Lessons from US financial history 1
All major industrial countries face problems connected with population aging. Depressed birth rates and rising longevity have increased the aged dependency ratio throughout the industrialized world. Demographic projections of the United Nations suggest that the percentage of people past age 65 in developed countries will double over the next five decades, and the ratio of aged dependents to working-age people will climb steeply.
As populations in the rich countries grow older, the cost of paying for pension and health benefits must rise, boosting tax burdens and threatening the government's ability to finance other obligations. Only one G7 country, the UK, has overhauled its public pensions in a way that is likely to hold down future spending to a level that is comparable to today's. The favorable outlook for British public pensions is the result of policies that tightly restrain growth in basic public benefits and strongly encourage active workers to abandon the second-tier, earnings-related public program in favor of private pensions. Future retirees are expected to derive much more of their retirement income from privately managed and invested pension accounts rather than the public pay-as-you-go system. Other leading industrial countries still face major challenges in paying for or fundamentally reforming their main public pension programs (Bosworth and Burtless 1998).
Policymakers in a few rich countries show interest in following the British example and replacing part or all of their public systems with private pensions organized around individual retirement accounts. Champions of this reform point to the experience of Chile, where a costly and failing public system was replaced by a less expensive private system in the early 1980s. So far, Chile's private pension system has received high marks for sound administration, good returns, and broad political acceptance. Some may wonder whether the experience of a country that scrapped its public pension system while under the sway of a military dictatorship is relevant to democratic states. Nonetheless, the expected surge in public