Income Protection for the Aged in the 21st Century: A Framework to Help Inform the Debate

By Wheeler, Peter M.; Kearney, John R. | Social Security Bulletin, Summer 1996 | Go to article overview

Income Protection for the Aged in the 21st Century: A Framework to Help Inform the Debate


Wheeler, Peter M., Kearney, John R., Social Security Bulletin


It is becoming increasingly difficult worldwide for the aged to sustain a minimum level of income protection into retirement. Rapidly aging populations and lower fertility rates are creating serious fiscal strains on current social insurance systems. A report issued by the World Bank maintains that countries whose primary mechanism for providing old-age income protection is a publicly managed social insurance system will experience significant difficulties unless they make structural changes in their programs. Actuarial estimates indicate that benefit payments in the United States could in fact exceed income to the Old-Age and Survivors Insurance (OASI) Trust Fund by 2029 and a variety of proposals to address this problem are being advanced. We suggest a framework to evaluate such proposals based on a set of core values (fairness, adequacy, and efficiency) and analyze some of the proposed changes both in relation to how they have been employed in other countries and within the context of the framework. The purpose of this article is to inform and help structure a most important debate.

Introduction

The advent of industrialization in Europe and the United States during the latter part of the l9th century brought with it mass migrations to urban centers and the decline of the family as the primary means of support for the aged. The first national contributory old-age insurance scheme was established in Germany in 1889 and, by the turn of the century, many European countries were debating whether to establish broadly based contributory old-age insurance or narrower means-tested noncontributory plans. Over the next few decades, most countries opted for partially funded national contributory plans with the modest goal of providing the aged with a bare level of subsistence. The sharp growth in real income during the years following World War II led many countries to legislate substantial increases in the amounts of old-age pensions.

It was not until 1935 that the United States introduced a formal national income protection program for the aged. Prior to the Great Depression of 1929, there was a growing market for private retirement annuities in the United States and no public mandate existed for the establishment of the type of government sponsored social security system that had been set up in many European countries. However, the numerous bank failures and widespread loss of private savings that occurred during the Great Depression led to greater political acceptance of the idea of a government sponsored program. After much debate, a government administered, contributory social insurance system, financed on a payas-you-go (PAYG) basis, was created.

The system was designed to permit the initiation of benefit payments at the earliest possible date. Since it allowed for payment of benefits to retirees funded either partially or entirely from the contributions of current workers, PAYG financing provided the means to start paying benefits in only a few years after the system was created. Nevertheless, it was an earnings-based system and work incentives were included from the very beginning. The more a worker contributed to the system, the larger his or her benefit would be. As with the programs in many European countries, benefits have become more generous over the years.

The task of providing adequate income protection for the aged, however, is becoming increasingly difficult not only in the United States and Europe, but throughout the world. The aged (age 60 or older) population worldwide will grow from half a billion in 1990 to 1.5 billion in 2050.' Due to advances in medical knowledge and changes in lifestyles, most of the growth will occur in developing countries. Nevertheless, the proportion of the population that is aged will continue to be highest in the more economically developed countries that are part of the Organization for Economic Cooperation and Development (OECD).2 The proportion of the U. …

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