• Background: Public pensions in crisis as population ages and baby-boomers retire
• Country Comparison: Europe has retrenched, reformed, and hybridized, Chile privatized
• Recent Legislation: 2004 Bush privatization proposal

Background

• Social Security is the public pension program in the United States that was established in 1935 to keep the elderly out of poverty and funded through payroll taxes on current wages. There are two ways of organizing pension systems: The first is a capitalized or fully funded system where money from paychecks go into a pool/fund that will eventually pay for the pensions of the workers who have funded the pool. The most common is a Pay as You Go system in which contributions from workers pay for the people who are currently retired.
• Affluent countries like the United States are facing a pension crisis as the baby-boomer generation moves into retirement. The pension system is generating $1 trillion and will continue to rise until 2020, when the baby-boomers begin retiring. By 2045 the fund will be depleted.
• A number of socio-economic changes are contributing to the crises. First, the average life expectancy was 65 years when pension systems were created. Today people are living 15 years more on average. At the same time, people have having fewer children since the cost of child rearing have increased, women have entered the workforce in larger numbers, and contraceptives have become available. Economic growth has slowed considerably since the postwar boom which slows job creation and depresses wage growth.

Country Comparison

• Most Western European countries faced with the problem of an aging population have reformed their pension system by cutting generous benefit packages, making benefits more progressive and less universal, introducing a private accounts on top of a publicly funded system, or a combination of solutions.
• Chile abolished the Pay-Go system and replaced it with a privatized system, requiring people to invest 10% of their paychecks. The government introduced a minimum pension for people whose investments failed. Today, the government is spending more on minimum pensions than before the switch because people failed to save or make enough in their investments.

Recent Legislation

• In 2004, President Bush proposed a plan that would replace the public pension scheme with private savings accounts for people under the age of 55. 4% of payroll tax would be diverted to private accounts, giving individuals control over their investments with the potential to receive bigger returns and higher interest rates than with government bonds. Bush's was unable to convince congress and the public who ultimately rejected his reform bill.
• Privatization presents a double-payment problem wherein the present generation is funding their own retirement in addition to the current retirees. By 2026, the cost will represent a $5 trillion in debt. Bush's proposal planned to borrow initially and cut benefits in 30 years while the debt grows exponentially. The plan would involve high administration costs and heavy regulation to ensure money is invested well. A safety-net would be provided when investments perform poorly or are lost. Many argue that there are simpler ways to fix Social Security that is more predictable than privatization. Raising payroll taxes to 14.2%, can eliminate the pension deficit for 75 years. Reversing half of the tax cuts given since 2001 can eliminate deficits forever. Raising the retirement age to 68 from 67 can eliminate the deficit by 1/3.