Individual Accounts for Social Security Reform: International Perspectives on the U.S. Debate

Individual Accounts for Social Security Reform: International Perspectives on the U.S. Debate

Individual Accounts for Social Security Reform: International Perspectives on the U.S. Debate

Individual Accounts for Social Security Reform: International Perspectives on the U.S. Debate

Synopsis

Individual accounts can be categorized with respect to the incentive for their provision or with respect to their relationship to social security pensions. Combining these two approaches, social security reform using individual accounts can occur five different ways: (1) voluntary carve-outs that partially replace social security, (2) voluntary carve-outs that fully replace social security, (3) mandatory add-ons to social security through legal requirements, (4) mandatory carve-outs that partially replace social security, (5) mandatory carve-outs that fully replace social security. Of these approaches, this book, in the context of possible U. S. reforms, focuses on three: voluntary carve-outs that partially replace social security, mandatory add-ons, and mandatory carve-outs that partially replace social security. One of the themes of the book is that the effects of individual accounts depend on which type of accounts are being considered. It is important to distinguish between add-ons and carve-outs. Another dimension of the structure of individual accounts is their financial management. For either add-on or carve-out accounts, individual accounts can be managed at least three ways: the Chilean model, the Australian model, and the Swedish model. This book focuses on the Chilean and Swedish models of financial management as being the approaches most relevant for the United States to consider.

Excerpt

Defined contribution pension plans providing workers with individual accounts dominate pension plan growth worldwide. Contributions are made into the accounts, usually by workers and sometimes by employers. the return on the investment of the funds is credited to the account. the participating worker usually has some choice over the investment of the account and bears the resulting financial risk. At retirement, the participant can convert the account balance to an annuity, receive it as a lump sum, or take benefits through phased withdrawals, depending on the rules governing the plan.

As recently as the early 1980s, defined contribution plans were an unimportant source of retirement income. in contrast, defined benefit plans have traditionally been the plan chosen by most countries for social security and by most employers who provide pensions for their employees. Such plans provide benefits determined by a formula that usually takes into account the worker's earnings and years of service. the risk associated with the financing that underlies defined benefit plans is not borne by the worker but by the plan sponsor or an insurance company. While there has been impressive growth in the number of countries that have adopted mandatory defined contribution plans, social security programs worldwide are still dominated by defined benefit plans.

As the popularity of mandatory defined contribution plans has spread, the names by which such plans are called have multiplied. Those names, which have political significance, differ in focus as to what element of the plan is stressed; some examples include personal retirement accounts, retirement savings accounts, private accounts, and individual accounts. This book follows the terminology used in publications of the National Academy of Social Insurance and refers to them as individual accounts.

Countries have adopted mandatory individual accounts primarily in Latin America and in Central and Eastern Europe, where the predecessor social security plans faced serious financial problems, but Hong . . .

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.