Speech

Demographic Challenges to State Pension Systems Around the World Culver-StocktonCollege Canton,Missouri February24,2005 Social Security has been in the news a involved.Manyofuswouldfinditunthinkable lot lately. For the first time since 1983, toaskourownchildrentodivertagrowingshare when the Social Security Trust Fund oftheirownincometosupportourretirement; came within months of running out of theexistenceoftheSocialSecuritySystemdoes funds, the nation is engaged in a healthy debate notchangethefactthatchildreningeneral,rather on the nature of the problem the Social Security thanchildrenofindividualfamilies,willhaveto System faces, and on the choices that are avail- bearagrowingburdenifretirementbenefitsare able to address the problem. My purpose today unchanged. is not to enter into this historic debate over the Thus,changingdemographicsforceusto meritsofavailablechoices,butinsteadtodiscuss makesomechoices.Wewillhavetoeitherraise the fundamental source of the problem and the theretirementageforthecurrentlevelofannual factthatthesameissueisaliveinmostcountries benefits,reducethelevelofbenefitsincurrent around the world. law,raisetaxesonworkingpersons,oradopt Thefundamentalsourceoftheproblem,as somecombinationofthethreeoptions.Most mostarenowaware,ischangingdemographics. participantsinthedebateagreethatthesooner Inallhigh-incomecountriesthepopulationis weaddresstheissuethebetterbecauseweshould agingasaconsequenceofabirthratemuchlower makechangeslongenoughinadvancetogive thaninearlieryearsandalongerlifeexpectancy peopleampleopportunitytoadjusttochanged asaconsequenceofadvancesinmedicine.The expectations. fractionofthepopulationoverage65isrising, TheUnitedStatesisnotaloneinfacinga andifthatagecontinuestomarkthetraditional fundingprobleminitsgovernment-runpension retirementagethenumberofdependentretired system.Almostalleconomicallyadvanced personsrelativetothenumberofworkingpersons countrieshavelarge,government-runpension willrisetolevelsneverseenbefore. programsthatreplaceahighpercentageofthe Naturally,thereisconsiderableaversion lifetimeearningsofretiredpersons.Thesepro- towardmakinganysubstantivechangesinSocial gramsusethetaxpaymentsofcurrentworkers Security;mostpersonswouldliketoretireat65 tofundthepensionbenefitsofretiredpersons orearlier.However,changingdemographicsmake andtheirdependents.Thefundingproblemall itimpossiblebothtomaintainthattraditional ofthesesystemsfacehasarisenbecausethenum- retirementage,withthelevelofbenefitsdefined berofpersonsdrawingbenefitsisrisingmore incurrentlaw,andtomaintainthecurrentlevel rapidlythanthenumberofworkingpersonspay- oftaxationontheworkingpopulationtosupport ingtaxestofundthosebenefits.Demographers theretirementsystem.Theoptionofraisingtaxes projectthatthesetrendswillcontinueoverthe ontheworkingpopulationisbeingactivelydis- nextseveraldecades;thus,withoutreforms,the cussed,butweshouldbeclearaboutwhatis fundingproblemsofSocialSecurityandthe 1 ECONOMICGROWTH similarprogramsofothercountrieswillonly ducedmostlyin2030,withsomecarriedover worsen. from2029.Theworkingpopulationin2030must Iwillbeginmytalktodaybyreviewingsome producethefoodandservicestoprocessand oftheunderlyingdemographicfactsthatposea distributeittotheentirepopulation—toboththe challengeforgovernment-runpensionsystems workingandthedependentpopulationofyoung suchastheU.S.SocialSecuritysystem.These personsandretiredpersons.Itisimpossibleto datashowthatsomeothercountries,notablyJapan accumulateafoodfundnowtobeusedinthe andafewcountriesinEurope,areexperiencing future.Accumulationoffinancialassetsdoes amorerapidlyagingpopulationthantheUnited notaccumulatefoodassets.Ifaretiredperson States.Next,Iwilldiscusssomeofthereforms sellsfinancialassetstopayforfood,someone alreadyundertakeninothercountriestoconfront mustpurchasethoseassets.Dependentpersons thefundingproblemsoftheirgovernment-run cannotpurchasetheassets—onlyworkingper- pensionsystems,inthehopethattheexperiences sonscan.So,accumulatingaretirementfund, ofothercountriesmightinformthedebateinour whetherintheSocialSecurityTrustfundor owncountry. privateretirementaccounts,doesnotsolvethe Beforeproceeding,Iwanttoemphasizethat problemforsocietyasawholeraisedbyanaging theviewsIexpressherearemineanddonot population. necessarilyreflectofficialpositionsoftheFederal TheSocialSecuritysystemwasestablished ReserveSystem.Ithankmycolleaguesatthe inthemid-1930sasoneofseveralprogramsintro- FederalReserveBankofSt.Louis—especially ducedtocombattheGreatDepression.Inthe HowardJ.WallandDavidC.Wheelock,both 1940s,thereweresome40personspayinginto assistantvicepresidentsintheresearchdivision— thesystemforeveryonepersonthendrawing forextensiveassistance.However,Iretainfull SocialSecuritybenefits.Inthe1950s,theratio responsibilityforerrors. wasabout16workingpersonspayingtaxesto supporteveryonepersonreceivingbenefits. Today,however,therearejustoverthreepersons DEMOGRAPHIC CHALLENGES financingthebenefitsofeachrecipient,andover thenextthirtyyearstheratiowillfalltotwoper- TO GOVERNMENT PENSION sonspayingtaxesforeachbenefitrecipient.These SYSTEMS projectionstakeintoaccountthescheduled Likethegovernment-runpensionsystemsof increaseinthenormalretirementageto67but mostcountries,SocialSecurityisa“pay-as-you- nototherpossiblechangesinlaborforcepartici- go”system,meaningthatbenefitspaidtocurrent pationthatcouldbeinducedbychangesinwork recipientsarefinancedbytaxesleviedontoday’s incentivesforthoseoverage67. workersandtheiremployers.Inessence,Social Whatexplainsthedeclineinthenumberof Securityisanintergenerationaltransferprogram personscurrentlypayingintoSocialSecurity andnotaretirementsavingsprograminthetra- relativetothosedrawingbenefits?Theanswer ditionalsense. hastwoparts.First,overthepastcentury,the Somelamentthepay-gonatureoftheSocial UnitedStates,likemostifnotalleconomically SecuritySystem,andarguethatourcurrentprob- advancedcountries,hasexperiencedanincrease lemwouldneverhavearisenifthesystemhad inaveragelifespan.Second,thesecountrieshave beenproperlyfunded.Hereitisimportantto alsoexperiencedadeclineinthebirthrate,espe- distinguishwhatanindividualcandoandwhat ciallysince1960orso.Consequently,thenumber asocietycando.Letmeusefoodasanexample ofpersonswhohavereachedtheageatwhich toillustrateanextremelyimportantpoint.Con- theyareeligibleforbenefitshasbeenrisingfaster siderfoodconsumedatsomefuturetime,such thanthenumberofpersonsinthelaborforce as2030.Thefoodconsumedin2030willbepro- payingtaxes.Demographersexpectthesetrends 2 DemographicChallengestoStatePensionSystemsAroundtheWorld inlifespanandbirthratetocontinue.Thus,with- Securitywillopenwide.Withoutreforms,the outreformstothesystem,thenumberofworking trusteesoftheSocialSecuritytrustfundtellus peoplepayingSocialSecuritytaxeswillcontinue thatSocialSecurityoutlayswillbegintoexceed tofallrelativetothenumberofpeoplereceiving payrolltaxrevenuesin2018andtheSocial SocialSecuritybenefits.Ishouldalsonotethat Securitytrustfundwillbeexhaustedby2042.1 laborforceparticipationofmalesaged55to64 Itisimportanttounderstandjusthowlarge declinedsubstantiallyfrom89.5percentin1948 hasbeenthemagnitudeofthedeclineinthefer- to68.7percentin2004.Earlyretirementhas tilityrate,whichdeterminesthesizeofthework- addedtotheproblem. ingagepopulationtosupportthebabyboom Theincreaseinlifespanreflectsthewonders generationwhenitretires.Inthe1950s,women ofmodernmedicineandourrisingstandardof intheUnitedStateshad,onaverage,3.5children living.Theworld’sfastest-growingagegroupis intheirlifetime.By2000,thefertilityratehad comprisedofthosepersonsaged80andover.In fallentoabout2.1,theminimumnecessaryfora 2000,69millionpersons,or1.1percentofworld populationtobeself-sustaining.TheUnited population,wereaged80orolder.By2050,the NationsprojectstheU.S.fertilityratewillcon- numberaged80orolderisexpectedtomorethan tinuetofalltoabout1.85bythemiddleofthe quintupleto377millionandbe4.2percentof century.Mosteconomicallydevelopedcountries worldpopulation.Inthatyear,21countriesor alreadyhavefertilityrateswellbelowthereplace- mentrate.Somerepresentativeexamplesarethe areasareprojectedtohaveatleast10percentof UnitedKingdom,1.60,Germany,1.35,Italy,1.23 theirpopulationaged80orover.Japanisexpected andJapan,1.32.Withsuchlowfertilityrates,the tohave15.5percentofitspopulationoverage populationsofthesecountriesareagingrapidly 80—thehighestofanycountry—andnearly1 andforcingreformstopublicpensionsystems. percentofitspopulationaged100ormore.The UnitedStatesisprojectedtohave7.2percentof itspopulationconsistofthose80andolder.In REFORMS AROUND THE WORLD 1940,U.S.lifeexpectancyatage65wasanaddi- tional13years;todayitisanadditional18years. Nowletusconsidersomestepsthatother Obviously,itisagreatachievementthatpeo- countrieshavealreadytakentoshoreupthe plearelivinglongerandusuallyinbetterhealth financingoftheirgovernment-runpensionsys- andfinancialcomfortthantheirparentsand tems.Thesystemsofothercountriesvarygreatly grandparents.Thedownside,however,isthat intheirdetails,butthereisonecharacteristic thebenefitpaymentsfromexistinggovernment- that,forourpurposes,helpsdistinguishamong runpensionsystemswillinthenearfutureexceed systems.Thatcharacteristicistheextenttowhich theinflowoftaxrevenuestofinancethosepay- thecontributionsapersonmakestothesystem mentsunlessstepsaretakentoreducebenefits, duringhisorherworkingyearsarelinkedtothe raisetheretirementage,and/orincreasestaxes benefitsthatpersonreceivesinretirement.In oncurrentworkersandtheiremployers. somesystems,thereislittleornolinkbetweena Thosepersonsborninthefirstyearsofthe person’scontributionsandretirementbenefits. post-WorldWarIIbabyboomaretodaynearing Inothers,benefitsarecloselytiedtocontribu- ourtraditionalretirementageof65,andasthis tions,oftenthroughtheuseofprivatelyfunded demographicgrouppassesfromtheirworking retirementaccounts.OurSocialSecuritysystem yearsintoretirement,thefundinggapinSocial fallssomewhereinthemiddle.Wehaveasystem 1 2004AnnualReportoftheSocialSecurityandMedicareBoardsofTrustees.TheU.S.SocialSecurityprogramcomprisestwoparts.The Old-AgeandSurvivorsInsurance(OASI)programpaysretirementandsurvivorbenefits,andtheDisabilityInsurance(DI)programpaysdis- abilitybenefits.TheyearsinwhichbenefitpaymentsexceedrevenuesandtheSocialSecuritytrustfundwillbeexhaustedrefertothecom- binedOASDIprograms. 3 ECONOMICGROWTH ofnotionalaccountsthatrelatetosomeextenta thestate-pensionproblem.Tobeginwith,many retiree’spromisedbenefitstotheamountheor Europeancountriesalreadyhavehightaxes— shepaidintothesystemintheformofpayroll muchhigherthanintheUnitedStates.Further- taxes.Nevertheless,allbenefitsarefinancedby more,thepopulationsofthesecountriesareaging taxesimposedoncurrentworkers. rapidly,andthescopeoftheloomingpublic FranceandGermanyareamongthecountries pensionfundingproblemissuchthatonlydrastic wheretherelationshipbetweenthebenefitspeo- taxincreasescouldhopetosolvetheproblem.In plereceiveinretirementandthetaxestheypay fact,asarecentOECDreportconcludes,largetax duringtheirworkingyearsisrelativelyweak. increasescouldmakemattersworsebyreducing Suchcountrieshavetypicallyofferedgenerous theincentivesformarketworkandforsaving.2 benefitstothosewhotakeearlyretirement.Thanks Hightaxesdiscourageeconomicactivity,and tobothatraditionofgenerousbenefitsandunfa- withoutstrongeconomicgrowth,countrieswill vorabledemographics,manyofthesecountries havetroublegeneratingenoughrevenuetofund havealreadybeguntoexperienceseriousproblems promisedbenefitstoretirees. inthefinancingofpublicpensions.Theyhave tendedtoundertakereformsthatstrengthenthe linkbetweencontributionsandbenefits,andthus BENEFIT REDUCTIONS maketheirsystemsmoreliketheU.S.system. Incountrieswherethechallengespresented Attheotherextremearecountriesthatimpose bydemographictrendsaremoresevere,and atightrelationshipbetweenaperson’spayments moreimmediate,thanintheUnitedStates,state- intothesystemandhisorherultimatebenefits. pensionreformhasincludedbenefitcuts. Severalcountries,includingSweden,Italy,the Severalcountrieshavesoughttoreducethe UnitedKingdomandChile,havestrengthened growthofbenefitsbymodifyinghowbenefitsare thislinkbyshiftingsomeofthefinancingofstate indexed.Manycountries,includingtheUnited pensionsontoprivatesources.Inthesesystems, States,automaticallyincreasepublicpension earlyretirementplaceslittle,ifany,burdenon benefitsannuallytoreflectincreasesinthe thesystem,andthesesystemsarerelativelywell generallevelofwages.IntheUnitedStates,the poisedtohandletheproblemofanagingpopula- initialbenefitisindexedtowagesandoncebene- tion.Still,severalofthesecountriesareconsid- fitsarepaidtheyareindexedtotheConsumer eringfurtherreformsoftheirsystems. PriceIndex.Indexingtheinitialbenefittowages Forconvenience,Iwillplacethevarious passesalongthebenefitsofhigherproductivity reformsthatcountrieshaveundertakenintofour andwagestopersonsatthetimeofretirement. categories:taxincreases,benefitreductions,meas- Thissystemmaintainsaninitialbenefitthatis urestoencouragelaterretirement,andexpansions roughlyconstantovertimeasapercentageofthe ofprivatefundingforgovernmentpensions.The economy’saveragewagelevel. firstthreecategoriesare“parametricreforms.” However,inacountrywithanagingpopula- Thatis,thesereformsaltersomeoftheparameters tionandapay-as-you-goretirementsystem,wage oftheexistingsystem,whereasthefourthcategory indexationimpliesthattheaveragetaxpayeris includeschangestothestructureofthesystem. calledupontodevoteaneverlargershareofhis orherincometofinancingthebenefitpayments ofretiredpersonsandtheirdependents.With TAX INCREASES risinglifeexpectancyandalowerfertilityrate ForEuropeancountries,furthertaxincreases thaninearlieryears,stabilizingtheinitialbenefit are,forthemostpart,anon-starterforaddressing asafractionoftheeconomy’swagelevelneces- 2 OECD.“StrengtheningGrowthandPublicFinancesinanEraofDemographicChange.”May2004. 4 DemographicChallengestoStatePensionSystemsAroundtheWorld sarilyreducestheafter-taxwageforemployees, enceinmanycountrieshasbeeninsufficientto becausethetaxratetosupporttheretirement discouragelargenumbersofpeoplefromretiring systemmustrise. early.TheUnitedStateshaslongbeensomething Becauseconsumerpricestendtorisemore ofanexception.Foramanwithaverageincome, slowlythanwages,severalcountries,including ourSocialSecuritySystemisroughlyactuarially Italy,Japan,Spain,andFrancehaverecently neutralbetweenages62and70.Thatis,the switchedfromwageindexationtopriceindexa- annualbenefitrisesasretirementisdelayedabout tioninanefforttoslowthegrowthofbenefit inaccordwiththedecreasednumberofyears paymentswhilestillprotectingretireesfrom benefitswillbereceived.Beyondage70,however, inflation.Byindexingtopricesinsteadofwages, theincentivetoremainintheU.S.laborforceis low,becausebenefitsarenotfurtherincreasedif theinitialbenefitwillkeepupwithinflationbut retirementisfurtherdelayed.Ofcourse,aperson graduallydeclineasapercentageoftheeconomy’s canworkandreceiveincomewhilealsoreceiving averagewagelevel.Thismethodofreducingthe SocialSecuritybenefits,buttheperson’sbene- initialbenefitlevelisunderactiveconsideration fitsmaybetaxedatarelativelyhighmarginal intheUnitedStatesaswell. rate,dependingonincome,andthepersonmust Anotheroftheparametricreformsistoraise alsopaySocialSecuritytaxesaswithanywage theageatwhichapersoniseligibleforpension earner.Forthesereasons,theimplicittaxof benefits.Thisreformrecognizesincreasedlife remaininginthelaborforcepastage70—the expectancy.Finlandhasalreadytakenthestep foregoneafter-taxbenefits—isrelativelyhigh. ofindexingitsfull-pensionretirementagetolife Notcoincidentally,theUnitedStatesstands expectancy.Othercountries,includingtheUnited outintermsoftheextenttowhicholderworkers States,havemadesmallincreasesintheirnormal participateinthelaborforce.In2000,68percent retirementage,thoughusuallylessthanthe ofAmericanmalesagedbetween55and64were increaseinlifeexpectancy.Stillothershave inthelaborforce.Thecorrespondingnumbers increasedthenumberofyearsthataperson forFrance,Germany,Italy,andtheNetherlands mustworkinordertoreceivefullbenefits. were42percent,56percent,45percentand46 Severalcountrieshavetakenstepstoencour- percent,respectively.Britain,Sweden,and agepeopletoremaininthelaborforceasthey NorwayaresimilartotheUnitedStatesinthat getolder.Somehavedonesobystrengthening over66percentofpersonsaged55to64arein thelinkbetweencontributionsandbenefits. thelaborforce.3 Sweden,forexample,hasintroduced“notional Consistentwiththesefigures,arecentOECD accounts,”bywhichparticipantscanseetheir studyfoundaclosecorrelationbetweenincen- potentialpensionbenefitsriseastheywork tivestoretireandretirementbehavior—notsur- longerandcontributemoretothesystem.Inthis prisingly,peopledorespondtoincentives!The sense,Sweden’ssystemhasbecomemorelike implicationofthisresearch,accordingtoits theU.S.SocialSecuritysystem. authors,isthatlaborforceparticipationinthe Othercountrieshavetakenstepstoreduce 55-64agegroupcouldbeincreasedsubstantially paymentstopersonswhoretirebeforethenormal byreformsthatabolishedpolicy-inducedincen- retirementage.Manycountrieshavetraditionally tivestoretireearly.Indeed,thereportgoesonto offeredgenerousbenefitstopeoplewhochoose suggestthatpolicymakersshouldconsiderskew- toretireearly.Althoughearlyretireestypically ingincentivesagainstretirement,atleastupto receiveasmallerannualpensionthanpersons someage,inrecognitionthatpeoplewhowork whowaituntiltheyareoldertoretire,thediffer- provideanetpositiveimpactonpublicbudgets.4 3 OECD.“PoliciesforanAgeingSociety:RecentMeasuresandAreasforFurtherReform.”November2003. 4 Thisresearchissummarizedin“StrengtheningGrowthandPublicFinancesinanEraofDemographicChange.”OECD,May2004. 5 ECONOMICGROWTH Bycontinuingtoworkpastnormalretirement Amovetowardpersonalaccountswould age,peoplesupportthemselvesandpaytaxes strengthenthelinksbetweenone’scontributions thathelptoreducethetaxburdenthatwould andthebenefitsheorshereceives,andthereby otherwisefallonothers. lessentheburdenofanagingpopulationonthe Letmenowturntotheissueofprivate fundingofretirementbenefits. financing.Asaprelude,allowmetoquotefrom OpponentsoftheAdministration’sproposal aPresidentialaddresstotheU.S.Congress.The forpersonalaccountshavepointedoutthatthose addressproposesaSocialSecuritysystemthat whochoosetousepersonalaccountswillface ultimatelyiscomprisedoftwocomponents.One somefinancial-marketrisks.Dependingonthe componentistoconsistof“compulsorycon- typesofassetsthatcanbeheldintheseaccounts, tributedannuitieswhichintimewillestablisha however,theserisksneednotbeparticularly self-supportingsystemforthosenowyoungand high.Ontheotherhand,personalaccountswill forfuturegenerations.”Aself-supportingsystemis allowpeopletoinsulatethemselvesfromthe oneinwhich“fundsforthepaymentof…benefits risksinherentinasystemthatreliesontaxing [do]notcomefromtheproceedsofgeneraltaxa- onegenerationtofundthebenefitsofanother tion.”Ourcurrentsystemdoesnotsatisfythis generation. principlecompletelybecauseitcannotbeself- Itwas70yearsagoalmosttothisdaythat supportingformanyyears.Butwithadjust- PresidentRooseveltproposedpersonalretirement ments,perhapsitmightbecomesoeventually. accountsasapillarofourSocialSecurity.Only Thesecondcomponentcalledforbythe recently,however,havecountriesbeguntomake Presidentistoconsistof“voluntarycontributory personalretirementaccountsapartoftheirgov- annuitiesbywhichindividualinitiativecan ernmentrunpensionsystems.BritainandChile increasetheannualamountsreceivedinoldage.” havegonethefarthestdownthisroad,with Inotherwords,thesystemshouldincludevolun- reformsdatingbacktotheearly1980s.More tarypersonalaccountstogoalongwiththemanda- recently,SwedenandItalyhavemadepersonal torynotionalaccountsofthecurrentsystem. accountsapartoftheirpublicsystems.Asa Aparticularlyastutestudentofpresidential pointofreference,iftheBushAdministration’s historymightrecognizethatIamquotingfrom proposalsareenactedandoptionalpersonal anaddressofPresidentFranklinRoosevelt, accountsarecreated,ourSocialSecuritysystem whopresentedtheseproposalsinanaddressto wouldresembleSweden’s,exceptthatinSweden CongressonFebruary17,1935.President personalaccountsaremandatory. Roosevelt’snotionofpersonalaccountswasnot TheBritishpensionsystemhasseenongoing quitethesameasthoseproposedbythecurrent reformthatbeganundertheConservativegovern- Administration,butakeyprincipleisthesame: mentofMargaretThatcherin1980andhascon- AlongsidenotionalaccountsfundedbySocial tinuedthroughtheLabourgovernmentofTony Securitytaxesonapay-as-you-gobasis,someof Blair.Asaresult,theBritishpensionsystemis themoneytopayforaperson’sretirementbene- themostreliantonprivatefinanceofanyhigh- fitsthroughtheSocialSecuritysystemshould incomecountry.Itisalsoamongthemostcompli- comefromhisorhervoluntarypurchaseof cated,soIwilltrytosimplifyitasmuchasIcan. financialassets. ThemandatoryfirsttieroftheBritishsystem Theadvantageofmovingtowardincreased includesabasicpensionthatisfinancedonapay- useofpersonalaccountsingovernmentpension as-you-gobasisfromtaxesoncurrentworkers. systemsisthatitwouldreducethetaxesimposed Thelevelofbenefitfromthebasicpensionisfairly ononegenerationtofundthebenefitspaidtoan low,however,andbenefitsaresupplementedby oldergeneration.Unlikeourpresentsystem,a variousmeans-testedpaymentsincludinga portionofeachgeneration’sretirementwouldbe MinimumIncomeGuaranteeandhousingbenefits. fundedbytheearningsoftheirprivateaccounts. ThesecondtieroftheBritishsystemismanda- 6 DemographicChallengestoStatePensionSystemsAroundtheWorld toryforallthoseinpaidemploymentwhoearn place.Evenso,bythelate1990s,totalspending aboveacertainlevel.Withinthistier,individuals onstatepensionshadfallentobelow4percent canchoosefromamongvariousapprovedprivate ofGDP.7 pensionplans,aheavilyregulated“basicpension” Individualshaveenjoyedaverageannual plan,andasecondstatepension.Thethirdtier returnsofmorethan10percentperyearontheir oftheBritishpensionsystemallowspeopleto privateretirementsavingsaccountsunderthe contributetoprivatepensionplansfromtheir Chileansystem,thankstotherapidgrowthof pre-taxincomeandincludesvariousothertax Chile’seconomyduringthe1980sand1990s. breaksforpaymentsandcapitalgainsfrompen- TheperceivedsuccessoftheChileanreforms hasledmanyothercountriestoundertakesimilar sionplans.Thus,thethirdtieroftheBritishsys- reformstotheirownstatepensionsystems.As temisverysimilartothesystemoftaxadvantages oflastyear,11LatinAmericancountrieshad affordedtothosewithprivatepensionplansor adoptedsomeversionoftheChileanmodel.8 IRAsintheUnitedStates. Therelativelyheavyuseofprivatepension planswithinthestatepensionsystemmeansthat CONCLUSION statepensionspendinginBritainaccountedfor only5.5percentofGDPin2000.Further,this ThedebateoverthefutureofSocialSecurity figureisexpectedtodeclineto5percentby2040. hasjustbegun.Therearenoeasysolutionstothe Incontrast,acrossalistofEuropeancountries, problemofhowtoensurethatourpublicpension theaverageexpenditureonstatepensionswas systemremainssoundinthefaceofinevitable over10percentin2000andisexpectedtoriseto demographicchanges.Comparedtomanycoun- nearly14percentby2040.5Bycomparison,in tries,however,weintheUnitedStatesarelucky. theUnitedStatesexpenditureonSocialSecurity Wehaveastrongeconomysupportingahighstan- benefitswas4.3percentofGDPin2003. dardofliving,ahighrateoflaborforcepartici- Thecountrythathasmovedfarthestincon- pation,andourSocialSecuritysystemimposes vertingitsstatepensionschemeintoaprimarily relativelylittledistortionontheretirementdeci- privateoneisChile.LiketheBritishsystem,the sionsofpersonsyoungerthanage70.Moreover, Chileansystemhasthreetiers.Theprimarydiffer- comparedtootherdevelopedcountries,the encebetweenthetwosystemsisthatChile’sfirst changesintheagedistributionofourpopulation tierprovidesamuchlowerminimumpension, havebeenandwillcontinuetoberelatively whichmakestheChileansystemevenlessreliant modest. ongovernmentfunding.Infact,theChileangov- Still,wemustmakesomechangesinour ernment’sexpenditureonfirsttierpensionsis SocialSecuritysystemtoensureitslong-run expectedtoremainbelow0.5percentofGDPfor solvency,andthosechangeswillinvolvesome theforeseeablefuture.6Theconversionintothe hardchoices.Understandingthenatureofthe newsystemhasbeenverycostly,however, availablechoices,whychoicesmustbemade becausethegovernmentdecidedtocontinue andlessonsfromexperienceabroadshouldhelp fundingthepensionpromisesmadetothose thenationaddresstheseimportantissuesina whowereworkingbeforethenewsystemwasin soundandlong-lastingway. 5 Disney,Richard.“PublicPensionReforminEurope:Policies,ProspectsandEvaluation.”WorldEconomy,2003,26,pp.1425-45. 6 Acuña,RodrigoR.andIglesias,AugustoP.“Chile’sPensionReformAfter20Years.”WorldBankSocialProtectionDiscussionPaperNo.0129, December2001. 7 Acuña,RodrigoR.andIglesias,AugustoP.“Chile’sPensionReformAfter20Years.”WorldBankSocialProtectionDiscussionPaperNo.0129, December2001. 8 Corbo,Vittorio.“PolicyChallengesofPopulationAgingandPensionSystemsinLatinAmerica.”PresentedattheFederalReserveBankof KansasCitySymposiumGlobalDemographicChange:EconomicImpactsandPolicyChallenges,JacksonHole,Wyoming,August26-28,2004. 7

William Poole (2005, February 23). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20050224_poole

@misc{wtfs_speech_20050224_poole,
  author = {William Poole},
  title = {Speech},
  year = {2005},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20050224_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}