germany was charged with developing
           recommendations to ensure sustainability for the social insurance
           system including pensions, health care, and long-term care. Two
           opposing approaches for health care financing were discussed, but
           the Commission was unable to reach consensus on a proposal.^27
           Reform of the Netherlands health care system in 2006 incorporated
           some elements similar to recommendations made by a commission that
           concluded its work almost 20 years earlier.
			  
^24GAO, Older Workers: Policies of Other Nations to Increase Labor Force
Participation, [44]GAO-03-307 (Washington, D.C.: Feb. 13, 2003).

^25According to an OECD official, reforms in OECD countries focused on
cost containment in the 1980s; in the 1990s, concerns focused on obtaining
value for spending. A 2003 report by the European Council, Committee on
Social, Health, and Family Affairs noted that in the 1980s, health care
reforms in Western European countries aimed at controlling spending; in
the 1990s reforms were concerned with the quality of care and equity of
access. For information on countries' health care systems and reforms, see
the European Observatory on Health Systems and Policies, WHO European
Centre for Health Policy, which publishes Health Systems in Transition
(HiT) profiles. These are country-based reports that provide a detailed
description of each health care system and of reform and policy
initiatives in progress or under development. See
[45]http://www.euro.who.int/observatory/ctryinfo/ctryinfo . See also the
International Network Health Policy and Reform, which monitors health
policy trends and developments in 20 industrialized countries. See
[46]http://www.hpm.org/en/index.html .

^26In 2006. For more information on entitlement reform in the Netherlands,
see The National Reform Programme for the Netherlands: 2005-2008.

^27The commission was also unable to reach consensus on a proposal for
long-term care.			  

           A Variety of Pressures Have Led to Entitlement Reform in Other
			  Countries
			  
           Several kinds of pressures--economic and fiscal crisis, the
           demographic changes of population aging--have been cited as
           prompting entitlement reform efforts. In many countries reforms
           occurred in environments of economic and fiscal crisis. Long-term
           concerns about population aging and economic competitiveness are
           commonly cited as prompting reforms, especially of pension
           programs. Supranational factors such as a desire to meet the
           fiscal criteria needed for entry into the European Monetary Union
           have also been cited as constituting pressures for reform.

           Many reform efforts began or accelerated in an environment of
           economic and fiscal crisis.^28 In the early 1990s, for example,
           the Swedish pension reform process took on urgency as Sweden was
           experiencing its worst recession since the 1930s, with growing
           public debt and a devaluation of its currency. A Parliamentary
           Working Group established by the government in 1991 developed the
           reform proposal that was ultimately enacted in 1998. Similarly,
           the 2002 reform effort of the German pension system was triggered
           by an economic downturn that worsened the program's financial
           condition and led to the establishment of the Rurup Commission.
           Although the Commission reached no consensus on health care and
           long-term care, the pension reforms it recommended were enacted in
           2004 and 2007.^29 According to experts, pension reforms in
           Australia, Canada, Denmark, Finland, Italy, and New Zealand all
           took place in an environment of economic and fiscal crisis.
			  
^28In the 1980s in some countries, including Canada, Japan and the U.K.,
pension reforms that reduced benefits and made changes to other
entitlement programs took place in a context of deficit reduction efforts.
See GAO, Deficit Reduction: Experiences of Other Nations,
[47]GAO/AIMD-95-30 (Washington, D.C.: Dec. 13, 1994).

^29The 2002 Rurup Commission's recommendation for a "sustainability
factor" was enacted in 2004 and its recommendation for increasing the
retirement age was enacted in 2007.

           Long-term pressures are also frequently cited as motivating
           reforms. Our 2005 report found that demographic as well as fiscal
           factors necessitated pension reform in many countries.^30 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. Population aging affects pension programs and
           projections directly. Swedish and German government officials
           attributed pension reforms primarily to concerns about the
           programs' long-term fiscal sustainability. Similarly, according to
           a Japanese government official, since 1994, projections of Japan's
           pension program's financial condition have necessitated a series
           of reforms largely due to further aging of society.^31

           Concerns about competitiveness in an era of globalization combined
           with current and future population aging are also cited as leading
           to entitlement reforms and influencing reform options.^32 In the
           1980s some pension reforms raised payroll tax contribution rates,
           but in the 1990s a desire in some countries to keep non-wage labor
           costs as low as possible tilted options toward benefit reductions.
           For example, in Germany, avoiding higher payroll tax contribution
           rates was one concern in their 1990s reforms. Reforms that
           included benefit reductions and eligibility changes in pension and
           non-pension social welfare programs, e.g., disability and
           unemployment, sought to increase labor force participation rates
           as one response to competitiveness concerns. The European
           Commission has noted a need to increase employment rates, notably
           of older workers, as an issue of prime importance in EU countries.
           The Commission has further noted that in countries where a
           significant decrease in the benefit ratio, i.e., average pensions
           over GDP per worker, is projected, raising employment rates of
           older workers is especially important as this could reduce the
           risk of possibly inadequate pensions in the future.

^30 [48]GAO-06-126.

^31Tetsuo Kabe, "Japan's Public Pension Reforms," Urban Institute
International Conference on Social Security Reform, February 24, 2006.

^32One expert has described these concerns as creating an environment of
"permanent austerity." See Paul Pierson, "Coping with Permanent Austerity:
Welfare State Restructuring in Affluent Democracies" in The New Politics
of the Welfare State, ed. Paul Pierson (Oxford: Oxford University Press,
2001).

           Supranational factors are also said to have played a part in
           bringing about entitlement reforms. In some European countries,
           the desire of some countries to meet fiscal criteria for entry
           into the European Monetary Union (EMU)^33 has been cited as a
           factor leading to reforms. For example, Italy's 1992 pension
           reform was undertaken as the country sought to join the EMU.
           Entitlement reforms during the 1990s in countries such as
           Netherlands, France, and Germany have similarly linked to these
           countries' efforts to meet the fiscal criteria for EMU membership.
           More recently, the European Commission has encouraged its member
           countries to adapt their public programs including entitlements
           such as pensions and health care to be better able to cope with
           future economic challenges as part of the "Lisbon Strategy" to
           ensure growth and jobs.^34 Denmark's first progress report on its
           national reform program, developed as a contribution to the Lisbon
           Strategy, focuses on its 2006 Welfare Agreement.

           Clearly, these various pressures are not mutually exclusive in
           Europe or elsewhere. For example, according to a Japanese
           government official, the 1985 pension reform in Japan was
           introduced as part of a broader fiscal reform in a context of the
           end of rapid economic growth, growing public debt, and the aging
           of society. Neither are the pressures sufficient explanations for
           why some countries enacted reform changes to increase program
           sustainability while others did not.^35 As a result, according to
           OECD, some countries' pension systems continue to need a major
           overhaul.

^33An important condition for successfully moving to a single European
currency is that economies of the participating countries should converge
towards each other and remain healthy. Members of the European Union are
expected to avoid excessive budgetary deficits (i.e., above 3 percent) and
to ensure their debt to GDP ratio stays within the reference value limit
of 60 percent as specified in the Maastricht Treaty. The budgets of EMU
countries are monitored annually by the European Commission for compliance
with the targets and for the long-term sustainability of their public
finances.

^34Promulgated in 2000 and updated in 2005. The Netherlands' 2007 report
on its National Reform Programme can be found at
http://ec.europa.eu/growthandjobs/pdf/1206_annual_report_netherlands_en.pdf.

^35Various explanations have been given of the relationships between
prompts and actual reform. Some observers believe that severe economic or
budgetary problems are a precondition for countries to undertake reform.
Other observers and government officials have noted that an environment of
economic or fiscal crisis may facilitate public acceptance and hence
enactment of reforms. Conversely, one quantitative study of 57 developed
and developing countries has shown that countries with a high public debt
to GDP ratio are less likely to privatize their pension programs (at least
when pension liabilities are low or moderate). The study attributes a lack
of reform in these types of circumstances to an inability to finance the
transitional costs associated with moving from a public pay-as-you-go
system to a system of fully funded individual accounts.

           How Reform Proposals Were Developed in Other Countries

           Detailed reform proposals in other countries were generally
           developed by commissions or other specially established groups.^36
           Proposal development, however, is only one stage in what is often
           a long, difficult, and conflict-ridden process.^37 Before reform
           can be enacted and implemented, policymakers and the public
           generally need to have a shared understanding of the size, scope,
           and nature of the problem. Next, reform options need to be
           developed, and reform packages that key stakeholders can support
           need to be negotiated. This stage generally involves dialogue,
           negotiation, and coalition building to reach a sufficient degree
           of consensus across political parties and groups in society.
           Special groups outside the normal political process such as
           commissions can be used to create a space where the difficult
           negotiations needed to reach consensus can take place. Such groups
           can mitigate political risk for reform participants as well as
           educate the public, creating pressure for change. Finally, a
           reform package needs to be enacted and implemented in succeeding
           years. Whatever the reform process, leadership is key at all
           stages for reform to be enacted and sustained. As one expert has
           put it,^38 for broad-ranging reform to occur, two conditions must
           exist: first, the public must believe that change is needed, and
           second, leadership must be able to transform this perception into
           an agenda that crystallizes the issues and points to their
           solution.
			  
^36According to OECD, most countries set up ad-hoc commissions when
pension reform processes are being launched.

^37On stages of reform, see Mitchell A. Orenstein, "How Politics and
Institutions Affect Pension Reform in Three Postcommunist Countries"
(Washington, D.C.: World Bank Policy Research Working Paper 2310, March
2000). Orenstein divides the reform process into three stages--commitment
building, coalition building, and implementation. The commitment-building
phase ends when the government creates a special office or working group
with a clear mandate to develop and pursue a single type of pension
reform. See also Sarah M. Brooks and R. Kent Weaver, "Lashed to the Mast?:
The Politics of Notional Defined Contribution Pension Reforms" (Boston:
Center for Retirement Research, January 2005).

^38See Val Koromzay, "Some Reflections on the Political Economy of
Reform," Paper presented at the Conference on Economic Reforms for Europe:
Growth Opportunities in an Enlarged European Union. Bratislava, Slovakia,
March 18, 2004.

           Stage 1 of Reform: Framing the Problem

           In reform efforts we examined, various events and actions helped
           define the size and scope of the problem. In Sweden a commission
           helped to put pension reform on the agenda. A large and diverse
           commission worked from 1984 to 1990 without being able to reach
           consensus on a proposal, but its analyses are credited with having
           laid the groundwork for later reform, raising public awareness of
           the problem and leading policymakers to conclude that major
           structural change was needed. (For more information on the Swedish
           pension reform, see app. IV.)

           It has been noted that the timing of reform depends on political
           leadership--in the first instance leadership to make clear that
           there is a crisis. In the Netherlands' long and difficult
           disability reform process, actions by political leaders defined
           the problem and communicated its urgency. (For more information on
           the Netherlands' disability reform, see app. V.)

           o The Netherlands disability reform: the "1 million" measure. In
           the early 1990s, government efforts to reform the disability
           program in the Netherlands and reduce benefits had met with
           considerable political opposition. Then-Prime Minister Lubbers
           made a speech in which he declared that if the number of
           disability claimants exceeded 1 million, he would resign.
           Analysts, including some who participated in later reform efforts,
           cited this measure as having re-framed the public discussion about
           disability. Although this number was never reached, the "1
           million" number became a widely accepted symbol of the need for
           reform in both expert studies and public discussion. This
           continued to be the case as the number of disability claimants
           rose and fell throughout the 1990s and into the early 2000s.^39 
           o Netherlands disability reform: televised hearings by the
           Buurmeijer Parliamentary Commission led to a change in the
           conversation about disability. In the mid 1990s, the Buurmeijer
           Commission, a special parliamentary inquiry chaired by Social
           Democrat Flip Buurmeijer, investigated the administration^40 of
           disability by employers and employee groups. According to experts,
           this kind of parliamentary inquiry is rare and considered
           significant in Dutch politics.^41 The work of the Commission took
           many months and received widespread public attention through
           nightly televised hearings. According to experts, this
           Commission's work had profound effects on the subsequent reform
           process. The Commission's recommendations influenced later
           legislation; in the public discussion they raised issues as to
           whether the program was meeting its goal of serving the truly
           needy. Ultimately, the reform process in the Netherlands became a
           conversation about the appropriate roles and responsibilities of
           government, employers, and employees in society.
			  
^39See Sanneke Kuipers, The Crisis Imperative: Crisis Rhetoric and Welfare
State Reform in Belgium and the Netherlands in the Early 1990s (Amsterdam:
Amsterdam University Press, 2006).

^40The Commission's charter was to investigate the administration of
social insurance programs including unemployment.

^41Inquiries of this type are customarily used to investigate alleged
fraud and abuse or scandal.

           o In Germany Chancellor Schroeder developed a reform agenda he
           termed "Agenda 2010" that was aimed at modernizing the German
           social insurance system and labor market.  The Schroeder
           government established numerous commissions as part of this
           effort, including the Hartz Commission on unemployment program
           reform and the Rurup Commission on the sustainable financing of
           the social insurance system. (For more information on the German
           pension reform, see app. VI.)
			  
			  Stage 2: Proposal Development

           In the three case study reform efforts we reviewed, once reform
           was on the agenda, proposals were developed by commissions
           established by governments with a strong commitment to reform.
           Commissions served as a venue for negotiation and compromise
           leading to a reform package. Commissions that developed proposals
           were generally small, but their composition varied, as did their
           charters. Within the commissions, leadership was also important.
           Negotiated behind closed doors, reform packages were presented
           publicly prior to legislative enactment and sometimes changed
           following participation in the reform process by other
           stakeholders. According to OECD, most countries set up ad-hoc
           commissions when pension reform processes are being launched.

           o Swedish 1991 Parliamentary Working Group.^42 In Sweden, a small
           parliamentary working group developed the reform package. This
           group was chaired by a minister of the center-right government
           then in power, who had participated in the earlier commission. The
           group's small size and limitation to political leaders were
           unusual, as was the exclusion of representatives from employer
           groups and labor unions. The major parties were represented. In
           contrast to the earlier 1984 commission, which had been tasked
           with making program changes within the existing framework, the
           1991 group had a broad charter for reform. Between 1991 and 1994,
           the group negotiated the outlines of a major structural pension
           reform, keeping deliberations within the group.^43 This outline
           became the basis of legislation enacted in 1998.
			  
^42Pension reform in Spain also involved the use of a parliamentary
working group.

^43From 1994 to 1998 a second parliamentary group worked out the details
of the reform. Following the 1994 elections, in which the Social
Democratic party took the majority, the second working group was chaired
by a Social Democrat who had played a key role in developing the reform
concept put forward by the first working group.

           o The 2001 Donner Commission. In the Netherlands, the Donner
           Commission crafted a disability reform package that included a
           recommendation for major structural change. Established by a
           Minister following many reform changes in the 1990s, the
           Commission was composed of respected public figures from major
           parties who were able to negotiate for those parties. Members were
           not currently active in national politics and not identified with
           the disability issue. The commission developed a reform proposal
           in meetings closed to the public and made use of an expert staff.
           Observers attribute the enactment of reform to the leadership of
           both the Minister who established the commission and guided its
           proposal through the legislative process and the Commission chair,
           Piet Donner.
           o The 2002 Rurup Commission. This German commission was chartered
           with developing proposals to make the public pension system, the
           health care system, and the long-term care social insurance
           sustainable. The Commission was established by the Social
           Democratic government of Chancellor Gerhard Schroeder as a means
           to garner support for reform from both within his party and
           outside.^44 The Commission was large (26 members), but broke into
           smaller sub-groups to address the three programs. While it was
           unable to reach consensus on health care and long-term care, the
           commission did make recommendations for pension reform. Led by
           experts, the pension sub-group worked closely with the Commission
           chair, Bert Rurup, an academic identified with the Social
           Democratic Party then in power. The Commission's recommendation
           for a "sustainability factor" in the pension system was enacted in
           2004 by the Social Democrats; its recommendation to raise the
           retirement age was enacted in 2007 by a coalition of Christian
           Democrats and Social Democrats.

           In some reforms, the process of negotiation and proposal
           development continued after the commission had concluded its work.
           For example, the Donner Commission's disability reform proposal
           was reviewed by an institution representing employer groups, labor
           unions, and the government. This review, a routine feature in the
           Dutch legislative process, led to further changes before
           legislation was enacted.^45 Similarly, according to the Danish
           government, the 2006 Welfare Agreement was based not only on the
           recommendations of the Danish Welfare Commission but also on the
           work of two other groups, the Danish Globalisation Council and a
           tripartite council of employer, employee (e.g., labor unions), and
           government representatives.
			  
^44Chancellor Schroeder also established other reform commissions
including one on unemployment, the Hartz Commission.

^45The Commission had recommended abolishing the benefit for partial
disability; the enacted proposal created retained a benefit for partial
disability but made this a separate program.

           Although all three case study countries used ad hoc commissions,
           commissions involved in a reform process can also be standing
           institutions. Japan used Pension Councils coordinated by a
           government ministry and composed of representatives of employers'
           groups, labor unions, academic researchers, and government
           officials to facilitate pension reforms during the 1990s.^46 Other
           countries also have standing commissions.^47 Whether ad hoc or
           standing, commissions or other specially established groups are
           commonly used to develop reform specifics because they can take
           divisive and controversial issues out of the usual political
           process, facilitate consultation and negotiation, and help to
           insulate policymakers from political risks inherent in supporting
           a reform package.

           Although commissions are a frequently used means to develop
           proposals, governments have also taken other approaches. In some
           countries the government developed reforms on a unilateral basis,
           i.e., without seeking consensus through participation by
           opposition parties or other stakeholders. Sometimes such efforts
           succeeded in creating changes; in other cases, they did not. The
           1980s pension reform in the U.K. was enacted despite opposition
           and sustained over time with numerous adjustments.^48 However in
           France a unilateral approach did not lead to legislative
           enactment. A 1995 civil service pension reform effort met with
           sufficient opposition that it was not enacted. The same thing
           happened with a 1994 pension reform effort in Italy, which led to
           a change in government.^49 In other cases, the public was involved
           in the reform process. Canada's 1997 pension reform included
           public consultations that highlighted consensus principles for
           reform. In Japan's 2000 reform, reform alternatives were presented
           to the public in the early stages of discussion. Indeed, a 2000
           study noted that a process involving consultation, negotiation,
           and public education has been used for pension reform in highly
           industrialized countries in recent years.^50
			  
^46See [49]GAO-03-307 .

^47In France a permanent government commission created in 2000 was tasked
with monitoring the retirement system and making recommendations for
change based on consultation. This group is composed of members of
Parliament, representatives of employer and employee groups, and
government officials. According to one expert this council established the
concept for the 2003 pension reform.

^48Some observers have attributed this to the U.K. form of parliamentary
government, which provides few hurdles to the exercise of power by a
strong majority government.

^49In both cases, subsequent governments returned to the issue and
continued to seek reforms.

^50Social Dialogue and Pension Reform, ed. Emmanuel Reynaud (Geneva: ILO,
2000). This 2000 study noted that in contrast to other countries studied
(Sweden, Germany, Japan, Italy, and Spain), the will to seek consensus on
pension reform was weak in the United Kingdom.

           The Process of Reform Is Complex and Not Sequential

           In reforms we examined, the reform process as it unfolded did not
           proceed in a simple or straightforward manner from problem
           definition to negotiation and consensus-building to enactment.
           Rather, the reform process at some points seemed more like a
           zigzag or "two steps forward, one step back" than a straight line.

           o An important provision of the 1997/1999 pension reform by the
           Christian Democrats in Germany was revoked by the successor Social
           Democratic government. This same government subsequently undertook
           a structural reform in 2001 and in 2002 established the Rurup
           Commission to address unexpected shortfalls in pension financing.
           o In Sweden, following the work of the 1991 group, a second
           Parliamentary Working Group worked out legislative details of the
           reform between 1994 and 1998 while leaders of the Social
           Democratic party worked to persuade opponents within their party
           on the need for and contours of reform.

           Similarly, the activities of consultation, negotiation, and public
           education may occur at several points in the process, with
           commissions performing multiple roles. For example, the Danish
           Welfare Commission both developed recommendations used in the
           legislative process and educated the public about the need for
           change. The 2002 Rurup Commission's recommendation to raise the
           retirement age is said to have led to a controversial public
           debate, with this change enacted in 2007.

           Reform is difficult. Commissions can help, but they are a tool in
           a larger process, not a guarantee of reform success. For reform
           changes to be enacted and sustained, a sufficient degree of
           consensus across the major parties and acceptance by the general
           public of the need for change must be achieved. Leadership is
           needed to bring this about. In Sweden and Germany, formal and
           informal cross-party cooperation was key in moving reform forward;
           in the Netherlands, disability reforms were enacted by various
           coalition governments. Consultation took place with key
           stakeholders either formally or informally.^51 As experts have
           noted, the tension is to build a broad coalition to assure the
           permanency of the reform, while preserving the main policy
           initiatives sought in the reform process.^52
			  
^51In Orenstein's view, tradeoffs exist across phases of reform in terms
of who should be included in the process of proposal development. In his
view, the smaller the number of key actors involved in design of reform at
the commitment-building phase, the faster and more radical the reform.
However, excluding key actors at the commitment-building phase (including
those who have the political capacity to hobble or prevent reform) may
cause them to mobilize effectively against reform in later phases.

^52See Brooks and Weaver.

			  The Reform Process May Continue Following Enactment of Legislation

           Each country's reform process was unique, but some re-adjustment
           or fine-tuning often occurred over time. In some cases adjustments
           were needed to address emerging implementation challenges. In
           other cases change included new rounds of reform as the reform
           process became iterative. In recent pension reforms, a trend has
           emerged toward including automatic mechanisms, or triggers, which
           aim at insulating reforms from policy change. These types of
           mechanisms are structured to reduce benefits without legislative
           action under specified circumstances, e.g., if demographic or
           economic trends prove unexpectedly unfavorable.

           As reforms are implemented, unexpected challenges may emerge that
           call for fine-tuning or other adjustments including due to
           unintended consequences.

           o In Sweden, following the implementation of pension reform,
           changes to individual account administration have been under
           discussion. Since account inception, the number of Swedes making
           active investment choices has dropped, with more people routing
           their money into the government default option. A government
           committee has recommended limiting investment options from over
           700 accounts to around 200, and converting the default fund into a
           fund that adjusts based on an individual's age. To date, no
           changes have been enacted.
           o In the Netherlands, one of the disability reforms sought to
           provide employers with incentives to limit the number of their
           employees claiming disability. However, some experts said that in
           response employers began to seek ways to identify prospective
           employees who posed a risk of becoming sick or disabled.
           Legislation was then passed preventing health screenings in the
           hiring process.
           o The United Kingdom experienced substantial difficulties in the
           1980s when it implemented its pension reform, in part, by
           providing too little public education and relying on its already
           existing regulatory system, which proved to be inadequate. In what
           has become known as the `mis-selling' controversy, high-pressure
           sales tactics were used to persuade individuals, especially older
           workers, to take up individual accounts when they would more
           likely have been better off retaining their occupation-based
           pensions.

           As we noted in our report on other countries' pension reforms,^53
           the extent to which new provisions are implemented, administered,
           and explained to the public may affect the outcome of the reform.

           In some cases the need to revisit is anticipated and initial
           legislation provides for some form of periodic re-visiting under
           specified circumstances. For example, Germany and Japan
           established "soft" triggers as part of their pension reforms. The
           2001 German reform included a requirement that if projections did
           not meet specified thresholds for maximum expected contribution
           rates or minimum replacement rates in the future, government
           action would need to be taken. Triggered in 2002, this mechanism
           led to the establishment of the Rurup Commission. A similar
           mechanism in Japan requiring an examination every 5 years of its
           pension program's sustainability led to additional rounds of
           reform.^54 Other countries also have established institutions to
           monitor pension fiscal sustainability and in some cases are tasked
           with recommending adjustments as appropriate.

^53 [50]GAO-06-126 .

^54Other countries also have similar mechanisms. Canadian pension reform
includes a re-visiting under specified circumstances as evaluated by their
Chief Actuary. According to one expert, Canada's mechanism is not expected
to be triggered. In France, an advisory council was created in 2000 to
monitor the French retirement system and to put forward recommendations
for public policy concerning retirement. The council includes members of
Parliament, representatives of employer and employee groups, experts, and
representatives of the state.

           Reform processes can be described as one-time "big bang" reforms
           as in Sweden; more commonly, reforms are iterative as in the
           Netherlands disability reform or German pension reform. In our
           work on other countries' pension reforms, we noted that, in almost
           every country we studied, debate continued about alternatives for
           additional reform measures even after initial changes were
           enacted. It is clearly not a process that ends with one reform,
           and it often requires more than one type of reform. An iterative
           process can be understood as reflecting the difficulties posed by
           reform of popular and politically sensitive programs.

           Some have pointed out that frequent changes may have a downside.
           Some officials we spoke with noted that although an iterative
           process may be politically necessary, constant re-opening of
           issues is not ideal. In some cases where several rounds of reforms
           occurred, frequent changes to pension systems created public
           mistrust. For example, in Japan noncompliance with the system
           became an issue in the public debate in the early 2000s following
           a series of pension reforms driven by rapid population aging.
           Swedish officials said that achieving a consensus on a reform that
           would be politically sustainable was one reason that the reform
           process took so long.

           Because reform is so difficult, a major goal is to have a reform
           that will last. Given that there is uncertainty about the future,
           some pension reforms include mechanisms to reduce benefits (and in
           some cases also increase revenues) without intervention by
           policymakers. In 2001 as part of its reform changes Sweden enacted
           an automatic balancing mechanism to adjust benefits if other
           reform changes prove insufficient to keep the pension program in
           fiscal balance.^55 The automatic balance mechanism is a kind of
           "hard trigger" that comes into play under specified
           circumstances.^56 Following Sweden's lead, several other countries
           have adopted similar types of mechanisms, and these mechanisms are
           considered an emerging trend in pension reform.^57 Germany's 2004
           pension reform included a "sustainability factor" as recommended
           by the Rurup Commission. The sustainability factor automatically
           adjusts benefits based on the number of workers to beneficiaries.
           Pension reforms in Japan, Italy,^58 Canada and other countries
           have also included automatic adjustment mechanisms. An aim of this
           type of mechanism is to insulate reforms from future legislative
           changes, thereby increasing trust in program sustainability and
           compliance with the system. In addition, experts have noted that
           such mechanisms could mitigate political risk for policymakers in
           the event reductions are triggered.
			  
^55Sweden's reform also included a notional defined contribution (NDC)
system for its pay-as-you-go defined benefit pension. This system
automatically adjusts initial benefits to changes in longevity. Other
countries including Italy have also adopted NDC systems as part of reform.

^56See our discussion of "hard" and "soft" triggers in Mandatory Spending:
Using Budget Triggers to Constrain Growth, [51]GAO-06-276 (Washington,
D.C.: Jan. 31, 2006).

^57See Rudolph G. Penner and C. Eugene Steuerle, Stabilizing Future Fiscal
Policy: It's Time to Pull the Trigger (Washington, D. C.: The Urban
Institute, Aug. 2007).

^58Italy has established a body tasked with monitoring pension finances
and making the calculations that determine the notional defined
contribution adjustment; the government and others have to agree on the
adjustment.			  

           The effects of such mechanisms generally remain to be seen.^59 In
           Japan, a mechanism adopted in 2004 to limit increases in
           contribution rates has been triggered. According to one expert,
           the result has been accepted by the public following a painful
           public debate.

           Experts have expressed differing views concerning these types of
           mechanisms as used in pension reforms. Some have expressed the
           view that automatic mechanisms may be the best approach to slowing
           cost growth in the entitlement programs driving the long-term
           fiscal challenge. Others have noted that mechanisms could be
           subject to erosion should they be triggered and the required
           benefit reductions prove politically unacceptable.^60 Those who
           support the concept of automatic mechanisms note that in this
           event legislators always have the option of suspending the
           mechanism and are unlikely to raise benefits above the levels that
           would have been the case had the mechanism never been activated.
           In any case, triggers may make it more difficult to ignore that a
           problem exists.^61
			  
^59One expert has noted that a shift to price-indexation of initial
pension benefits in the U.K. reform of the 1980s was the first use of an
automatic mechanism to adjust benefits. Over time this mechanism reduced
benefits such that elderly poverty became an issue in the United Kingdom.
Recent reforms include a modification to the 1980s formula. See Richard
Jackson, "The `State of the Art' in Entitlement Reform: Lessons from
Abroad," Facing Facts Quarterly, Vol. II, No. 1 (Washington, D.C.: Concord
Coalition, Winter 2006). Jackson describes the U.K. change as a "blunt
instrument" in comparison with recent NDC systems.

^60Brooks and Weaver have expressed the view that NDC-based reforms are
likely to work best in countries that have the political capacity to
achieve and sustain broad political agreement and the administrative
capacity to produce independent forecasts of economic and demographic
trends and complete and accurate records of earnings, as well as the
capacity to ensure compliance and adequate understanding on the part of
employers and employees. NDC-based reforms are less likely to work well
where these capacities are lacking.

^61In 1983, a "hard" trigger was added to Social Security. Under current
law, Social Security benefits for the elderly and disabled are updated
annually by the change in inflation as measured by the Consumer Price
Index. Should the trust fund ratio of payable benefits to reserves fall
below a specified level, however, the annual update is to be the lower of
price or wage change. The "triggering" trust fund percentage was 15
percent through 1988 and 20 percent for 1989 and later (42 U.S.C.
S415(i)). To date, trust fund ratios have remained above the threshold.

           Implications for the United States

           The experiences of other countries suggest that while reform is
           difficult, it is also possible. Countries more advanced in
           population aging and facing greater demographic challenges than
           ours have undertaken reforms of major entitlement programs. In
           many countries, reform occurred despite political processes that
           made it difficult. Consensus had to be built in coalition
           governments, and leaders had to work across parties to achieve a
           broad consensus for reform. Nonetheless, politically sensitive and
           popular programs such as public pensions were reformed including
           those which were (and are) more generous to individuals and
           constituted a larger share of their economy than is the case in
           the U.S.

           The experiences of other countries also underline that for reform
           to be enacted and sustained, it needs broad-based support that
           reaches across parties and groups. In the U.S. this means that
           reform will need to be done on a broad bipartisan basis. For
           reform to be sustained, a broad public consensus must be reached
           on the need for reform.

           Other countries' reform processes show that at all points in the
           process leadership will be needed to create and sustain consensus.
           In other countries leaders undertook many actions to begin the
           reform process and move it forward to enactment and
           implementation. Leaders framed the problem in new ways, persuaded
           the public and other policymakers that reform was necessary and
           urgent, established commissions to develop reform packages, and
           worked to build coalitions to support reform. Throughout the
           process, leaders had to negotiate tensions between the need to
           build broad coalitions while maintaining reform goals. In the
           U.S., presidential leadership will be key if reform is to happen.

           As in the 1983 reform of Social Security, other countries'
           experiences show that commissions can be a useful tool.
           Commissions in other countries moved reform forward by educating
           the public and also provided a forum for developing reform
           packages. Commissions we studied often met out of the public eye,
           thereby facilitating discussions and negotiations that could then
           be supported by all those involved. Establishing a commission,
           however, does not guarantee that a reform package that can gain
           consensus will be developed. While commissions can help, they are
           not a substitute for leadership or political will.

           Other countries' experiences show that for reform to occur,
           certain elements must fall into place. For reform to occur and be
           sustained, the public and policymakers in other countries were
           ultimately persuaded that reform was necessary and urgent.
           Coalitions were built to support reform, and a package that could
           gain support and a broad consensus was negotiated and enacted. For
           reforms to be enacted and be sustained by future governments, the
           involvement of major stakeholders whose support was necessary for
           the success of the reform was needed, whether through membership
           in the commission or through some other means. How this happened
           differed from country to country--each country's process was
           unique. Taken as a whole, reform processes were generally complex
           and often conflict-ridden before they ultimately succeeded in
           enacting legislation.

           One conclusion is that it is hard to know--before legislation is
           actually enacted--how close any given process is to reaching its
           culmination. In the U.S., past commissions and other public
           discussions on entitlement reform have laid groundwork for reform
           even while appearing to "fail," e.g., no reform was enacted. For
           Social Security reform in this country, options have been
           developed, and policymakers have had the opportunity to learn from
           past initiatives that did not gain consensus. Public debate has
           been ongoing for some time, with considerable and growing public
           awareness that Social Security and Medicare are unsustainable.
           While no one can know what needs to happen next, given leadership
           committed to reform, it is possible that our reform process could
           be further along than it may seem.

           We are sending copies of this report to interested parties. Copies
           will also be made available to others upon request. In addition,
           the report will be available at no charge on the GAO Web site at
           [40]http://www.gao.gov . This report was done under the direction
           of Susan J. Irving, Director of Federal Budget Analysis, Strategic
           Issues, who may be reached at (202) 512-9142 if you have any
           questions about this report. Contact points for our Offices of
           Congressional Relations or Public Affairs may be found on the last
           page of this report. GAO staff who made major contributions to
           this report are listed on appendix VII.

           David M. Walker
			  Comptroller General of the United States
			  
			  Appendix I: Scope and Methodology

           To develop criteria for "major entitlement reforms" and to select
           case studies and reform efforts for further review, we conducted a
           literature review and consulted with experts.

           We reviewed GAO reports on other countries' entitlement reforms
           for pension programs, labor market reforms, and disability
           reforms; OECD reports on pension reforms, disability reforms, and
           long-term care reforms; the WHO Health Care in Transition country
           profiles; International Monetary Fund country profiles and studies
           of health care reforms by the International Network Health Policy
           & Reform, which monitors health policy trends and developments in
           20 industrialized countries. We reviewed materials from a 2007
           OECD conference of budget officials from several OECD countries
           involved in budgeting for entitlement programs and concerned about
           the future cost implications of these programs.

           o We reviewed papers from a 2006 conference on entitlement reforms
           and reform process in European countries including reforms to
           pensions, unemployment, and health care programs.
           o We analyzed OECD information on pension reforms to identify
           countries that had made the largest reductions in benefit
           promises. We reviewed the 2005/06 and 2007 sustainability
           assessments made by the European Commission of EU for the
           sustainability of public finances in those countries, focusing on
           countries where risk assessments indicated that entitlement
           reforms had improved sustainability.
           o We consulted with the staff responsible for the GAO reports on
           international entitlement reform and with OECD officials
           responsible for pension reform and health care. We also consulted
           with an OECD official who had convened a conference on budgeting
           for entitlement reforms and with an academic expert on budgeting
           and public policy.

           Although OECD countries have made many reforms to their health
           care systems since the 1980s, and reform efforts continue, we
           found no country that has been able to optimize the multiple goals
           of cost containment, access, and quality over time. Some countries
           have already undertaken national pension reform efforts to address
           demographic changes similar to those occurring in the United
           States, and in a previously issued report we drew lessons from
           their experiences.

           Based on these reviews and consultations we narrowed our focus to
           highly developed, relatively affluent OECD countries on the
           grounds that these countries were more likely to have similar
           types of political pressures to the U.S., but even more daunting
           long-term challenges and demographic changes. We further limited
           our review to reforms enacted within the last 10 years that had
           aimed at slowing cost growth and increasing fiscal sustainability.
           Finally, we selected the following reform efforts for further
           review: pension reform in Sweden, Germany, Japan, Italy, France,
           U.K., and Canada; disability reform in the Netherlands; and reform
           of social programs in Denmark.

           To understand how reform proposals were developed and to
           understand the dynamics of entitlement reform, we reviewed
           political science literature on reform process in various
           countries including theoretical studies of the stages of reform.
           We also reviewed studies from experts including researchers at the
           Center for Strategic & International Studies (CSIS), the Urban
           Institute, the International Labour Office (ILO), and the Center
           for Retirement Research.

           To analyze how reform proposals were developed and to supplement
           our analysis of the other objectives, we selected three reform
           efforts for more in-depth review. In selecting reform efforts we
           took into account information from the literature review and
           recommendations by the experts we consulted. We selected reform
           efforts representing a range of approaches to reform process
           including whether any mechanisms for revisiting changes or
           triggers were built into the reform. Each of the reform efforts
           selected had included one or more commissions or other specially
           established groups.

           o Sweden's pension reform was an example of a major reform that
           has been sustained without further structural change following a
           long process.
           o Germany's pension reform was an example of an iterative process
           over an extended period of time and also an example of a process
           that included a trigger requiring actions under specified
           circumstances in its reforms.
           o The Netherlands' disability reform was an example of an
           iterative process of reform of a non-pension program and as an
           example of entitlement reform in a country that has undertaken
           reform of multiple entitlements in recent years.

           In these countries we interviewed government officials
           knowledgeable about the reform process, at least one commission
           participant or commission staffer, and independent experts.

           We did not evaluate the effect of reforms on beneficiaries or on
           program effectiveness. Consideration of any entitlement reform
           process should not be taken to imply approval of the specifics of
           any given reform. We limited our review to documents available in
           English.
			  
	Appendix II: Summary of Selected U.S. Commissions
	
Greenspan Social Security 1983: 
Statutory basis? No; Executive order but agreement by the Congress; 
Imminent crisis or other action-forcing event? Yes; 
Presidential leadership and commitment to success of effort? Yes; 
Within the general charter was scope broad or restricted (and how)? 
Broad; 
Number of commissioners; (No. of current elected federal officials/No. 
of others): 15 (7/8); 4 Senators, 3 House Representatives, 8 non-
elected (included 2 former Members of Congress; also insurance, labor, 
business representatives); 
Appointments by both President and Congress? Yes; 5 by President, 5 by 
Senate, and 5 by House; 
Bipartisan? Yes; 
Co-chairs? No; 
Open/transparent process including public hearings? Yes; but found way 
to do smaller conversations; 
Commission resulted in report? (month, year issued): Yes; (Jan. 1983); 
Report set forth specific, actionable recommendations? Yes; 
Under establishment of Commission was action required by the President 
or Congress? Or were there other action-forcing provisions? No; 
Did President/Congress take required action or some other responsive 
action? Yes; 
Other relevant information: [Empty]. 

Kerrey-Danforth Bipartisan Commission on Entitlement and Tax Reform 
1994: 
Statutory basis? No; Executive order; 
Imminent crisis or other action-forcing event? No; 
Presidential leadership and commitment to success of effort? 
Within the general charter was scope broad or restricted (and how)? 
Broad; entitlement spending and tax reform; 
Number of commissioners; (No. of current elected federal officials/No. 
of others): 32 (22/10); 
Appointments by both President and Congress? No; presidential 
appointments only; 
Bipartisan? Yes; of the 22 Members of Congress, 11 Democrats and 11 
Republicans; 
Co-chairs? Yes, functionally; technically Chair and Vice-Chair; 
Open/transparent process including public hearings? Yes; all meetings 
and hearings were televised on C-SPAN. All commission documents, 
transcripts and reports made public on a CD; 
Commission resulted in report? (month, year issued): Yes; failed to 
reach consensus on specific recommendations; (Jan. 1995); 
Report set forth specific, actionable recommendations? No; but 
recommended 5 broad principles for crafting "solutions to our fiscal 
problems"; 
Under establishment of Commission was action required by the President 
or Congress? Or were there other action-forcing provisions? No; 
Did President/Congress take required action or some other responsive 
action? No; 
Other relevant information: Interim report widely respected; source for 
much of what is said today. 

Breaux-Thomas Commission on the Future of Medicare 1998: 
Statutory basis? Yes; Balanced Budget Act 1997; 
Imminent crisis or other action-forcing event? No; 
Presidential leadership and commitment to success of effort? No; 
President strongly disagreed with proposed recommendations; 
Within the general charter was scope broad or restricted (and how)? 
Broad; 
Number of commissioners; (No. of current elected federal officials/No. 
of others): 17 (9/8); 
Appointments by both President and Congress? Yes; 1 of 17 (Chair) by 
both President and Congress; 4 others by President; others by 
congressional leadership (Republicans appointed 4 each house and 
Democrats 2 each house) = 8 by each party; 
Bipartisan? Yes; 
Co-chairs? Yes, functionally; technically Breaux = Chair; Thomas = 
"Administrative Chair"; 
Open/transparent process including public hearings? Yes; 
Commission resulted in report? (month, year issued): No; proposed 
recommendations failed to gain required 11 votes; 
Report set forth specific, actionable recommendations? N/A; 
Under establishment of Commission was action required by the President 
or Congress? Or were there other action-forcing provisions? No; 
Did President/Congress take required action or some other responsive 
action? N/A; 
Other relevant information: Outlook for Medicare appeared to improve 
while Commission met. 

Bush Committee to Strengthen Social Security 2001: 
Statutory basis? No; Executive order; 
Imminent crisis or other action-forcing event? No; 
Presidential leadership and commitment to success of effort? Yes; 
Within the general charter was scope broad or restricted (and how)? 
Restricted; had to include individual accounts; 
Number of commissioners; (No. of current elected federal officials/No. 
of others): 16 (0/16); Included 3 former Members of Congress; 
Appointments by both President and Congress? No; presidential 
appointments only; 
Bipartisan? Yes; 8 Republicans and 8 Democrats; 
Co-chairs? Yes; 
Open/transparent process including public hearings? Yes; 
Commission resulted in report? (month, year issued): Yes; (Dec. 2001); 
Report set forth specific, actionable recommendations? Report set forth 
3 reform models; 
Under establishment of Commission was action required by the President 
or Congress? Or were there other action-forcing provisions? No; 
Did President/Congress take required action or some other responsive 
action? No; 
Other relevant information: Limit on scope and conditions for 
membership perceived as having negative impact on acceptance of 
analyses-even those not related to specific individual account issue; 
Democrats appointed not viewed as representative of party point of 
view. 

9/11 Commission 2002: 
Statutory basis? Yes; Pub. L. No.107-306; 
Imminent crisis or other action-forcing event? Yes; 
Presidential leadership and commitment to success of effort? Partial; 
Within the general charter was scope broad or restricted (and how)? 
Broad; 
Number of commissioners; (No. of current elected federal officials/No. 
of others): 10 (0/10); 
Appointments by both President and Congress? Yes; 1 by President 
(Chair); 1 by Senate Minority Leader with House Minority Leader consult 
(Vice-Chair); 2 each by Senate Majority Leader and House Speaker; 2 
each by Senate and House Minority Leaders; 
Bipartisan? Yes; 
Co-chairs? Yes, functionally; technically Chair and Vice-Chair; 
Open/transparent process including public hearings? Yes; 
Commission resulted in report? (month, year issued): Yes; (July 2004); 
Report set forth specific, actionable recommendations? Yes; 
Under establishment of Commission was action required by the President 
or Congress? Or were there other action-forcing provisions? No; 
recommended actions to both but not required; 
Did President/Congress take required action or some other responsive 
action? Yes - many were enacted; 
Other relevant information: [Empty]. 

Mack-Breaux Tax Reform 2005: 
Statutory basis? No; Executive order; 
Imminent crisis or other action-forcing event? No. 
Presidential leadership and commitment to success of effort? No; 
Within the general charter was scope broad or restricted (and how)? 
Restricted; required revenue neutrality and keeping incentives for 
homeownership and charitable giving, and encouraging savings; required 
to consider equity and simplicity too; 
Number of commissioners; (No. of current elected federal officials/No. 
of others): 9 (0/9); Chair and Vice-Chair were former Senators; 1 
former House Representative on panel; also included 4 professors and 2 
"tax practitioners"; 
Appointments by both President and Congress? No; presidential 
appointments only.
Bipartisan? Yes; 
Co-chairs? Yes; 
Open/transparent process including public hearings? Yes; 
Commission resulted in report? (month, year issued): Yes; (Nov. 2005); 
Report set forth specific, actionable recommendations? Yes; 
Under establishment of Commission was action required by the President 
or Congress? Or were there other action-forcing provisions? No; 
recommended actions to President but not required; 
Did President/Congress take required action or some other responsive 
action? No; 
Other relevant information: Commission viewed report as starting point 
for congressional consideration of tax reform; no action yet.

Source: GAO analysis. 

[End of table] 

[End of section] 

Appendix III: Summary of Selected Reform Efforts: 

Most recent reform: 
Sweden: Pension reform: Passed in 1994, details passed in 1998; 
implemented in 1999; automatic stabilizer in 2001; 
Japan: Pension reform: 2004; 
Germany: Pension reform: 2004; Retirement age: 2007; 
Netherlands: Disability reform: 2005; 
Canada: Pension reform: 1998; 
United Kingdom: Pension reform: 2007; 
Italy: Pension reform: 2004; 
France: Pension reform: 2003. 

Pressure(s) for reform: 
Sweden: Aging population; predictions that the system was unsustainable 
in the mid-1980s; a recession in the early 1990s; 
Japan: Population aging; statutory requirements for periodic 
monitoring; 
Germany: Population aging; high non-wage labor costs; economic 
downturn; 
Netherlands: High number of beneficiaries; population aging; 
Canada: Primarily financial pressures: 
* declining economic conditions; 
* declining demographic conditions; 
* increase in disability benefit use; 
* benefit increases from the 1970s; also, in 1993, pension assets were 
not enough to pay benefits (benefits funded by collecting provinces' 
debt to pension plan); 
United Kingdom: Growing levels of pensioner poverty; 
Italy: Population aging; economic crisis in early 1990s; meeting 
Maastricht criteria for entry into European Monetary Union; 
France: Deficit in the pension system and unfavorable projections for 
the future solvency of the system. 

Reform history: 
Sweden: Process that led to reform began in 1984; 
Japan: Beginning in 1985, pensions have been reformed multiple times 
due to population aging and lower economic growth rates with the goal 
of achieving fiscal sustainability; 
Germany: Incremental reforms began to be implemented in 1992 under the 
Kohl government; 
Netherlands: Many reforms and changes to the system since the 1980s; 
Canada: Pension reform in Canada is difficult, and thus uncommon, 
because it requires consent from the provinces; 
United Kingdom: Pension system changes had been common in the UK and 
have been seen as unilaterally driven by government in power; recent 
reform included public outreach; 
Italy: Reform efforts began in 1992 and continued through the decade. 
These efforts were met with controversy, including strikes and 
protests; 
France: Reform of public pensions in 1993 stemmed from discussions in 
the mid-1980s. Attempt at reform of civil service pensions in 1995 was 
met with strikes and ultimately failed. 2003 reform is seen as the 
beginning of a series of reforms. 

Commission(s) or other institutional prompts: 
Sweden: Swedish government appointed a commission to study pension 
system in 1984, which met through 1990; a parliamentary working group 
met from 1991 to 1994 to create legislation; another parliamentary 
group focusing on implementation details met from 1994 to 1998; 
Japan: National Pension Council: a standing government commission; 
Germany: German government appointed a commission in 2002 following an 
economic downturn and financial crisis in the public pension system- 
and a 2001 law required the government to take action when projections 
were unfavorable; 
Netherlands: Parliamentary committee investigated disability 
administration in 1993 leading to greater public awareness; the 
government appointed a commission in 2000; its recommendations were 
deliberated by a standing body with representatives from government, 
employers, and employee groups; reform passed in 2005; 
Canada: No commission or special group was used. Reform was based upon 
negotiations with Ministry of Finance and provincial ministers along 
with information collected from town hall meetings; 
United Kingdom: An independent government commission; 
Italy: Italy has a standing commission to monitor expenditures. This 
commission is not seen as having prompted 2004 reform; 
France: Pension Advisory Council was created in 2000. This is a 
standing body. 

Composition of commission/special group(s): 
Sweden: 1984 commission included experts, political party 
representatives, unions, business organizations, and government 
officials. The 1991 group had 8 members representing the parties in 
power; 6 of them were Parliament Members. The 1994 group had 8 members 
from the parties that agreed to the reform; 4 were current Parliament 
Members, 1 was a former Member; 
Japan: Government assessment begins with pension experts from Ministry 
of Health and Welfare. They consult with National Pension Council 
(which includes business groups, trade unions, and pension experts) 
along with political parties; 
Germany: Pension reform was handled by a subset of 26-member 
commission; this commission included academic experts, officials from 
lower levels of government, employer and union representatives; 

Parameters of commission/study group: 
Sweden: 1984 commission was tasked with examining the challenges of the 
old system, and making recommendations within the old system's 
framework. The 1991 group was tasked with creating legislative 
proposals for a system that is fiscally and politically sustainable in 
the long term; 
Japan: Standing commission required to provide input to Ministry of 
Health and Welfare's assessment of financial outlook every 5 years and 
assist in developing reforms if necessary;
Germany: The Rurup Commission was tasked to make recommendations on 
ways to achieve sustainability in the pension system, within the 
parameters established in 2001-payroll tax at no more than 20% up to 
2020 and no more than 22% to 2030; replacement at no less than 67% of 
average net earnings; 
Netherlands: 1993 committee: Members of Parliament from multiple 
parties; 2000 commission: Five representatives of large political 
parties (not from parliament), one independent expert, and one civil 
servant; 
Canada: N/A; 
United Kingdom: Three members and a small secretariat. One member from 
private sector, one from unions, one academic expert; 
Italy: Not applicable for this reform; 
France: Includes representation from government, labor, business, and 
elderly interest groups. 
Netherlands: Goal of recent reform was to decrease share of population 
receiving disability-to increase size of labor force; 
Canada: N/A; 
United Kingdom: Commission charged with looking at level of pensions, 
level of pension savings, level of other savings among pensioners, and 
to make recommendations based upon these findings; commission produced 
three reports; 
Italy: Not applicable for this reform; 
France: Purpose of council is to monitor French retirement and put 
forth recommendations based upon negotiations with involved partners. 

           Source: GAO.
			  
           Appendix IV: Pension Reform in Sweden: 
			  
			  Reform Overview: Significance of the Reform

           Sweden's pension reform, a complete overhaul enacted in 1998,
           restructured a pension system that was the hallmark of the Swedish
           social welfare system and a result of political conflict in the
           1950s. The reform's novelty is evident in its employment of a
           notional defined contribution approach to the pay-as-you-go
           benefit component and an automatic balance mechanism.^1 In
           addition to the substantive reform, the process that facilitated
           the changes is also noteworthy, namely the lengthy period of
           deliberations that ultimately reconciled disparate interests and
           gathered strong support in Parliament.

           As a result of the reforms, Sweden's pension system changed from a
           traditional pay-as-you-go defined benefit plan, like the U.S.
           Social Security program, to a system where participants' benefits
           are more closely related to their contributions.^2 Like its
           predecessor, the new system uses pay-as-you-go financing; however,
           the former benefit scheme was replaced with notional and
           individual accounts whose balances are based primarily on
           work-related contributions, and a guaranteed minimum pension for
           low-income individuals (see table 1).^3 Credits for child care,
           education, military service, and sickness also contribute to an
           individual's pension rights. The system relies on a reserve fund
           for financing during periods of economic or demographic changes
           that cause increased pension liabilities.^4 If liabilities exceed
           the reserve fund, a balancing mechanism will temporarily adjust
           indexation of benefits and interest rates on the notional
           accounts, thus preventing contribution rate increases.
			  

[1] Although the balance mechanism was mentioned in the 1998 reform 
legislation, it was not formalized until additional legislation was 
passed in 2001. Pay-as-you-go pension systems use contributions from 
current workers to fund current beneficiaries. 

[2] For further discussion of the programmatic changes to Sweden's 
pension system, see GAO, Older Workers: Policies of Other Nations to 
Increase Labor Force Participation, GAO-03-307 (Washington, D.C.: Feb. 
13, 2003). 

[3] Notional accounts hold contributions and investment earnings, but 
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 retirement. 

[4] The fund is the difference between contributions and expenditures 
in the pension system. The fund can include investments in any capital 
market instrument that is quoted and marketable, but the fund is 
subject to several restrictions on the allocation of the investments. 
From 1999 to 2001, the fund was used to help ease the transition to the 
new system. In the future, the fund will help finance pensions for baby 
boomers.

Table 1: Sweden's Public Pension System, Pre-and Post-Reform: 

Benefits and Structure: 
Pre-reform: 
* Flat rate universal benefit, established in 1913; 
* Earnings-related benefit, established in 1960. Payouts calculated 
based on an individual's 15 highest earning years. Supplements were 
available for low-income individuals; 
Current system: 
* Notional accounts ï¿½ payouts that are based on credits from payroll 
contributions and credits from eligible nonwork periods; 
* Mandatory individual accounts; 
* Guaranteed minimum benefit for low-income individuals. 

Financing: 
Pre-reform: 
* Approximately 19 percent payroll tax on employers; 
* General tax revenue supported the universal benefit; 
Current system: 
* Employers and employees pay equally into an 18.5 percent tax on 
earnings; 16 percent goes to notional accounts, and 2.5 percent goes to 
individual accounts; 
* General tax revenue supports the guaranteed minimum benefit and 
nonwork credits for notional accounts. 

Source: GAO analysis. 

Note: Employees only pay on earnings up to the pension ceiling, while 
employers pay on all earnings.  

Origins of Reform

By the mid-1980s, the actuarial predictions showed that the old system was
financially unsustainable. Accordingly, Swedes were losing faith in the
system. Demographic changes, increased longevity and an aging population
soon eligible for benefits, threatened to strain the system. In 1980, 21.9
percent of Swedes were age 60 or older, compared with 15.6 percent in the
U.S.

Other considerations also played a role in reform. The benefit formula had
an "inequitable and unsystematic relationship" between benefits and
contributions according to one government official, implying that
decreased work did not necessarily mean reduced benefits. Furthermore, the
income ceiling for benefits was indexed to consumer prices, meaning that
as more people earned wages above the ceiling, the earnings-related
benefit would eventually become a flat rate.

Even before the reform effort of the 1990s, the contributory pension
system had been a focus for political conflict. The system, which was
enacted by a Social Democrat Parliament in 1960, was only gradually
accepted by non-Socialist parties.^5 After an oil crisis in 1979, the
non-Socialist Parliament unilaterally attempted to remove energy prices
from the pension benefit indexation formula. The effort failed and the
Social Democrats campaigned on the issue and regained control of
Parliament in 1982. Once in power, the Social Democrats changed the index
formula but did not initiate other reforms, causing non-Socialists to
believe the Social Democrats abandoned their reform intentions.

^5Social Democrats are a left-of-center party generally aligned with the
interests of labor.

The Reform Process

In 1984 the Social Democratic government appointed a pension committee
tasked with examining the challenges of the system, and proposing reforms
within the existing framework.^6 The committee's membership was typical of
a Swedish Parliamentary commission: it was large and included
representatives from political parties, unions, employers, experts, and
government. The committee's deliberations lasted six years, culminating in
a report that proposed changes to survivors' pensions, but not an overall
reform (see fig. 4). According to one expert, the report said the
financial problems would not peak until about 2010-2015 and therefore
reform was not an immediate need.

By the early 1990s, Sweden experienced its most serious recession since
the 1930s, marked by an increased deficit, high unemployment, near failure
of several major banks, and a devaluation of the currency. Starting in
1990, Sweden's budget surplus became a deficit, leading to a dramatic
escalation in government debt. The recession served as the final spur for
pension reform, making the issue a high priority in 1991 for the newly
elected center-right coalition in Parliament, who appointed a working
group on pensions.

This group was tasked with producing proposals for a new pension system
that would be financially solvent and broadly supported. Unlike the 1984
committee, the working group was small, consisting of two Social Democrats
and a representative from each of the six other parties in Parliament at
the time; everyone but the chairman and one of the working group members
were Members of Parliament.^7 The small size of the group was the result
of a decision by the chairman, who also wrote the group's directives. The
chairman was the Minister of Social Affairs at the time, and a former
member of the 1984 committee. According to a government official, it is
unusual for a minister to chair a working group, but it showed the
importance of the reform. The exclusion of interest groups such as labor
unions was justified by the work of the 1984 committee, who laid the
reform's foundation by highlighting financial problems, leaving reform
negotiations to the politicians, according to an expert. Despite their
lack of direct participation, interest groups had close ties to the
parties and participated in occasional meetings of special groups known as
reference groups.

^6One academic expert told us he believed the Social Democrats tried to
"bury" the issue in the committee.

^7Although seven parties were represented, five parties constituted an
"inner circle" that negotiated the substantial reform elements, and later
were the supporters of the reform.

Prior to negotiating specific compromises, the working group came to an
agreement on broad principles, according to a group member. To prevent the
endless introduction of new debates, members agreed to reach consensus
before they consulted with nonmembers. An expert and a working group
member described the members as "social engineers" who possessed the
leadership, knowledge, and personal dynamics necessary to produce
legislation. During negotiations, both the majority coalition and the
Social Democrat opposition adjusted their preferred reform models in
exchange for preservation of their overall goals. For example, the Social
Democrats agreed to incorporate individual accounts into the system*an
inclusion important to conservatives*but Social Democrats advanced their
views by insisting that the accounts be kept to a relatively small
portion, 2.5 percent, of benefits. The strength of the Social Democrats as
the opposition party permitted responsibility for legislative outcomes to
be diffused between both the majority and the opposition, according to an
academic expert; each party could cite the other as the force
necessitating unpopular concessions. The deliberations resulted in a
consensus and a proposal outlining principles for reform.

A majority of Parliament *five parties representing about 85 percent of
the electorate*passed the principles in 1994 just prior to an election.
However, the legislation did not contain specific legal provisions and
therefore only served as a guide for future legislation. Due to the
relatively early agreement on the reform principles and small size of the
group, the opportunity for interest groups and politicians to muster
strong opposition or support was limited, according to a working group
member. Reform debates were not public, a condition that prompted some
criticism of the process.

To formulate the details of the reform, a second working group, composed
of representatives from the five parties who supported the reform,
convened later that year following the return of the Social Democrats to a
majority in Parliament.^8 As with the 1991 working group, there was little
public discussion of the 1994 group's deliberations. During this period,
however, Social Democrat leaders faced opposition to the reforms within
their party, as some members believed the reforms veered too far from the
existing system the Social Democrats created. Party officials had to
persuade members to support the reforms, holding lengthy discussions.
Additionally, it took time to work with the Ministry of Finance, which did
not have a direct role in the proposal's formation. During these
negotiations, Sweden's National Insurance Board*the government agency
responsible for administering pensions at the time*began preparing for
implementing the reforms. In June 1998, Parliament passed the finalized
legislation. One group member told us that it was significant that the
bulk of the reform was accomplished all at once. Unlike incremental
reforms, one set of changes helps to reduce the public's uncertainty and
ensure the trust and security that is vital for social insurance schemes,
according to one expert. To introduce the reforms to the public, the
government launched a three year information campaign, which included
media outreach and mailings of individual benefit projections. Payments
under the new system began with retirees born after 1937, who receive
benefits from both the old and new systems.^9

^8 The implementation group was chaired by a Social Democrat who was
instrumental in developing the reform proposal in the 1991 group.

Post-Reform Implementation and Adjustments

Although the bulk of the reform was enacted in 1998, the government faced
challenges with implementation and ensuring the political insulation and
fiscal stability of the system. Because the new system is still influenced
by demographics, it was necessary to introduce an automatic balancing
mechanism to assure the system's stability, a part of the system discussed
in the 1990s, but not enacted until technical details were resolved in
legislation passed in 2001. The mechanism was intended to help protect the
system from political recalibration during system imbalances by
automatically activating when necessary and therefore minimizing
intervention from Parliament.

The Swedish government also sought to refine the administration of
individual accounts. A committee was established in 2004 to evaluate
program guidance, clarity of investment options, system costs, and the
possibility of including life annuities in addition to the unit-linked
funds already being offered. The committee report showed that the number
of Swedes making active investment choices has dropped since the accounts'
inception, with more people routing their money into the default option
offered by the government. In addition to proposing steps to reduce
administrative costs, the committee recommended limiting investment
options from over 700 accounts to around 200, and converting the default
fund into a fund that adjusts based on an individual's age. To date, the
government has not implemented any changes.^10

^9 Individuals born between 1938 and 1953 will receive adjusted benefits
from both systems, and individuals born after 1954 will receive pensions
based completely on the new system. Individuals born before 1938 receive
benefits based on the old system.

Legacy of the Reform

The reforms enacted in Sweden highlight the importance of coupling
universally acknowledged problem definitions with knowledgeable leadership
in order to pass reform. Specifically, the analysis performed by the 1984
pension committee, a large group with broad membership, set the stage for
the legislative negotiations in the 1990s, according to an expert.
Economic conditions and eroded confidence in the old pension system helped
activate those deliberations in the 1990s. The 1991 working group, which
had the necessary social engineering skills and knowledge, used the
projections of program fiscal unsustainability to craft a major structural
reform that was agreeable to a strong majority of Parliament. Although
also a criticism, the autonomy of the 1991 working group and its small
size decreased the potential opportunities for derailing the legislation
and helped build consensus across party lines, according to one expert.

The result of the two decade and multi tier process was a complete
reconstruction of the pension system, designed with the aim of insulating
it from the temptation of constant political fine-tuning. As the reforms
are gradually phased in, the Swedish public's true grasp and support of
the changes remains to be seen. Government survey data from the early
2000s suggests the public's understanding of the reform is not high,
despite outreach efforts.^11 Although some criticism exists of the reform,
officials and experts believe it has public support and will be sustained.
Another government official stated that people who currently oppose the
system tend to base their opinions on politics and not because of lost
benefits. One result of the reform, according to a government official and
member of the working group, is that young Swedes who previously had no
confidence in the system now believe they will receive a small pension.
The complete impact of the reforms and any potential need for
reexamination will be more evident as the phase-in of the system is more
complete and baby boomers begin collecting benefits.

^10 In the fall of 2006, after the committee released its report in 2005,
Sweden's government changed from Social Democrat control, to a
center-right coalition government.

^11According to an official from Sweden's National Insurance Board, about
3 percent of Swedes report their knowledge of the pension system as "very
good," and about one-third say their knowledge is "good" while about 50
percent reports that their knowledge is poor and 10 percent that their
knowledge is very poor.

Figure 4: Key Events in Sweden's Pension Reform, 1982 through 2001

Appendix V: Disability Reform in the Netherlands

Reform Overview: Significance of the Reform

Since 1967, the disability program in the Netherlands has had a broad
definition of "disability" that included partial disability benefits. This
broad definition opened the disability system to high levels of use. For
most of the 1980s, 1990s and the first half of this decade, the proportion
of the labor force on long-term disability was over 10 percent. Because
there was broad support for the program and disabled individuals in
general, reforming the disability system was politically difficult. The
disability program had been a source of national pride for the
Netherlands, referred to as the "crown jewel" of its social programs.
After multiple attempts at reforming the system, a structural reform of
the program was implemented in 2006 that is seen as significant by
government officials and experts. The process leading to the reform was
long and difficult, requiring many attempts at reform and a shift in
public perception of the disability program. Figure 5 illustrates the key
events that occurred in this reform process.

Figure 5: Key Events in the Netherlands Disability Reform Process

Disability in the Netherlands Differs from that in the United States

The Netherlands disability system differs significantly from disability
programs in the United States and other countries. The disability program
in the Netherlands differs from Disability Insurance (DI) in the United
States in the following ways:

           o The Netherlands provides a "partial disability" benefit.

           Individuals in the Netherlands can claim a benefit if one is
           "partially" disabled, meaning that those who can still work and
           those who are still working can receive benefits if working at a
           reduced capacity.^1 Partial disability is rated on a percentage
           basis; before 2006, beneficiaries had to be at least 15 percent
           disabled to receive the benefit. No partial disability benefit
           exists in the United States. In the United States, for a person to
           receive DI benefits, the impairment must be of such severity that
           not only is the person unable to do previous work but, considering
           his or her age, education, and work experience, is unable to do
           any other kind of substantial work that exists in the national
           economy.

           o There is virtually no waiting period for receiving benefits in
           the Netherlands.

           While a claimant in the Netherlands does not qualify for the
           disability program at first, he or she immediately qualifies for
           benefits under employer financed "sickness insurance" for up to 2
           years. In the United States, one must have or expect to have a
           disabling condition for at least 1 year and there is a mandated 5
           month waiting period before receiving benefits.

           o The disability program was originally administered by employer
           and labor groups in the Netherlands until the mid-1990s.

           In contrast, U.S. disability benefits are administered by the
           government.

           Figure 6 shows the number of disability beneficiaries for each
           year since the beginning of the disability program. Over this
           time, the number of beneficiaries has generally increased. In the
           1990s after a period of decreasing beneficiaries, the number once
           again went up.
			  
^1This benefit is less than the benefit one would receive if one 
qualified for full disability benefits. 

           Figure 6: Disability Beneficiaries in the Netherlands: 1968
           through 2007
			  
			  Origins and History of Reform

           Number of those receiving disability increased in the 1980s and
           remained high despite benefit reductions

           Following a recession in the late 1970s, the Netherlands had an
           increased rate of unemployment. Individuals--if they
           qualified--started to claim disability benefits instead of
           unemployment benefits because disability provided a more desirable
           benefit. For some, the benefit facilitated early retirement. As
           the economy improved, however, similarly high levels of disability
           beneficiaries continued. The government believed that this was too
           costly and, if similar levels of disability receipt continued,
           costs would continue to rise.

           Reform of the disability system began in the 1980s and early
           efforts focused on reducing disability benefits to reduce costs.
           These reforms included ending tax exemptions for the disabled, a
           10 percent reduction in the disability benefit's replacement rate,
           and a decrease in the earnings base (which is used to calculate
           disability benefits). While the amount paid for individual
           benefits decreased, government data show that the number of
           beneficiaries increased in this decade.

           Policy reform in 1990s focused on return-to-work measures as
           public perceptions of the program changed

           The number of people on disability continued to be high during the
           1990s, with studies showing that the disability system was used as
           an option for early retirement and unemployment ("stress" was also
           cited as a reason for receiving disability benefits). Concerns
           about the effect of population aging also created pressure for
           change, as this could lead to even more use of the disability
           program.

           A change in policy reform from benefit reductions to
           return-to-work provisions was accompanied by political events that
           helped to change public perception of the disability system and
           made the public more amenable to reform.

           In 1990, Prime Minister Ruud Lubbers (a Christian Democrat who
           served as Prime Minister from 1982 through 1994) stated that the
           Netherlands was "sick" and threatened to resign if the number of
           those in the disability program in the Netherlands reached 1
           million. Experts agreed that 1million was an arbitrary number, but
           it became an accepted measure of the need for reform. While this
           threshold was never surpassed, his statement generated public
           interest and concern over the disability program, and the "1
           million" measure continued to shape discussion of the program past
           Prime Minister Lubbers' tenure. Throughout the 1990s and beyond,
           experts noted that whenever the number on disability approached 1
           million, public discussion of the disability system increased.

           In 1991, major retrenchments of the disability program were
           proposed by the governing coalition, a combination of the
           center-right Christian Democratic party and the center-left Social
           Democratic party. These proposals were met with disfavor, leading
           to large protests. According to experts, the governing coalition
           was threatened with a loss of power and did not follow through
           with the proposed reforms. One expert said that this series of
           events was the catalyst for a shift in focus on the part of the
           government to reforming the administration of the disability
           system instead of a further reduction in benefits.

           In 1993, a special parliamentary commission known as the
           Buurmeijer Commission had an impact on public perceptions of the
           disability program. The Buurmeijer Commission was a parliamentary
           group that held hearings on social insurance programs^2 including
           the disability program. The chair was Flip Buurmeijer, a Social
           Democratic member of Parliament. The commission led to policy
           recommendations, but experts say that its most important legacy
           was informing the public and changing its perception of the
           disability system. The hearings exposed fraud and abuse in the
           disability program and showed the public how both employer and
           employee interests benefited from misuse of the disability
           benefit. One expert said that the commission identified this moral
           hazard, which convinced the public that change was needed.

           The commission had several features that experts said gave it the
           power to change public opinion. First, parliamentary commissions
           are a rarity in Dutch government, used primarily to investigate
           scandals and thus significant attention was paid to the disability
           hearings. Second, the hearings were broadcast on national
           television and viewed by many, creating public awareness of fraud
           in the disability system.

           Following the Buurmeijer Commission, reforms were implemented to
           address the disability system's problems. Several laws were passed
           in the 1990s containing provisions that aimed at returning
           disabled employees to the labor force. Examples of these included:
           laws mandating that employers pay the employee for an initial
           period of time;^3 incentives for employers to retain and recruit
           disabled workers; and requiring reintegration plans for disabled
           individuals to be submitted to a government organization.

           However, experts said in most cases, reforms resulted in only
           limited effects on new disability cases. Some of the laws during
           this period had unintended consequences. One example given by an
           expert is a law that intended to provide incentives to employers
           to limit the number of employees that claimed disability while
           employed with them. As a result, employers began to screen
           potential employees and, according to experts, would not hire
           those who posed a risk of becoming sick or disabled. In response,
           the government enacted a law that prevented employers from
           performing health screenings for new employees. Other disability
           reforms that proved controversial or problematic were repealed.
           Some laws did have more lasting effects, including a 1998 PEMBA
           law, which indexed employers' contributions to the disability
           system based on their risk.^4
			  
^2The Buurmeijer Commission also looked at unemployment benefits.

^3This is part of the sickness insurance. Subsequent legislation increased
the period of time that the employer paid.

^4"PEMBA," when translated to English, stands for "Act on Premium
differentiation and market-competition in the disability insurances."

           Structural Reform Implemented in 2006, Prompted by the Donner Commission

           In 2000, the Minister of Social Affairs and the Minister of
           Interior Affairs of the moderate governing coalition established a
           commission chaired by Piet Hein Donner, a member of the Council of
           State.^5 This commission (known as the "Donner Commission") was
           the starting point for the most recent reform, which was enacted
           in 2005 and implemented in 2006.

           According to one expert who was involved with the Donner
           Commission, the commission was formed in an environment of
           political stalemate. Parties in the coalition government could not
           agree on a path for reform. Unions and employer groups were
           unsatisfied with progress on reform and they were considering
           developing a proposal. As the number of beneficiaries approached 1
           million, the Minister of Social Affairs believed that forming a
           commission would produce meaningful reform that could break
           through the stalemate and the influence of unions and employers on
           disability policy.

           The Donner Commission was a small group that included members of
           each of the principal parties. Five of the seven members
           represented the five largest political parties in the Dutch
           government at the time, although--with the exception of
           Donner--the members did not hold national political offices. The
           sixth was an academic expert and the seventh was a civil servant
           who acted as a government liaison. In addition, there was a three
           person secretariat that produced reports and proposals for
           discussion by the commission. According to an expert familiar with
           the commission, the members were able to negotiate the reform
           package for their respective parties. The meetings of the
           commission were closed to the public. The commission drafted a
           report which included a set of recommendations, the primary one
           being an elimination of the partial disability benefit. The
           recommendations received much attention from the media once they
           were made public.
			  
^5The Council of State is a constitutionally established advisory body to
the government, which advises the Cabinet before laws are submitted to
Parliament. Its membership includes members of the royal family and
appointed members from various backgrounds including military, political,
and business.			

           Experts and government officials noted several reasons why the
           Donner Commission was successful at designing a reform that was
           adopted and appears to be effective. One expert said that the
           Donner Commission was formed in part because the "normal"
           political channels would be unable to reach an agreement on
           disability reform due to the controversy surrounding it. The
           commission also built consensus among different political parties;
           the fact that the commission had members from multiple parties
           also made the recommendations more difficult to ignore, according
           to one expert.

           Following the issuance of the Donner Commission's recommendations,
           the government asked that the Social and Economic Council (SER)
           provide comments on the proposals. The SER is a standing body that
           includes equal representation from labor, employers' groups, and
           government-appointed members that represent the public interests.
           The SER comments, either when requested by the government or by
           choice, on social and economic policy. In March 2002, the group
           issued its response to the Donner Commission's recommendations,
           unanimously recommending maintaining a partial disability benefit.
           According to an expert, vetting the recommendations through the
           SER brought about consensus because there was input to the reform
           from interests outside the government.

           In July 2002, the center-right Balkenende government came to
           power. One expert noted that the Minister of Social Affairs was
           committed to disability reform. However, in October 2002, another
           round of elections occurred, necessitating a delay in enactment of
           disability reform. The reform was considered by Parliament in an
           environment of fiscal crisis, as the Netherlands was in a
           recession. Government officials said that these fiscal issues were
           not the drivers of reform, but that the environment of fiscal
           crisis made reform of the disability program more politically
           feasible.

           Legislation was passed in 2005 and implemented in 2006 that
           contained elements of recommendations from both the Donner
           Commission and the SER. Experts said that the recent reform has
           had an initial impact of reducing the number of those on the
           disability program.

           This reform removed the partial disability benefit from the
           disability program and created a separate system for those on
           partial disability. In addition to establishing the separate
           partial disability system, reforms occurring in the same period:

           o increased the threshold to claim partial disability from 15
           percent disabled to 35 percent disabled;
           o increased the benefit for those who were totally and permanently
           disabled from 70 percent of predisability wage to 75 percent of
           predisability wage; and
           o mandated medical reassessment for those under age 50 receiving
           disability benefits.

           While it is not possible to cite the exact impact of the 2006
           disability reform, there has been a decrease in the number of
           people in the disability program along with a reduction in the
           number of new beneficiaries. The Netherlands government data show
           that the total number on disability dropped from 963,800 in 2004
           to 845,000 in 2007. The data also show that inflow into the
           disability program has decreased in this period, from 74,800 in
           2004 to 56,000 in 2007.
			  
			  Expectations: The Future of Reform

           Experts said that there were pressures to soften the reform,
           although they disagreed as to whether there would be significant
           changes. According to government representatives, the Parliament
           is examining possible changes in the future to the benefit for
           those under age 18 who are covered by the program, due to recent
           increases in use of the program by this age group. In addition, a
           longitudinal study is currently underway that seeks to determine
           what happens to workers who claim a disability over time under the
           new policy. Of particular interest to the authors is whether
           changes in the disability policy make it more likely for
           individuals to apply for other social programs, such as
           unemployment or welfare.
			  
			  Appendix VI: Pension Reform in Germany
			  
			  Reform Overview: Significance of the Reforms

           In Germany, as elsewhere in Europe, population aging and the
           accompanying increase in the number of retirees relative to
           workers have financially strained the pay-as-you-go (PAYGO)
           defined-benefit public pension program. For this reason,
           policymakers have reformed the pension program over the last 15
           years, first by introducing measures that made it less generous
           while preserving the basic structure of the system in 1992 and
           1999, then by changing its structure in 2001. The monolithic PAYGO
           pension program then became a multipillar one with the addition of
           supplementary pension schemes--specifically, fully funded private
           and occupational schemes. Further changes in 2004 and 2007 sought
           to put the pension system on a financially sustainable path.

           The reforms occurred incrementally as in the majority of countries
           around the world, but were significant in the sense that, taken
           together, they considerably transformed the world's oldest
           defined-benefit public pension program, according to experts. The
           reforms were initiated by the Christian Democratic Party/Christian
           Social Union (CDU/CSU) but continued when the Social Democratic
           Party (SPD) came to power in the late 1990s, as well as when a
           "Grand Coalition" brought the two parties together in government
           in 2005. The reforms took place in diverse political environments
           that were sometimes consensual, sometimes more adversarial.
			  
			  Origins and History of the Reforms

           By the mid-1980s, long-term demographic projections showed that
           the public pension system would be financially unsustainable
           unless contribution rates were increased dramatically, or benefits
           cut substantially, according to an expert. The government of
           Chancellor Helmut Kohl introduced reforms in 1989-- which became
           effective in 1992--under favorable economic conditions. Experts
           generally view these reforms as consensual, with the main
           opposition party--the SPD--and the governing CDU/CSU party
           agreeing on the measures. Changes included indexing benefits to
           net wages instead of gross wages, which effectively decreased
           benefits because higher contributions and taxes reduced net wages
           relative to gross wages; increasing the normal retirement age from
           63 to 65; and actuarially adjusting pensions, reducing incentives
           for early retirement, so those opting to receive benefits before
           65 would face permanent reductions.

           However, the German reunification of 1989 made it clear that these
           reforms would not be sufficient to make the pension system
           financially sustainable for the next two decades, as expected. The
           unification brought a large number of new claimants from the
           former East Germany into the pension system, quickly putting
           pressure on its budget, according to government officials. Also,
           high contribution rates and the associated increase in nonwage
           labor costs became big issues in the mid-1990s following the
           economic recession of 1992-93. The political debate after 1995
           emphasized pressures from globalization and European monetary
           integration. In particular, it focused attention on how high
           contribution rates would hinder Germany's competitiveness in the
           global economy and prevent job creation.

           New reforms passed in 1997--becoming law in 1999--but were
           politically contentious. The federal elections in 1998 increased
           partisanship as the reelection prospects of Chancellor Kohl, who
           had been in power since 1982, became uncertain, according to an
           expert. The reform provisions included gradually bringing women's
           and unemployed individuals' normal retirement age in line with
           men's at 65. However, in the charged political climate, the Social
           Democrats and labor unions opposed, and subsequently reversed, the
           introduction of a demographic factor that would have reduced the
           replacement rate of pensions.

           The failure to reduce nonwage labor costs provided momentum for
           further reforms once the SPD came into office under the leadership
           of Chancellor Gerhard Schroeder. Paradoxically, the new
           government's package of legislation in 2001 contained more drastic
           measures than those they opposed a few years earlier, as the
           following examples illustrate.

           o The Riester^1 reforms transformed the public pension system into
           its current multipillar structure, with the traditional
           earnings-related statutory PAYGO pensions constituting the first
           pillar; occupational pensions making up the second; and the funded
           private pensions representing the third pillar.^2 These private
           pensions were made voluntary, but the government sought to
           encourage people to take them up by offering direct subsidies or
           tax advantages.^3 The relatively good performance of the stock
           market in the 1990s and the idea that everyone could benefit from
           it played a role in the promotion of these private pensions,
           according to an expert. The successful introduction of individual
           accounts in other countries, especially Sweden, which was viewed
           as a model by the Social Democrats, also played a role.
			  
^1The reforms were passed through parliament by the labor minister Walter
Riester.

^2Older workers with low incomes and those with reduced earning capacity
are also entitled to a means-tested benefit.

^3The individual pensions are specially regulated contracts with financial
institutions. People investing in these are guaranteed, at a minimum, to
get back the amount they put in. The government subsidies are especially
high for low-income people and those with children.
			  
           o The Riester reforms stipulated a gradual reduction of the PAYGO
           first pillar pensions by modifying the adjustment formula. They
           also set to stabilize contributions rates at no more than 20
           percent before 2020 and 22 percent before 2030 for the first
           pillar^4 to avoid negative effects on employment and growth. In
           addition, the reform package fixed a target for the replacement
           rate, promising that pensions would not fall below 67 percent of
           average net earnings, from the current 70 percent. The replacement
           rate was actually redefined insofar as it assumed the average
           worker would invest 4 percent of his or her gross earnings in the
           new voluntary supplementary pensions. Some experts view this
           replacement rate target more as a symbolic concession that
           "modernizers" within the SPD made to the "traditionalists" and to
           labor unions.^5 The modernizers also managed to reach a consensus
           with the opposition led by the CDU.
           o The reforms included a built-in reexamination clause that called
           for government action if contribution and replacement rate targets
           were not expected to be met. This mechanism was triggered soon
           after as the pension system experienced a financial crisis in
           2002-2003, which eventually led to further reforms.

           A deep economic downturn in 2002-03 caused, to a large extent,
           this financial crisis in the pension system. Unexpectedly high
           unemployment rates and dismal economic growth created a sense of
           urgency for reforms, according to an expert. In November 2002
           immediately after winning a second term in the federal elections,
           Chancellor Schroeder's government set up a commission. The Rurup
           Commission^6 was charged to make recommendations on ways to
           achieve sustainability in the pension system, as well as in health
           and long-term care insurance schemes. The commission was a way for
           the government to build consensus for further changes in these
           programs. It gave more legitimacy to reforms as the government
           lacked the strong mandate it enjoyed during its first term, with
           the CDU-led opposition clearly dominating the upper house--or
           second chamber--of Parliament, the Bundesrat, according to
           government officials. By deferring responsibility--and blame--to a
           commission of experts, the "modernizers" within the Social
           Democratic Party also sought to overcome intraparty opposition.
			  
^4The contribution rate on this earnings-related pillar is shared equally
between employers and employees.

^5Some experts view fixing targets for both contribution and replacement
rates as contradictory.

^6Bert Rurup chaired the commission, more formally called the Commission
for Sustainability in Financing the German Social Insurance Systems.

           The Rurup Commission was composed of 26 members with
           representatives of various interests in society, including labor
           unions and employers' organizations, and officials from lower
           levels of government. The subcommission on public pensions had
           about a third of the total number of members. It was successful in
           pushing for broad reforms, unlike the other two subcommissions on
           health and long-term care insurance, partly because the group
           agreed early on to avoid extreme ideological positions and find a
           rational, rule-bound middle ground acceptable to everyone,
           according to a member of this group. The subcommission on health
           insurance, on the other hand, was deeply divided and could not
           achieve a majority behind a policy model.^7 Moreover, the media
           focused its attention on the bitter debates over health insurance
           financing as those became public, even though commission members
           were supposed to avoid public commentary and position taking,
           according to government officials. This allowed the pension group
           to work without close public scrutiny.^8

           All but one of the recommendations of the Rurup Commission
           regarding pensions--the 2004 reforms^9--became legislation fairly
           rapidly. Building on the Riester reforms, the new provisions
           included supplementing the pension benefit adjustment formula with
           a new "sustainability factor" to reflect changes in the number of
           workers supporting the system relative to pensioners;^10 and
           loosening the rules and regulations governing the Riester pensions
           to encourage greater participation.^11 The sustainability factor
           would lead to smaller pension adjustment, hence smaller increase
           in benefits, whenever the ratio of contributors to pensioners
           declines.^12 The pension adjustment would be allowed to go down to
           zero but not lower to prevent pensions from declining, in nominal
           terms. The commission's projections showed that individuals
           choosing to invest in supplementary pensions, either in the second
           or third pillar, would be able to maintain a constant replacement
           rate.^13 The sustainability factor was introduced to ensure that
           the pension system would be self-sustaining, balancing itself
           automatically in line with demographic development and employment
           levels.^14 The expectation was that such a mechanism reduces the
           need for future reexamination and helps "depoliticize" the system.

^7The Rurup Commission was more limited in its options for health
insurance reform, according to an expert, because of strong organized
interests--doctors, hospitals, pharmaceutical companies, health insurers,
etc.--and the conflicting political values behind the different financing
models. Some observers also believe that the Federal Minister for Health
and Social Policy Ulla Schmidt's choice of appointments on the commission
may have led to this division.

^8The opposition led by the CDU set up its own Herzog Commission to look
into the same issues. The two commissions worked closely together behind
the scenes on pension reform, according to a member of the Rurup
Commission.

^9The reforms were passed under the Old-Age Pensions Insurance
Sustainability Act.

^10Benefits are computed as follows: for each year of contributions, an
individual receives pension points. At retirement, the sum of pension
points are multiplied by a pension point value currently set at about 23
euros. This pension point value is adjusted annually by an index that is
based on net wage growth and the sustainability factor. All German
pensions--both for new and current retirees -- are affected by these
adjustments.

^11For example, individuals eligible for government subsidies for the
supplementary pensions now include all taxpayers. Also, the procedures for
granting government subsidies have been simplified.

^12Conversely, pension adjustment would increase if the number of working
people contributing to the pension system rises relative to the number of
individuals receiving pensions.

^13With the Rurup Commission's economic and demographic projections,
pension replacement rates will initially decline then reach their 2004
level by 2030.

^14Hence, the sustainability factor takes into account not only changes in
life expectancy but also fertility rates, immigration, as well as other
factors.

           The 2004 reforms also stipulated that the government should report
           to the legislative bodies--the Bundestag and Bundesrat--every 4
           years on whether targeted replacement rates for 2020 and 2030 are
           at risk, given the contributions rates, and if so, propose
           remedies.

           Only one recommendation of the Rurup Commission--the gradual
           increase in the retirement age from 65 to 67--was adopted later in
           2007 by the current coalition government, which includes both the
           SPD and the CDU. The fact that this highly unpopular measure was
           postponed for several years can be interpreted as a sign that the
           reformers in the Schroeder government recognized the need to reach
           a compromise with its opponents, both inside and outside of the
           party, according to a German expert. But it was more a symbolic
           concession in the sense that the provision had not been scheduled
           to come into effect before 2011.
			  
			  The Reforms and the Public

           According to an OECD official, the pension reforms were technical
           but efforts were made over several years to ensure that the public
           understood them. Experts also told us that the need for change in
           the public pension system in Germany has been discussed widely
           since the early 1990s. Successive governments in the last 15 years
           have made citizens aware of the necessity of reforms by using the
           recurring themes of population aging and high labor costs
           hampering economic growth. Reforms took place incrementally over
           this period of time. Overall, there was a mix of behind-the-scene
           work on the specifics and public information.

           Since 2004, every year individuals receive a report detailing
           their pension information.^15 Financial institutions offering
           private pensions must also provide information on possible
           investments, portfolio structure, and risk potential to their
           clients before contracts are signed.
			  
			  Expectations: The Future of Reform

           Government officials and some experts expect these reforms to be,
           on the whole, sufficient to ensure the sustainability of the
           pension system for the near future, and therefore do not foresee
           significant changes to the system. Officials seem cautiously
           optimistic that with time and the tax incentives and subsidies
           provided for supplementary pensions, people will enroll at
           sufficiently high rates. Experts estimate that the demand for
           Riester pensions doubled in 2004 after a slow start, then again in
           2005 to reach more than 20 percent of all workers covered by the
           statutory first pillar, with another steep increase in 2006.^16
           Taken together, the three pillars of the pension system should
           ensure adequate pensions, according to officials.

           However, some characteristics of the system may lead to certain
           groups of people retiring with insufficient pensions. For example,
           supplementary private pensions are voluntary rather than mandated,
           and even though the take-up rate has been increasing, individuals
           may fail to contribute to them on a regular basis throughout their
           working life. Moreover, the market returns on these private
           pensions may be too modest. Also, low-income individuals may have
           less incentive to contribute to private pensions despite the high
           subsidies provided to them because these pensions would affect
           their eligibility for other means-tested payments, such as the
           minimum social security guarantee for old age.
			  
^15Specifically, individuals from age 27 receive an annual pension
statement; from age 54, they receive a more detailed statement every 3
years. The report includes information on their entitlements and their
expected pension. People can also check their report online.

^16Axel Boersch-Supan, Anette Reil-Held, and Christina B. Wilke, "How a
Unfunded Pension System Looks like Defined Benefits but Works like Defined
Contributions: The German Pension Reform," Paper written for the Fundacion
Carolina (May 31, 2007).

Figure 7: Key Events in German Pension Reform Process

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Susan J. Irving, (202) 512-9142 or [email protected]

Acknowledgments

In addition to the contact named above, key contributors to this report
were James McTigue, Assistant Director; Linda Baker, Analyst-In-Charge;
Lisa Henson; Jeff Niblack; Lindsay Welter; and Seyda Wentworth.

(450574)

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Highlights of [60]GAO-08-372 , a report to the Committee on the Budget,
U.S. Senate

January 18, 2008

ENTITLEMENT REFORM PROCESS:

Other Countries' Experiences Provide Useful Insights for the United States

Looking to the future, our nation faces large and growing structural
deficits and escalating federal debt due primarily to rising health care
costs and known demographic trends. Slowing the growth of entitlements is
an essential part of the solution to these challenges.

GAO was asked to identify useful insights from the entitlement reform
processes in other countries. Specifically, GAO was asked to analyze (1)
other countries' major efforts to reform entitlement programs, (2) the
pressure(s) that led countries to undertake the reforms, (3) how reform
proposals were developed, and (4) to what extent enacted reforms built in
triggers requiring future actions under certain conditions; and where such
trigger mechanisms did not exist, whether some adjustments nonetheless
occurred.

GAO conducted a literature review focusing on developed, high-income
Organisation for Economic Co-Operation and Development (OECD) countries
facing similar fiscal challenges. To gain a more in-depth understanding of
reform process, GAO selected three efforts for further study: Sweden's
pension reform in 1998, Germany's pension reform in 2004, and the
Netherlands' disability reform in 2005. For these cases GAO interviewed
government officials, reform participants, and experts knowledgeable about
the reforms.

GAO is making no new recommendations in this report.

Other countries' experiences suggest that reform of entitlement programs
is difficult but also possible. Several countries more advanced in
population aging and facing greater demographic challenges than ours have
successfully undertaken reforms of major entitlement programs. Since the
1980s, almost all of the OECD countries have restructured their public
pension programs; disability, unemployment, and other programs have also
been reformed. Many reform efforts began or accelerated in an environment
of economic and fiscal crisis. Other prompts included longer term concerns
about population aging and economic competitiveness, and supranational
factors such as a desire to meet the fiscal criteria for entry into the
European Union. In many countries, reform occurred despite political
processes that made it difficult. Consensus had to be built in coalition
governments, and leaders had to work across parties to achieve a broad
consensus for reform.

Commissions were generally used to develop proposals, but this was only
one stage in the reform process. Leaders needed to define the problem,
persuading others that reform was needed and urgent. The challenge was to
build a broad coalition to assure the reform's permanency while preserving
the main policy initiatives sought in the reform process.

           o In some reform efforts political leaders used the "bully pulpit"
           to educate the public but in some cases commissions also helped.
           Achieving a broad consensus across parties and groups was key to
           enacting and sustaining reform.

           o Proposals were generally developed by ad hoc commissions
           established by governments with a strong commitment to reform.
           Commissions in case study efforts that developed proposals were
           small, with varying composition. They removed divisive issues from
           the usual political process, facilitating consultation and
           negotiation needed to devise a reform package. Commissions also
           helped to insulate policymakers from political risk.

           o Reform processes were generally complex and often
           conflict-ridden before they ultimately succeeded in enacting
           legislation. Many reforms were iterative. Following reform
           enactment, a need for additional changes sometimes emerged.

           o In some countries standing commissions were established to
           monitor pension systems and make recommendations for change. Some
           recent pension reforms have included mechanisms to automatically
           adjust benefits if adopted reforms prove insufficient to make
           programs sustainable.

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