Although the number of workers for every elderly  person in the U.S. has been relatively stable over the past few decades, it  has already fallen substantially in other developed countries. Several countries are preparing to pay future benefits by either  supplementing or replacing their PAYG programs. For example, some have  set aside and invested current resources in a national pension reserve fund  to partially pre-fund their PAYG program. National pension reserve funds. These are set up to partially pre-fund  PAYG national pension programs. Individual accounts. We are applying GAO’s Social Security reform criteria to the experiences  of countries that are members of the OECD as well as Chile, which  pioneered individual accounts in 1981. For example, Hungary and Poland were undergoing large  political and economic transformations as they reformed their national  pension systems. In addition to the adjustments that countries have made to their existing  PAYG systems, many countries have undergone other changes as well,  indicating that change may not be a one-time experience. Adjustments to Existing PAYG Programs Show Importance of Sustainability, Safety Nets, and Incentives to Work and Save

The experiences of the countries that have adjusted their existing PAYG  national pension programs highlight the importance of considering how  modifications will affect the program’s financial sustainability, its  distribution of benefits, the incentives it creates, and the extent to which  the public understands the new provisions. PAYG Adjustments Prove Important to Financial Sustainability

To reconcile PAYG program revenue and expenses, nearly all the  countries we studied have decreased benefits and most have also  increased contributions, often in part by increasing retirement ages. Maintenance of a Safety Net and Work and Saving Incentives Proved Important

All of the countries have included in their reforms provisions to 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. Implementation, Administration, and Public Education Are Important

The extent to which new provisions are implemented, administered, and  explained to the public may affect the outcome of the reform. Early Action and Effective Management Help Make National Pension Reserve Funds Successful

Another type of pension reform is the accumulation of reserves in national  pension funds, which can contribute to the system’s financial  sustainability depending on when the funds are created or reformed and  how they are managed. These resources are expected to  make significant contributions to the long-term finances of national  pension programs. Individual Account Reforms Show the Importance of Funding Decisions and Ensuring Benefit Adequacy

Countries that have adopted individual account programs—which may  also help pre-fund future retirement income—offer lessons about  financing the existing PAYG pension program as the accounts are  established. Some countries manage this transition period by expanding  public debt, building up budget surpluses in advance of implementation,  reducing or eliminating the PAYG program, or some combination of these. Approach to Funding Individual Accounts Affects Sustainability of National Pension System

It is important to consider how different approaches to including  individual accounts may affect the short-term and long-term financing of  the national pension system and the economy as a whole. These guarantees may, however, result in  limited investment diversification with a potentially negative impact on  returns. In  the UK, for example, regulations capping fees may have discouraged some  providers from offering pension funds. Some countries have  done a better job of providing fund performance information than others. Though one common goal behind  reform efforts everywhere is to improve financial sustainability, countries  have adopted different approaches depending on their existing national  pension system and the prevailing economic and political conditions. Although some pension reforms were undertaken too recently to provide  clear evidence of results, the experiences of other countries may suggest  some lessons for U.S. deliberations on Social Security reform.
Why GAO Did This Study

Many countries, including the United States, are grappling with demographic change and its effect on their national pension systems. 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 U.S. 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 U.S., we may draw lessons from their experiences. The Chairman of the Subcommittee on Social Security of the House Committee on Ways and Means asked GAO to testify on preliminary results of ongoing work on lessons learned from other countries' experiences reforming national pension systems. GAO focuses on (1) adjustments to existing PAYG national pension programs, (2) the creation or reform of national pension reserve funds to partially pre-fund PAYG pension programs, and (3) reforms involving the creation of individual accounts.

What GAO Found

Based on preliminary work, all countries in the Organisation for Economic Co-operation and Development (OECD), as well as Chile, have, to some extent, reformed their national pension systems, consistent with their different economic and political conditions. While reforms in one country may not be easily replicated in another, their experiences may nonetheless offer lessons for the U.S. 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, the incentives it creates, and public understanding of the new provisions. Nearly all of the countries we are studying reduced benefits, and most have also increased contributions, often by increasing statutory retirement ages. Countries included provisions to ensure adequate benefits for lower-income groups, though these can lessen incentives to work and save for retirement. Also, how well new provisions are implemented, administered, and explained to the public may affect the outcome of the reform. 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. 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 other social and political 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 pre-fund 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 some combination of these. 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 capped fees, centralized the processing of transactions, or encouraged price competition. Although countries have attempted to educate individuals about reforms and how their choices may affect them, some studies indicate that many workers have limited knowledge about their retirement prospects.