A similar demographic trend is  occurring or will occur in all OECD countries. The number of workers for every elderly person in the United  States is projected to fall from 4.1 in 2005 to 2.9 in 2020 and to 2.2 in 2030. Adjustments to Existing PAYG Programs Show Importance of Sustainability, Safety Nets, and Incentives to Work and Save

The countries that have adjusted their existing PAYG national pension  programs demonstrate a broad range of approaches for both reducing  benefits and increasing contributions in order to improve the programs’  financial sustainability. Essential Reform Elements Include Maintenance of a Safety Net and Work and Saving Incentives

All of the countries we studied that reformed their PAYG pension  programs by reducing projected benefits included provisions to help  ensure adequate benefits for lower-income groups and put into place  programs designed to ensure that all qualified retirees have a minimum  level of income. Successful Reform Requires Careful Implementation, Administration, and Public Education

The extent to which new provisions are implemented, administered, and  explained to the public may affect the outcome of the reform. To educate workers about how PAYG programs and PAYG reforms affect  them, countries including Canada, Sweden, the United Kingdom, and the  United States, send workers periodic statements concerning the program,  the record of their contributions to it, and the benefits they are projected  to receive. Early Action and Effective Management Help Strengthen National Pension Reserve Funds

Another measure often found in reform packages is the accumulation of  reserves in national pension funds with the aim of partially prefunding  PAYG pension programs. Effective Management Can Contribute to Financial Sustainability

Examples from several countries reveal that prefunding with national  pension reserve funds is less likely to be effective in helping assure that  national pension programs are financially sustainable if these funds are  also used for purposes other than supporting the PAYG program. Some  countries have used funds to pursue industrial, economic, or social  objectives. Individual Account Reforms Show the Importance of Funding Decisions and Benefit Adequacy

Countries that have adopted individual account reforms—which may also  help prefund future retirement income—offer lessons about financing the  existing PAYG pension program as the accounts are established. To  manage this transition period these countries have expanded public debt,  built up budget surpluses in advance of implementation, reduced or  eliminated the PAYG program, or used some combination of these  approaches. Approach to Funding Individual Accounts Affects Sustainability of National Pension System

The experiences of other countries demonstrate the importance of  considering how individual accounts may affect the long-term and short- term financing of the national pension system and the economy as a  whole. Some countries transferred funds from  general budget revenues to help pay benefits to current and near retirees,  expanding public borrowing. Some countries  set a guaranteed rate of return to reduce certain investment risks and help  ensure adequacy of benefits. Additionally, as investment options have expanded, some countries have  incorporated other protections. In the United Kingdom,  for example, regulations capping fees may have discouraged some  providers from offering pension funds. Many countries restrict the number of times an individual can  switch. That is why  reforms in one country are not easily replicated in another, or if they are,  may not lead to the same outcome. Although some pension reforms were undertaken too recently to  provide clear evidence of results, the experiences of other developed  countries do suggest some lessons for U.S. deliberations on Social  Security’s future. Appendix I: Scope and Methodology

We reviewed national pension reforms that occurred since 1970 in all   30 Organisation for Economic Co-operation and Development (OECD)  countries and Chile. On the basis of our preliminary research, we  identified three types of reform—adjustments to the existing pay-as-you-go  (PAYG) program, national pension reserve funds, and individual account  programs—that illustrate a variety of circumstances and experiences with  national pension reform across these countries. We did, however, draw some lessons based on our  review, as well as including the lessons that others have drawn. Table 7 provides information on individual account programs that  countries have adopted as part of their mandatory national pension  systems.
Why GAO Did This Study

Many countries, including the United States, are grappling with demographic change and its effect on their national pension systems. With rising longevity and declining birthrates, the number of workers for each retiree is falling in most developed countries, straining the finances of national pension programs, particularly where contributions from current workers fund payments to current beneficiaries--known as a pay-as-you-go (PAYG) system. Although demographic and economic challenges are less severe in the United States than in many other developed countries, projections show that the Social Security program faces a long-term financing problem. Because some countries have already undertaken national pension reform efforts to address demographic changes similar to those occurring in the United States, we may draw lessons from their experiences. The current and preceding Chairmen of the Subcommittee on Social Security of the House Committee on Ways and Means asked GAO to study lessons to be learned from other countries' experiences reforming national pension systems. GAO focused on (1) adjustments to existing PAYG national pension programs, (2) the creation or reform of national pension reserve funds to partially prefund PAYG pension programs, and (3) reforms involving the creation of individual accounts. We received technical comments from SSA, Treasury, the OECD, and other external reviewers.

What GAO Found

All countries in the Organisation for Economic Co-operation and Development (OECD), as well as Chile, have, to some extent, altered their national pension systems, consistent with their different economic and political conditions. While changes in one country may not be easily replicated in another, countries' experiences may nonetheless offer potentially valuable lessons for the United States. Countries' experiences adjusting PAYG national pension programs highlight the importance of considering how modifications will affect the program's financial sustainability, its distribution of benefits, and the incentives it creates. Also, how well new provisions are implemented, administered, and explained to the public may affect the outcome of the reform. Most of the countries GAO studied both increased contributions and reduced benefits, often by increasing retirement ages. Generally, countries included provisions to help ensure adequate benefits for lower-income groups, though these can lessen incentives to work and save for retirement. Countries with national pension reserve funds designed to partially pre-fund PAYG pension programs provide lessons about the importance of early action and sound governance. Some funds that have been in place for a long time provide significant reserves to strengthen the finances of national pension programs. Countries that insulate national reserve funds from being directed to meet nonretirement objectives are better equipped to fulfill future pension commitments. In addition, regular disclosure of fund performance supports sound management and administration and contributes to public education and oversight. Countries that have adopted individual account programs--which may also help prefund future retirement income--offer lessons about financing the existing PAYG pension program as the accounts are established. Countries that have funded individual accounts by directing revenue away from the PAYG program while continuing to pay benefits to PAYG program retirees have expanded public debt, built up budget surpluses in advance, cut back or eliminated the PAYG programs, or taken some combination of these approaches. Because no individual account program can entirely protect against investment risk, some countries have adopted individual accounts as a relatively small portion of their national pension system. Others set minimum rates of return or provide a minimum benefit, which may, however, limit investment diversification and individuals' returns. To mitigate high fees, which can erode small account balances, countries have for example capped fees or centralized the processing of transactions. Although countries have attempted to educate individuals about reforms and how their choices may affect them, studies in some countries indicate that many workers have limited knowledge about their retirement prospects.