Individual Accounts in Other Countries

By Kritzer, Barbara E. | Social Security Bulletin, January 1, 2005 | Go to article overview

Individual Accounts in Other Countries


Kritzer, Barbara E., Social Security Bulletin


The United States is currently engaged in a national discussion about whether to make personal accounts a part of Social Security. To date, 31 other countries have implemented some type of individual, or personal, account as part of their mandatory retirement income systems. This article identifies those countries, categorizes how the individual accounts fit into their retirement income systems, and identifies some basic characteristics of the accounts. The article also mentions a number of other countries that have either passed legislation that has not yet been implemented or are considering adopting individual accounts.

For this discussion, the term individual account will be used to describe plans in other countries that include some type of personal retirement account. Because this analysis of individual accounts is intended to inform the current U. S. debate involving Social Security, the discussion is limited to countries in which such accounts are part or all of a mandatory retirement income program.

What Is an Individual Account?

The International Social Security Association classifies an individual account as "an arrangement in which capital belonging to an individual person accumulated from mandatory or voluntary contributions is recorded so that it may be withdrawn in the case of certain specified future contingencies" (ISSA and INPRS 2003).

Many countries have voluntary retirement income plans in addition to the mandatory system. The United States has many examples of such plans. Individual retirement accounts allow workers to contribute a certain amount per year to an individual account with the financial institution of their choice. Employees and sometimes employers contribute to 401(k) plans, which provide a range of investment choices offered by the employer. Defined contribution plans can be considered individual accounts, as can some hybrid plans, since they combine the features of defined benefit and defined contribution plans. However, these plans are not part of the formal Social Security system.

Individual accounts may form the basis of a country's retirement system or may serve as a complement to the basic public program. In some countries, workers are required to contribute to an individual account. In others, workers may choose whether to have an individual account, but they may not opt out of the larger system of which the individual account is a part.

Types of Individual Accounts

Individual accounts may be divided into three categories:

* individual,

* occupational, and

* notional.

"In the popular pension discussion," as Holzmann and Palacios (2001,2) report, '"individual accounts' are often used as short hand for funded, privately managed defmed-contribution type pension arrangements." In this approach, which was pioneered in Chile, each worker (and sometimes the employer) is required to contribute a certain percentage of earnings to an individual account with a public or private asset manager. At retirement, the benefit is based on the insured's contributions plus returns on investments minus administrative fees. This type of account may be called an individual retirement program. In some countries, like the United Kingdom, they are called personal pensions.

Variations on this approach-with some form of public pay-as-you-go program and individual accounts as another component-are called mixed systems. Participation is mandatory and may include a choice between an individual account and an earnings-related program. A few Latin American countries have adopted the Chilean approach, and many Latin American and Central and Eastern European countries have set up mixed systems.

Some countries maintain individual accounts as part of mandatory occupational pension plans that are set up by either an employer or group of employers and are sometimes connected to labor groups such as trade unions. The employer (and sometimes the employee) is required to contribute a percentage of payroll (Yermo 2002). …

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