Report to Congressional Requesters

United States Government Accountability Office

GAO

October 2005 SOCIAL SECURITY 

REFORM 

Other Countries’ 

Experiences Provide 

Lessons for the United 

States 

GAO-06-126 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

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Highlights of GAO-06-126, a report to 

congressional requesters 

October 2005

SOCIAL SECURITY REFORM 

Other Countries' Experiences Provide 

Lessons for the United States 

All countries in the Organisation for Economic Co-operation and 

Development (OECD), as well as Chile, have, to some extent, altered their 

national pension systems, consistent with their different economic and 

political conditions. While changes in one country may not be easily 

replicated in another, countries’ experiences may nonetheless offer 

potentially valuable lessons for the United States. 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, and the incentives it creates. Also, 

how well new provisions are implemented, administered, and explained to 

the public may affect the outcome of the reform. Most of the countries GAO 

studied both increased contributions and reduced benefits, often by 

increasing retirement ages. Generally, countries included provisions to help 

ensure adequate benefits for lower-income groups, though these can lessen 

incentives to work and save for retirement. 

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. Some 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 nonretirement 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 prefund 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 taken some combination of these 

approaches. 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 

for example capped fees or centralized the processing of transactions. 

Although countries have attempted to educate individuals about reforms and 

how their choices may affect them, studies in some countries indicate that 

many workers have limited knowledge about their retirement prospects. 

Many countries, including the United 

States, are grappling with 

demographic change and its effect on 

their national pension systems. With 

rising longevity and declining 

birthrates, 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 

United States 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 United States, we may draw 

lessons from their experiences. 

The current and preceding Chairmen 

of the Subcommittee on Social 

Security of the House Committee on 

Ways and Means asked GAO to study 

lessons to be learned from other 

countries’ experiences reforming 

national pension systems. GAO 

focused on (1) adjustments to existing 

PAYG national pension programs, 

(2) the creation or reform of national 

pension reserve funds to partially 

prefund PAYG pension programs, and 

(3) reforms involving the creation of 

individual accounts.

We received technical comments 

from SSA, Treasury, the OECD, and 

other external reviewers. 
Page i GAO-06-126 Social Security Reforms Abroad 

Letter 1

Results in Brief 3 

Background 5 

Adjustments to Existing PAYG Programs Show Importance of 

Sustainability, Safety Nets, and Incentives to Work and Save 10 

Early Action and Effective Management Help Strengthen National 

Pension Reserve Funds 16 

Individual Account Reforms Show the Importance of Funding 

Decisions and Benefit Adequacy 20 

Concluding Observations 30 

Agency Comments 31 

Appendix I Scope and Methodology 33 

Methodology 33 

Appendix II Information on OECD Countries and Chile, Their 

Pension Systems, and Reforms 36 

Appendix III GAO Contact and Staff Acknowledgments 57 

Glossary 58 

Tables 

Table 1: Countries’ National Pension Reforms—1970-2004 9 

Table 2: Countries Undertaking Selected Types of Adjustments to 

their PAYG Pensions—1970-2004 12 

Table 3: Background on OECD Countries and Chile 37 

Table 4: Information concerning Countries’ National Pension 

Systems 40 

Table 5: Examples of Adjustments to PAYG Programs, 1970-2004 45 

Table 6: National Pension Reserve Fund Reforms 52 

Table 7: Individual Account Reforms 54 

Contents 
Page ii GAO-06-126 Social Security Reforms Abroad 

Figure 

Figure 1: National Pension Reserve Funds as a Percentage of GDP 20 

Abbreviations 

GDP gross domestic product 

ILO International Labour Organization 

NDC notional defined contribution 

OECD Organisation for Economic Co-operation and Development 

PAYG pay-as-you-go 

SSA Social Security Administration 

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Page 1 GAO-06-126 Social Security Reforms Abroad 

October 21, 2005 

The Honorable Jim McCrery 

Chairman 

Subcommittee on Social Security 

Committee on Ways and Means 

House of Representatives 

The Honorable E. Clay Shaw, Jr. 

House of Representatives 

Many countries, including the United States, are grappling with 

demographic change and its effect on their national pension systems and 

long-term fiscal posture. With increasing longevity and declining 

birthrates, the number of workers for each retiree is falling in most 

developed countries. These trends can strain the finances of national 

pension programs, particularly those in which contributions from current 

workers fund payments to current beneficiaries—a form of financing 

known as pay-as-you-go (PAYG). Demographic and economic challenges 

are less severe in the United States than in many other developed 

countries—the birthrate is not as low, people are more likely to stay in the 

labor force for a greater number of years, and immigration continues to 

provide young workers. Yet projections show that the Social Security 

program faces a significant long-term financing problem. Because some 

countries have already undertaken national pension reform efforts to 

address demographic changes similar to those occurring in the United 

States, their experiences can provide lessons for U.S. policymakers. 

To assist the Subcommittee in its deliberations concerning Social 

Security’s future, you asked us to review the experiences of other 

developed nations and highlight lessons that can be learned from their 

various approaches to national pension reform. Historically, developed 

countries have had national pension systems that included some form of a 

PAYG pension program. Countries have typically undertaken quite 

different approaches to reforming their pension systems. These reforms 

fall into three broad categories—adjustments to PAYG programs 

(decreased benefits or increased contributions),1

 efforts to set aside funds 

 1

Generally, changes in contributions made to a national pension program means changes in 

the tax rate on individuals or employers. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-06-126 Social Security Reforms Abroad 

to help pay future benefits through a national reserve fund, and efforts to 

prefund retirement income through contributions to individual accounts. 

Accordingly, our objectives were to examine the lessons that can be 

drawn from countries that have (1) adjusted their existing PAYG national 

pension systems, (2) adopted national pension reserve funds to help 

finance their national pension systems, and (3) adopted individual account 

reforms to their national pension systems. 

To address these objectives, we studied the experiences of the countries 

that constitute the Organisation for Economic Co-operation and 

Development (OECD), plus Chile, the nation that pioneered the use of 

individual accounts.2

 As part of our analysis, we assessed both the extent 

to which another country’s circumstances are similar enough to those in 

the United States to provide a useful example and the extent to which 

particular approaches to pension reform were considered to be 

successful.3

 We aligned our lessons with the criteria GAO developed for 

evaluating domestic Social Security reform proposals—fiscal 

sustainability, adequacy and equity, and implementation and 

administration of reform.4

 At the same time, drawing lessons from other 

countries’ experiences requires recognition that countries have different 

starting points, including unique economic and political environments, and 

that availability of other sources of retirement income, such as 

occupational pensions, also varies greatly. Therefore, reforms in one 

country may not be easily replicated in another or may not lead to the 

same outcome. 

Our review included interviews with, and analysis of materials provided 

by, officials and interest group representatives in Washington, D.C.; Paris; 

and London. We met with pension experts and country specialists at the 

OECD as well as French and British experts. In addition, we drew from 

interviews conducted by GAO with Chilean officials in 2002. We conducted 

 2

The OECD is a forum for the governments of 30 countries to work together on economic, 

social, environmental, and governance issues through their commitment to democratic 

government and the market economy. The OECD works to promote economic growth, 

financial stability, trade and investment, technology, innovation, and development 

cooperation. 

3

For additional information concerning Social Security reform in the United States, see 

GAO, Social Security Reform: Answers to Key Questions, GAO-05-193SP (Washington, 

D.C.: May 17, 2005). 

4

See GAO, Social Security: Criteria for Evaluating Social Security Reform Proposals, 

GAO/T-HEHS-99-94 (Washington, D.C.: Mar. 25, 1999). 
Page 3 GAO-06-126 Social Security Reforms Abroad 

our review between August 2004 and September 2005 in accordance with 

generally accepted government auditing standards. For additional 

discussion of our scope and methodology, see appendix I. We also include 

a glossary of key terms in the back of this report. 

With respect to adjustments to PAYG programs, the experiences of the 

countries we studied 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. To reconcile PAYG program 

revenue and expenses, most OECD countries have both increased 

contributions and reduced benefits, often in part by increasing retirement 

ages. Although several countries have yet to make their programs 

financially sustainable, some have come close to doing so. According to 

OECD economists, some countries (Sweden and Italy, for example) have 

succeeded in large part by automatically linking benefits to factors such as 

worker contributions, changes in demographics, and growth in the 

national economy. Generally, the countries that have come closest to 

achieving sustainability have also undertaken other types of reform, such 

as the individual account programs in Sweden and Australia. These 

reforms may, however, substantially reduce benefits promised originally, 

leaving future retirees with benefits that replace a lower portion of their 

earnings than those provided to earlier generations or make them payable 

beginning at a later age. Other countries’ adjustments to their existing 

PAYG programs have had mixed results for the programs’ solvency, and 

debate continues about additional reforms to reduce benefits or increase 

revenue. This is the case in France and Germany, for example. Often 

countries have included in their reforms provisions to help ensure 

adequate benefits for lower-income groups. In certain cases, however, 

such provisions lessen incentives to work and save for retirement, and can 

weaken the country’s economy over time. In addition, the way in which 

new provisions are implemented, administered, and explained to the 

public affects the outcome of the reform. For example, most countries 

phase in changes to the national pension programs, such as changing the 

retirement age over a certain period of time. Governments such as the 

United Kingdom have had only limited success in efforts to educate 

workers about changes in provisions that will affect their retirement 

income. 

Where countries created national reserves to partially prefund PAYG 

pension programs, many lessons can be drawn, including the importance 

of early action and sound governance. In some countries where 

Results in Brief 
Page 4 GAO-06-126 Social Security Reforms Abroad 

requirements for prefunding through national reserves have been in place 

for a long time and have been complemented by other reform measures, 

significant amounts of money have already accumulated.5

 These are 

projected to help make substantial contributions to the financial 

sustainability of national pension programs. While acting early in setting 

up national reserve funds helps maintain adequate benefits and distribute 

pension costs more equitably across generations, governing these funds in 

the interest of participants is also crucial. Countries that insulate national 

reserve funds from being directed to meet nonretirement objectives are 

better equipped to fulfill their future pension commitments. Some 

countries have legislated specific starting dates for drawing down national 

funds to resist demands for their immediate use. Effective governance of 

national funds also requires that governments commit to making regular 

transfers into these funds. Countries that count on budget surpluses to 

finance their reserve funds will need strong and sustained budgetary 

discipline to accumulate enough reserves to prepare for future pension 

spending requirements. Moreover, where transfers to national funds are 

limited to social security surpluses, reserve funds may not grow 

sufficiently to help national pension systems become solvent. In addition, 

regular disclosures of fund performance help achieve transparency in 

management and administration and contribute to public education and 

oversight. 

The countries adopting individual account reforms offer lessons about the 

importance of addressing the financial solvency of existing PAYG pension 

systems as the accounts are established. Countries adopting individual 

accounts face the common challenge of how to pay for both a new funded 

pension and an existing PAYG pension simultaneously. Some countries did 

this by expanding public debt, building up budget surpluses, cutting back 

or eliminating the PAYG system, or using some combination of these 

approaches. Additionally, two countries, Australia and Switzerland, used 

new sources of funding to add individual accounts to their existing system. 

Because no individual account program can fully protect individuals from 

investment risk, some countries protect the overall level of benefits. For 

example, some have adopted individual accounts as a relatively small 

portion of their national pension system. Others that rely more heavily on 

 5

Asset allocation varies greatly across countries. The U.S. Social Security Trust Fund, for 

example, is exclusively invested in nonmarketable government securities; on the other 

hand, countries such as Canada and Sweden invest a large fraction of their reserve fund 

assets in equities. Moreover, several countries, such as New Zealand, diversify their 

portfolios to include a significant portion of foreign shares. 
Page 5 GAO-06-126 Social Security Reforms Abroad 

individual accounts, including Chile and Australia, set minimum rates of 

return or provide a minimum benefit. While these provisions are intended 

to protect individuals, they may also have unintended consequences. For 

example, guaranteed rates of return imposed on fund managers in some 

countries have been done in a way that may limit investment 

diversification and variation in individuals’ returns (in Chile and 

Switzerland, for example). In addition, important lessons can be learned 

regarding the administration of individual accounts, including the need for 

effective regulation and supervision of the financial industry to minimize 

investment risks that individuals face. To mitigate high fees that can erode 

small account balances, some countries have capped the level of 

administrative fees. Information about individual accounts should be 

provided to help individuals make informed decisions about their 

retirement savings. Some countries have done a better job than others in 

providing information about their individual account programs. 

Additionally, although studies in some countries indicate that many 

individuals have only limited knowledge about their retirement prospects, 

several countries have programs to provide information on investment 

choices and retirement income options, such as annuities. The 

effectiveness of these programs is unclear, however. 

We received technical comments from the Social Security Administration, 

the Department of Treasury, the OECD, and other external reviewers and 

incorporated them where appropriate. 

The U.S. Social Security program’s projected long-term financing shortfall 

stems primarily from the fact that people are living longer and having 

fewer children. As a result, the number of workers paying into the system 

for each beneficiary is projected to decline. A similar demographic trend is 

occurring or will occur in all OECD countries. (See table 3 in app. II for 

demographic and other characteristics of OECD countries and Chile.) 

Although the number of workers for every elderly person (aged 65 and 

over) in the United States has been relatively stable over the past few 

decades, this ratio has already fallen substantially in other developed 

countries. The number of workers for every elderly person in the United 

States is projected to fall from 4.1 in 2005 to 2.9 in 2020 and to 2.2 in 2030. 

In nine of the OECD countries, this number has already fallen below the 

Background 
Page 6 GAO-06-126 Social Security Reforms Abroad 

level projected for the United States in 2020.6 These decreases in the 

projected number of workers available to support each retiree could have 

significant effects on countries’ economies, particularly during the period 

from 2010 to 2030. These effects may slow growth in the economy and 

standards of living, and increase costs for aging-related government 

programs. Long run demographic projections are imprecise, however, due 

to uncertainty about future changes in longevity, for example. 

Although social security programs in all OECD countries and Chile 

provide benefits for qualified elderly people, survivors, and the disabled, 

the programs differ in many respects across the countries. In some 

countries, “social security” refers to a wide range of social insurance 

programs, including health care, long-term care, workers’ compensation, 

unemployment insurance, and so forth. To generalize across countries, we 

use “national pensions” to refer to mandatory countrywide pension 

programs providing old-age pensions. We use “Social Security” to refer to 

the U.S. Old-Age, Survivors, and Disability Insurance Program, since that is 

how the program is commonly known. 

Although nearly all OECD countries use contributions from workers and 

employers designated to finance pension benefits, most also use general 

revenues as a funding source. Nearly all OECD countries, including the 

United States, make pension benefits dependent on an individual’s work 

history, while several also provide benefits to all qualified residents 

whether or not they have a work history. Countries’ pension systems may 

be financed differently, use different criteria for identifying qualified 

beneficiaries, and calculate benefits in a different manner. Several OECD 

countries finance benefits to the disabled or survivors with worker or 

employer contributions designated for this purpose. Others use general 

revenue to finance these benefits or have a single fund that provides oldage pension benefits and benefits for the disabled and survivors. Some 

OECD countries provide a universal benefit of a specified amount each 

week or each month. Some adjust benefits based on time spent raising 

children, or pursuing education, as well as years spent working. Some 

 6

The Social Security Administration (SSA) uses a somewhat different ratio—the number of 

workers covered by the Social Security program for each Social Security beneficiary. In 

2004 there were 3.3 such workers for each SSA beneficiary, and SSA projects that this ratio 

will decline to 2.1 in 2031, based on the intermediate assumptions of the 2005 trustees’ 

report. SSA’s projections take into account the effects of gradual increases in retirement 

age for those born after 1937, with a retirement age of 67 for those born in 1960 or later. 

Pension and Other Social 

Insurance Programs in 

OECD Countries 
Page 7 GAO-06-126 Social Security Reforms Abroad 

national pension programs, identified as “defined benefit” programs, 

provide retirees a pension of a set amount per week or month or an 

amount calculated based on such factors specified by law as their number 

of years of work and the level of their earnings or contributions, and their 

age at retirement. Other national pension programs, identified as “defined 

contribution” programs, provide retirees income based on the 

accumulated value of contributions and investment earnings on those 

contributions. Many OECD countries have a pension system that includes 

a combination of pension programs rather than a single program, 

providing many retirees with more than one source of income. 

(See table 4 in app. II for additional information concerning countries’ 

national pension systems.) 

Voluntary occupational pension programs are common in many OECD 

member countries though the aggregate accumulated value of these 

pension funds exceeds 25 percent of gross domestic product (GDP) in 

only seven countries, including the United States, Canada, and Denmark. 

These include programs sponsored by employers, trade associations, or 

trade unions and regulated by governments; in some cases, the pensions 

provided by these programs are to some extent insured by governmental 

entities—counterparts to the Pension Benefit Guaranty Corporation in the 

United States. Tax laws in many countries encourage participation in these 

voluntary programs. Germany, for example, supplements its national 

pension system with voluntary individual “Riester” accounts, supported by 

subsidies as well as tax incentives. Our review, however, did not include 

these programs, except in the United Kingdom, where workers’ 

contributions to PAYG national pension programs are reduced if they 

choose to participate. Where these voluntary programs are prevalent, they 

can affect countries’ decisions about public pension reforms. 

Historically, developed countries have relied on some form of a PAYG 

national pension program.7

 Over time, countries have used a variety of 

approaches to respond to demographic challenges and the ensuing 

increases in expenditures for these programs. In many cases, these 

approaches provide a basic or minimum benefit as well as a benefit based 

on the level of a worker’s earnings. Several countries are preparing to pay 

 7

Some countries, such as Germany, originally had pre-funded national pension programs 

providing modest benefits, but pension reserves diminished as they increased the level of 

benefits. 

Types of National Pension 

Reform 
Page 8 GAO-06-126 Social Security Reforms Abroad 

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 prefund their PAYG program. 

Some have established fully funded individual accounts. These are not 

mutually exclusive types of reform. In fact, many countries have 

undertaken more than one of the following types of reform (see table 1 for 

the reforms OECD countries and Chile have undertaken):8

• Adjustments to existing pay-as-you-go systems. Typically, these are 

designed to create a more sustainable program by increasing contributions 

or decreasing benefits, or both, while preserving the basic structure of the 

system. Measures include phasing in higher retirement ages, equalizing 

retirement ages across genders, and increasing the earnings period over 

which initial benefits are calculated. Some countries have created notional 

defined contribution (NDC) accounts for each worker, which tie benefits 

more closely to each worker’s contributions and to factors such as life 

expectancy and the growth rate of the economy. 

• National pension reserve funds. These are set up to partially prefund 

PAYG national pension programs.9

 Governments commit to make regular 

transfers to these investment funds from, for example, budgetary 

surpluses. To the extent that these contribute to national saving, they 

reduce the need for future borrowing or for large increases in 

contributions to pay scheduled benefits. Funds can be invested in a 

combination of government securities and domestic as well as foreign 

private sector securities. Because of differences in accounting practices, 

some countries report reserve funds as part of national budgets while 

others do not include them in federal figures.10

• Individual accounts. These are fully funded accounts that are 

administered either by employers, the government, or designated third 

parties and are owned by the individual. The level of retirement benefits 

depends largely on the amount of contributions made by, or on behalf of, 

an individual into the account during his or her working life, investment 

earnings, and the amount of fees individuals are required to pay. 

 8

This list of types of reform is not comprehensive. Some countries, Norway, for example, 

recently adopted legislation requiring employers to provide pensions (usually defined 

benefit programs) for employees. 

9

A fully prefunded pension program would no longer be a PAYG system. 

10The Netherlands, New Zealand, and the United States are examples of countries that 

incorporate reserve funds into national budgets; Canada and Finland, for instance, do not. 
Page 9 GAO-06-126 Social Security Reforms Abroad 

Table 1: Countries’ National Pension Reforms—1970-2004 

Groups of countries undertaking different types of reform 

Only adjustments to PAYG 

Adjustments to PAYG and 

national pension fund 

Adjustments to PAYG and 

individual accounts 

Adjustments to PAYG, national 

pension fund, and individual accounts

Austria Belgium Australia Denmark 

Czech Republica Canada Chileb Sweden 

Italy Finland Hungary Switzerlandc

Germanyd France Icelande 

Turkey Greece Mexico 

 Ireland Poland 

 Japan Slovak Republic 

 Luxembourg United Kingdomf 

 Netherlands 

 New Zealandg 

 Norwayh 

 Portugal 

 South Korea 

 Spain 

 United States 

Source: OECD, International Social Security Association, and Social Security Administration. 

a

The Czech Republic’s defined contribution account program is not included as an individual account 

reform as it is a voluntary supplementary program. For a discussion of these accounts, see GAO, 

Social Security Reform: Information on Using a Voluntary Approach to Individual Accounts, 

GAO-03-309 (Washington, D.C.: Mar. 10, 2003), pp. 46-54. 

b

Chile is not an OECD country, but was included in our study because it pioneered individual account 

reforms. 

c

Switzerland’s mandatory occupation-based pensions provide individual accounts that accrue credits 

at least at a minimum prescribed interest rate. The program’s requirements are phrased in terms of 

individual accounts and the consulting actuaries must make an individual account calculation applying 

the differing contribution rates per age bracket in order to determine compliance with the law. But in 

fact many companies offer plans that work like defined benefit pensions. Benefits are based on the 

notional balance of the account at retirement. 

d

Germany’s Riester pension program is not included as an individual account reform because it is a 

supplement to the mandatory national pension program, rather than an alternative. For a discussion 

of these accounts, see GAO-03-309, pp. 55-63. 

e

Iceland’s mandatory occupation-based pension program allows for the creation of defined 

contribution individual accounts as a complement to defined benefit pensions. However, in practice, 

employers have not yet established these. Voluntary supplementary individual accounts are also 

available. 

f

The United Kingdom requires participation in either a state earnings-related pension program or an 

approved alternative, including an individual account. 

g

New Zealand’s national pension is technically not a PAYG program as it is funded with general 

government revenue rather than workers’ or employers’ contributions to the program. 
Page 10 GAO-06-126 Social Security Reforms Abroad 

h

Norway’s Petroleum Fund is not, by law, dedicated exclusively to future pension expenditures, but it 

is regarded as a fund to meet the future expenses of an aging society, including pensions. 

The countries that have adjusted their existing PAYG national pension 

programs demonstrate a broad range of approaches for both reducing 

benefits and increasing contributions in order to improve the programs’ 

financial sustainability. Their experiences also provide lessons about the 

potential effects of some adjustments on the distribution of benefits, 

including the maintenance of a safety net and incentives to work and save. 

They also emphasize the care required in implementing and administering 

reforms and ensuring that the public understands the new provisions. 

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. 

Generally countries with national pension programs that are relatively 

financially sustainable, based on estimated changes in spending on old-age 

pensions, have undertaken a package of several far-reaching adjustments.11

Most of the countries we studied increased program revenue by raising 

contribution rates, increasing the range of earnings or kinds of earnings 

subject to contribution requirements, or increasing the retirement age. 

Most of these countries increased contribution rates for some or all 

workers. Canada, for example, increased contributions to its Canadian 

Pension Plan from a total of 5.85 percent to 9.9 percent of wages, half paid 

by employers and half by employees. Several countries, including the 

United Kingdom, increased contributions by expanding the range of 

earnings subject to contribution requirements. 

Nearly all of the countries we studied decreased the promised level of 

benefits provided to future retirees, using a wide range of techniques. 

Some techniques reduce the level of initial benefits; others reduce the rate 

at which benefits increase during retirement or adjust benefits based on 

retirees’ financial means. 

 11OECD has assessed the financial sustainability of most OECD member countries’ pension 

systems by projecting the change in spending needed to support the old-age pension 

programs through 2050. For details, see table 4 in app. II. 

Adjustments to 

Existing PAYG 

Programs Show 

Importance of 

Sustainability, Safety 

Nets, and Incentives 

to Work and Save 

PAYG Adjustments Prove 

Key to Financial 

Sustainability 
Page 11 GAO-06-126 Social Security Reforms Abroad 

• Increased years of earnings. To reduce initial benefits, several countries 

increased the number of years of earnings they consider in calculating an 

average lifetime earnings level. France previously based its calculation on 

10 years but increased this to 25 years for its basic public program. Austria 

is gradually increasing the number of years from 15 to 40 years. 

• Increased minimum years of contributions. Another approach is to 

increase the minimum number of years of creditable service required to 

receive a benefit. France increased the required number of years from 

37.5 to 40 years. Belgium is increasing its minimum requirement for early 

retirement from 20 to 35 years. 

• Changed formula for calculating benefits. Another approach to 

decreasing the initial benefit is to change the formula for adjusting prior 

years’ earnings. Countries with traditional PAYG programs all make some 

adjustment to the nominal amount of wages earned previously to reflect 

changes in prices or wages over the intervening years. Although most of 

the countries we studied use some kind of average wage index, others, 

including Belgium and France, have adopted the use of price indexes. The 

choice of a wage or price index can have quite different effects, depending 

on the rate at which wages increase in comparison with prices. The extent 

to which wages outpace prices varies over time and among countries. 

• Changed basis for determining year-to-year increases in benefits once 

retirement begins. In many of the countries we studied, the rate at which 

monthly retirement benefits increase from year to year during retirement 

is based on increases in prices, which generally rise more slowly than 

earnings. Others—including Denmark, Ireland, Luxembourg, and the 

Netherlands—use increases in earnings or a combination of wage and 

price indexes. Hungary, for example, changed from the use of a wage 

index to the Swiss method—an index weighted 50 percent on price 

changes and 50 percent on changes in earnings. 

• Implemented provisions that adjust benefits in response to economic 

and demographic changes. Adjustments, which link benefits to factors 

such as economic growth, longevity, or the ratio of workers to retirees, 

may contribute to the financial sustainability of national pension systems.12

Finland and Germany, for example, have adopted adjustment mechanisms 

of this kind. In some countries, such as Italy and Sweden, this approach 

 12Increases in life expectancy, decreases in birth rates, or decreases in real (inflation 

adjusted) interest rates can reduce the level of benefits that a pension program can provide 

at a given tax (contribution) rate. 
Page 12 GAO-06-126 Social Security Reforms Abroad 

takes the form of a notional defined contribution program. Italian and 

Swedish workers have “notional” accounts in that both the incoming 

contributions and the investment earnings exist only on the books of the 

managing institution. At retirement, the accumulated notional capital in 

each account is converted to a stream of pension payments using a 

formula based on factors such as life expectancy at the time of retirement. 

Most of the countries we studied undertook more than one of these types 

of reforms as indicated in table 2. See table 5 in appendix II for additional 

information concerning adjustments to PAYG programs. 

Table 2: Countries Undertaking Selected Types of Adjustments to their PAYG Pensions—1970-2004 

Country 

Increase in 

contribution 

rates or 

coverage 

Increase in 

retirement 

agea

 

Change in 

years of 

earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefit 

Change in 

indexation for 

benefits 

during 

retirement 

Other adjustment 

mechanisms 

linking initial level 

of benefits to 

demographic or 

economic factors 

Other 

decrease in 

benefits 

Australia X X 

Austria X X X X 

Belgium X X X 

Canada X X X X 

Chile X X 

Czech Republic X X 

Denmark X X 

Finland X X X X X 

France X X X X X 

Germany X X X X X 

Greece X X X X 

Hungary X X X X 

Iceland X 

Ireland X 

Italy X X X X X X X 

Japan X X X X X 

Luxembourg X X X 

Mexico X X 

Netherlands X X X X 

New Zealand X X 

Norway X X 

Poland X X 
Page 13 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Increase in 

retirement 

agea

 

Change in 

years of 

earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefit 

Change in 

indexation for 

benefits 

during 

retirement 

Other adjustment 

mechanisms 

linking initial level 

of benefits to 

demographic or 

economic factors 

Other 

decrease in 

benefits 

Portugal X X X 

Slovak Republic X X X X 

South Korea X X X 

Spain X X X X 

Sweden X X 

Switzerland X X 

Turkey X X X 

United Kingdom X X X X X 

United States X X X X X 

Source: OECD, International Social Security Association, and individual government sources. 

a

Generally, increasing the retirement age both increases lifetime contributions and decreases lifetime 

benefits, as people remain in the workforce for a longer period and spend a shorter period in 

retirement, without changes in monthly contribution rates or benefit amounts. 

Several countries, such as Sweden and the United Kingdom, have 

undertaken one or more of these adjustments to their PAYG programs and 

have achieved, or are on track to achieve, relative financial sustainability. 

Other countries, including France, and Germany, may need to take 

additional action to finance future benefit commitments. Generally, the 

countries that have come closest to achieving sustainability are those that 

have undergone more than one type of national pension reform. 

All of the countries we studied that reformed their PAYG pension 

programs by reducing projected benefits included provisions to help 

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.13 Most did so by providing a means-tested program that 

provides more benefits to retirees with limited financial means. Two 

countries—Germany and Italy—provide retirees access to general social 

welfare programs that are available to people of all ages rather than 

providing programs with different provisions for elderly people. 

 13The adequacy of pension benefits can be evaluated both in terms of their minimum level 

and the extent to which they replace earnings. For more information on projected 

replacement rates for OECD pensions systems, see table 4 in app. II. 

Essential Reform Elements 

Include Maintenance of a 

Safety Net and Work and 

Saving Incentives 
Page 14 GAO-06-126 Social Security Reforms Abroad 

Twelve countries use another approach to providing a safety net: a basic 

retirement benefit. The level of the benefit is either a given amount per 

month for all retirees or an amount based on years of contributions to the 

program (but not the level of earnings during those years). In Ireland, for 

example, workers who contribute to the program for a specified period 

receive a flat-rate pension equal to about 167 euros a week in 2004—

approximately one-third of average earnings.14 According to the Social 

Security Administration (SSA), Chile set a minimum pension for those 

younger than age 70 at 62.7 percent of the minimum wage in 2004. The 

United Kingdom and Belgium give low-income workers credit equivalent 

to the minimum level contribution even though their earnings were too 

low to require a contribution. Several countries give workers credit for 

years in which they were unemployed, pursued postsecondary education, 

or cared for dependents. Establishing a safety net requires a careful 

consideration of costs and incentives for working and saving. Costs can be 

high if a generous basic pension is provided to all eligible retirees 

regardless of their income. On the other hand, means-tested benefits can 

diminish incentives to work and save. The United Kingdom provides both 

a basic state pension and a means-tested pension benefit. Concern about 

the decline in the proportion of preretirement earnings provided by the 

basic state pension has led some to advocate making it more generous. 

Others argue that focusing safety net spending on those in need enables 

the government to alleviate pensioner poverty in a cost-effective manner. 

Prior to 2003, retirees in the United Kingdom received a means-tested 

benefit that brought their income up to a guaranteed minimum retirement 

income level. This benefit left those retirees with low to moderate incomes 

no financial incentive to work or save, because additional income was 

offset by equal reductions in the means-tested benefit.15 To help remedy 

this, the United Kingdom introduced the savings credit, which provides a 

supplementary benefit equal to a portion of an individual’s additional 

income within a range near the guaranteed retirement income level. This 

new benefit increases, but does not fully restore, the incentive to work and 

save because a portion of the additional income is lost through reductions 

in pension income. If, for example, a retiree with pre-benefit income of 

 14This was the equivalent of about $203 a week in mid-2004. To qualify for this basic benefit, 

the retiree must have 260 weeks of paid contributions, with an annual average of at least 

48 weeks of paid or credited contributions. 

15The lack of a financial incentive applies up to the point at which the retiree has sufficient 

income or assets that they no longer qualify for the benefit. 
Page 15 GAO-06-126 Social Security Reforms Abroad 

$700 a month increases this income to $800 a month, his or her total 

retirement income including these means-tested benefits would increase 

by $60, from $892 to $952. The proportion of United Kingdom pensioners 

eligible for these means-tested benefits is expected to rise. The United 

Kingdom Pensions Commission projects that unless current pension rules 

are changed, almost 65 percent of retiree households will be eligible for 

these means-tested benefits by 2050, because the increases in the Basic 

State Pension are linked to prices, but increases in other components of 

the United Kingdom’s pension system are linked to earnings. 

The extent to which new provisions are implemented, administered, and 

explained to the public may affect the outcome of the reform. Although 

many adjustments to PAYG programs are not difficult to implement and 

administer, some more complex reforms, such as the development of a 

notional defined contribution program, can be challenging. Poland, for 

example, adopted NDC reform in 1999, but the development of a data 

system to track contributions has been problematic. As of early 2004, the 

system generated statements documenting contributions workers made 

during 2002, but there was no indication of what workers had contributed 

in earlier years or to previous pension programs. Without knowing how 

much they have in their notional defined accounts, workers may have a 

difficult time planning for their retirement. Additionally, countries 

typically phase in certain changes, such as increasing the retirement age. 

This could help to provide workers with enough time to understand how 

the changes to the pension program will affect their retirement income. 

To educate workers about how PAYG programs and PAYG reforms affect 

them, countries including Canada, Sweden, the United Kingdom, and the 

United States, send workers periodic statements concerning the program, 

the record of their contributions to it, and the benefits they are projected 

to receive.16 To increase the likelihood that recipients will read and 

understand them, the United Kingdom provides different messages 

tailored to workers of different ages. Nonetheless, the United Kingdom has 

had limited success in efforts to educate workers about changes in 

provisions that will affect their retirement income. For example, a survey 

of women in the United Kingdom showed that only about 43 percent of 

women who will be affected by an increase in the retirement age knew the 

 16For a discussion of the understandability of benefit statements in Canada, Sweden, the 

United Kingdom and the United States, see GAO, Social Security Statements: Social 

Security Administration Should Better Evaluate Whether Workers Understand Their 

Statements, GAO-05-192 (Washington, D.C.: Apr. 1, 2005). 

Successful Reform Requires 

Careful Implementation, 

Administration, and Public 

Education 
Page 16 GAO-06-126 Social Security Reforms Abroad 

age that applied to them. A large proportion (70 percent) of younger 

women indicated that they expect to retire before their state pension 

eligibility age—65 years.17

Another measure often found in reform packages is the accumulation of 

reserves in national pension funds with the aim of partially prefunding 

PAYG pension programs. With public centralized prefunding, governments 

set aside resources in the current period to safeguard the financing of their 

PAYG pension programs in the future. Typically invested in various 

combinations of bonds and equities, these reserve funds are in some cases 

meant to remain untouched for several years before being channeled into 

the public pension system, in particular to maintain adequate pension 

levels for the baby boom cohort. Pension reserve funds can contribute to 

the system’s financial sustainability, depending on when they are created 

or reformed, as well as how they are invested and managed. Countries that 

took action early have had time to amass substantial reserves, reducing 

the risk that they will not meet their pension obligations. Effective 

management of reserve funds has also proved important, as a record of 

poor fund performance has led some countries to put reserve funds under 

the administration of a relatively independent manager with the mandate 

to maximize returns and minimize avoidable risk.18

Establishing reserve funds ahead of demographic changes—well before 

the share of elderly in the population increases substantially—makes it 

more likely that enough assets will accumulate to help meet future 

pension obligations. In countries such as Sweden and Denmark, which 

have had long experience with partial prefunding of PAYG programs, 

important reserves have already built up. Combined with long-term 

policies aimed at ensuring sound public finances, raising employment 

rates, and adjusting pension program provisions, these resources are 

expected to make significant contributions to the long-term finances of 

 17In contrast only 7 percent of the women who were not affected by the increase expected 

to retire before they reached the state pension age that applied to them (60 years). 

18While some investment risks are unavoidable, other kinds of risks can be minimized by 

diversifying the portfolio among asset classes, for example stocks, bonds, and real estate, 

and within asset classes. 

Early Action and 

Effective Management 

Help Strengthen 

National Pension 

Reserve Funds 

Early Action Matters 
Page 17 GAO-06-126 Social Security Reforms Abroad 

public pension programs.19 For example, Denmark’s reserve fund, set up in 

1964, had assets equivalent to about 25 percent of GDP in 2000. Sweden’s 

reserve fund, created in 1960, was around 24 percent at the end of 2003. 

Other countries that have recently created pension reserve funds for their 

pension programs have a shorter period in which to accumulate reserves 

before population aging starts straining public finances. In particular, the 

imminent retirement of the baby boom generation is likely to make it 

challenging to continue channeling a substantial amount of resources to 

these funds. France, for example, relies primarily on social security 

surpluses to finance its pension reserve fund set up in 1999. Given its 

demographic trends, however, it may be unable to do this beyond the next 

few years. Similarly, Belgium and the Netherlands plan on maintaining 

budget surpluses, reducing public debt and the interest payments 

associated with the debt, and transferring these earmarked resources to 

their reserve funds. However, maintaining a surplus will require sustained 

budgetary discipline as a growing number of retirees begins putting 

pressure on public finances. Some countries have set specific starting 

dates for drawing down national funds to resist demands for their 

immediate use. 

Though the Irish National Pensions Reserve Fund was established in 2001, 

as of 2004 it had already amassed substantial assets, nearly 10 percent of 

GDP. Its resources are projected to support the financial sustainability of 

the pension program for two main reasons. First, Ireland enjoys relatively 

favorable demographics. Its aging problem is expected to increase in 

severity at a later date than those of other Western European countries; 

thus, it has in effect created its pension fund relatively early, with more 

time for returns to accumulate. Second, Ireland provides somewhat less 

generous public pensions to their beneficiaries than other OECD 

countries; its pension spending is, therefore, relatively low. 

Examples from several countries reveal that prefunding with national 

pension reserve funds is less likely to be effective in helping assure that 

national pension programs are financially sustainable if these funds are 

also used for purposes other than supporting the PAYG program. Some 

countries have used funds to pursue industrial, economic, or social 

 19If however, policymakers increase deficit spending or decrease surpluses in the rest of 

the government’s budget in response to the accumulation of pension reserves, the 

prefunding benefits of the reserve will be offset. 

Effective Management Can 

Contribute to Financial 

Sustainability 
Page 18 GAO-06-126 Social Security Reforms Abroad 

objectives. For example, Japan used its reserve fund to support 

infrastructure projects, provide housing and education loans, and 

subsidize small and medium enterprises.20 As a result, Japan compromised 

to some extent the principal goal of public prefunding, which is to save in 

advance and accumulate assets so as to continue providing adequate 

benefits to retirees while keeping contribution rates of workers stable. 

Japan has since implemented a series of reforms. The latest wave, which 

became effective in 2001, refocused the fund’s objective in the interests of 

participants, rather than those of the general public. Measures introduced 

include management improvements and more aggressive investment 

strategies with the aim of maximizing returns. 

Past experiences have also highlighted the need to mitigate certain risks 

that pension reserve funds face, in addition to the risks that are inherent in 

investment of any pension funds. One kind of risk has to do with the fact 

that asset buildup in a fund may lead to competing pressures for tax cuts 

and spending increases, especially when a fund is integrated into the 

national budget.21 For instance, governments may view fund resources as a 

ready source of credit. As a result, they may be inclined to spend more 

than they would otherwise, potentially undermining the purpose of 

prefunding. For example, according to many observers, the United States’ 

Social Security trust fund, which is included in the unified budget and 

invested solely in U.S. Treasury securities that cannot be bought or sold in 

the open market, may have facilitated larger federal budget deficits. 

Ireland sought to alleviate the risk that its reserve fund could raise 

government consumption by prohibiting investment of fund assets in Irish 

government bonds. Some economists argue in favor of similar limits on the 

share of domestic government bonds the fund portfolio can hold. 

Additionally, pension reserve fund investments in private securities can 

have negative effects on corporate governance. There is the danger that if 

the government owns a significant percentage of the stocks of individual 

companies and as a result controls their corporate affairs, the best interest 

 20Apart from a national fund for pension reserves, with a balance equal to about 28 percent 

of GDP as of 2003, Japan has accumulated savings through Japan Post, a national 

corporation with a large savings program. Japan Post’s assets (50 percent of GDP in fiscal 

year 2003) included postal savings and life insurance. 

21The fact that reserve funds are sometimes accumulated separately from the budget does 

not entirely relieve the pressure to use them for current consumption. So far, no country 

has managed to completely “wall off” its fund from at least the pressure to divert some of 

the proceeds for program priorities or tax cuts. 
Page 19 GAO-06-126 Social Security Reforms Abroad 

of shareholders may not be upheld because of potential conflicts of 

interest. Limiting the government’s stock voting rights by investing 

national pension resources in broad index funds may provide a safeguard 

against this type of risk. 

Another risk is that groups may exert pressure to constrain fund 

managers’ investment choices, potentially lowering returns. For example, 

Canada and Japan have requirements to invest a minimum share of their 

fund portfolios in domestic assets, restricting holdings of foreign assets to 

stimulate economic development at home. In contrast, Norway chose to 

invest its fund reserves almost exclusively in foreign assets.22 The funds of 

Ireland and New Zealand also have large shares of foreign investments.23

Investing a significant share of reserves in foreign assets may not be a 

realistic or viable option for large economies with mature financial 

markets, such as the United States. Funds in several countries have also 

faced pressure to adopt ethical rather than purely commercial investment 

criteria, with a possibly negative impact on returns.24 In recent years, some 

countries have taken steps to help ensure that funds are managed to 

maximize returns and minimize avoidable risk. Canada, for example, has 

put its fund under the control of an Investment Board operating 

independently from the government since the late 1990s. Several 

countries, including New Zealand, have taken steps to provide regular 

reports and more complete disclosures concerning pension reserve funds 

which may help achieve transparency in management and administration 

and contribute to public education and oversight.25 (For additional 

information concerning national pension reserve programs, see fig. 1 and 

table 6 in app. II.) 

 22Although the Norwegian Government Petroleum Fund is not a pension fund per se, its 

assets are designated to deal with the impact of population aging. 

23Investing abroad also helps lower the risk that funds will distort domestic capital 

markets. On the other hand, there is a risk that changes in exchange rates will decrease the 

value of foreign investments. 

24New Zealand and Sweden are examples of countries stating explicitly that ethical 

considerations must be taken into account in investment policy. 

25Maintaining high standards of transparency and disseminating accurate information 

contribute to public education and oversight, providing some degree of discipline to fund 

management. 
Page 20 GAO-06-126 Social Security Reforms Abroad 

Figure 1: National Pension Reserve Funds as a Percentage of GDP 

Note: The figure for Finland excludes the statutory pension funds (58.3% of GDP). Figures as of 

2003, except as follows: as of December 31, 2000, for Portugal, as of December 31, 2004, for Spain, 

Ireland, the United States, and Norway. 

Countries that have adopted individual account reforms—which may also 

help prefund future retirement income—offer lessons about financing the 

existing PAYG pension program as the accounts are established. To 

manage this transition period these countries have expanded public debt, 

built up budget surpluses in advance of implementation, reduced or 

eliminated the PAYG program, or used some combination of these 

approaches. Another important consideration for countries that have 

individual account programs is how to balance achieving high rates of 

Individual Account 

Reforms Show the 

Importance of 

Funding Decisions 

and Benefit Adequacy 

0

10203040

Source: OECD and individual government sources.

Norway

Japan

Sweden

Luxembourg

Percentage of GDP

United States

Korea

Ireland

Finland

Portugal

Spain

Canada

New Zealand

France

0 10 20 70 30 40 50 60
Page 21 GAO-06-126 Social Security Reforms Abroad 

return while ensuring individuals receive an adequate level of benefits. 

Measures such as limits on how the funds are invested and the level of fees 

and charges may help to ensure that benefits will be adequate, but should 

not be so restrictive that they unduly harm individuals or pension fund 

managers. In addition, administering individual accounts requires effective 

regulation and supervision of the financial industry to protect individuals 

from avoidable investment risks. Educating the public is also important as 

national pension systems become more complex. 

The experiences of other countries demonstrate the importance of 

considering how individual accounts may affect the long-term and shortterm financing of the national pension system and the economy as a 

whole. In the long-term, individual accounts can contribute to 

sustainability by providing a mechanism to prefund retirement benefits 

that could be less subject to demographic booms and busts than a PAYG 

approach. Individual accounts prefund benefits in private accounts rather 

than government accounts. If governments are unable to save through 

national pension reserves, private accounts may facilitate pre-funding that 

would not occur otherwise.26 If, however, such accounts are funded 

through borrowing, no such prefunding is achieved. In the short-term 

countries adopting individual accounts face the common challenge of how 

to pay for both a new funded pension and an existing PAYG pension 

simultaneously. The cost of the transition from a PAYG program to 

individual accounts depends on whether the individual accounts redirect 

revenue from the existing PAYG program, the amount of revenue 

redirected, and how liabilities under the existing PAYG program are 

treated. 

The countries we studied vary in the amount of revenue diverted from 

their PAYG programs to fund their individual accounts, resulting in a range 

of related transition costs. Australia and Switzerland used new sources of 

funding to add individual accounts to their existing, relatively modest, 

 26The extent to which individual account programs can contribute to national saving is not 

yet clear, however. Some studies of Chile’s individual account program have concluded 

that it has contributed to national saving rates. Other studies provide less clear evidence 

that individual account programs contribute to national saving rates, in part because saving 

in individual accounts can displace other forms of saving. Accounting issues also cloud the 

evidence.

Approach to Funding 

Individual Accounts 

Affects Sustainability of 

National Pension System 
Page 22 GAO-06-126 Social Security Reforms Abroad 

national pension systems.27 Transition costs were not an issue, because no 

resources were diverted from paying current benefits. Nonetheless, new 

financing was needed to both fund the new program and to support the 

existing program. (For additional information concerning these “add-on” 

programs and other countries’ individual account programs, see table 7 in 

app. II.) Some countries diverted revenue from the existing PAYG program 

to the individual accounts, a “carve out,” resulting in shortfalls that reflect, 

in part, the portion of the PAYG program being replaced with individual 

accounts. For example, transition costs may be less in countries such as 

Sweden where the contribution to individual accounts is 2.5 percent of 

covered earnings, than for Poland or Hungary, which have contribution 

rates of 7.3 percent and 8 percent, respectively. 

In addition to the level of transition costs resulting from redirecting PAYG 

revenue, how a country manages these costs also affects the success of 

the reform. All of the countries we reviewed also made changes that were 

meant to help finance the transition to individual accounts, such as 

increasing contributions to or decreasing benefits from their PAYG 

programs. In addition, Chile built a budget surplus in anticipation of major 

pension reform, and Sweden had large budget surpluses in place prior to 

establishing individual accounts. Some countries transferred funds from 

general budget revenues to help pay benefits to current and near retirees, 

expanding public borrowing. Where they financed individual accounts 

through borrowing, these countries will not positively affect national 

saving until the debt is repaid, as contributions to individual accounts are 

offset by increased public debt.28 For example, Poland’s debt is expected 

to exceed 60 percent of GDP in the next few years, in part because of its 

public borrowing to pay for the movement to individual accounts. 

Countries sometimes had difficulty predicting their transition costs. In 

particular, countries that allowed workers to opt in or out of individual 

account programs had difficulty estimating costs. For example, more 

workers in the United Kingdom, Hungary, and Poland responded to 

incentives to contribute to individual accounts than originally anticipated, 

leaving the existing PAYG programs with less funding than planned. 

 27Australia’s national PAYG program consistently replaces approximately 25 percent of 

average wages (23 percent in 2005); Switzerland’s national PAYG program replaced 

approximately 36 percent of average wages in 2005. 

28Additionally, increased government debt may crowd out private-sector access to lending 

markets and dampen the economic growth individual accounts are meant to generate. 
Page 23 GAO-06-126 Social Security Reforms Abroad 

Hungary’s short-run fiscal concerns resulted in a slower increase in 

contribution rates to individual accounts than originally planned. 

Regardless of whether workers have a choice of participating in the 

program, individual accounts may also affect the long-term costs to the 

government. For example, if income from substitute accounts leaves 

particular individuals with less retirement income than if they had not 

participated, some may qualify for benefits from other means-tested 

programs. On the other hand, to the extent that the accounts increase 

retirement incomes, costs for such programs may fall. Under a voluntary 

approach, such effects could depend partly on the rate of participation. 

The actual effect of countries’ individual account programs on other 

programs as they relate to government spending will not be clear for years 

to come, when cohorts of affected workers retire. 

Countries adopting individual accounts as part of their national pension 

systems have had to make trade-offs between giving workers the 

opportunity to maximize expected returns in their accounts and helping 

assure that benefits will be adequate for all participants. Some countries 

set a guaranteed rate of return to reduce certain investment risks and help 

ensure adequacy of benefits. Guaranteed rates of return may be relative, 

that is, related to other funds’ returns, as in Chile, or fixed—a guaranteed 

percentage rate return, as in Switzerland. In Chile workers with individual 

accounts are guaranteed a minimum rate of return set at 2 percentage 

points below the average return for funds of the same type during a 3-year 

period.29 In Switzerland, account holders were assured a minimum rate of 

return of 2.25 percent in 2004.30 This type of guarantee may, however, 

result in limited investment diversification or conservative investment 

decisions, resulting in lower rates of return overall. In Chile, for example, 

the guaranteed return may have resulted in a “herding” effect, creating an 

incentive for fund managers to hold similar portfolios and reducing 

variation in returns. To help ensure that individuals receive at least a 

benefit based on the guaranteed rate of return, several countries require 

 29Previously, Chile’s rate of return guarantee was calculated over a 12-month period. The 

Chilean association of the fund managers reported that the average annual real (inflationadjusted) rate of return on funds in the individual accounts, before deducting 

administrative fees, was 10.3 percent during the 24 years since the inception of the 

program. 

30Switzerland originally set its minimum return guarantee at 4 percent. However, because 

of funding problems from lower than expected yields on investments, it gradually lowered 

its rate to the current 2.25 percent. 

Countries Balanced 

Opportunities to Realize High 

Expected Returns with 

Provisions to Help Ensure 

Benefit Adequacy 
Page 24 GAO-06-126 Social Security Reforms Abroad 

fund managers to have reserve funds to pay benefits at the guaranteed 

return level. A number of these countries have further provisions that the 

government will provide benefits if all of the fund reserves are used. 

Another measure to ensure retirees will have at least a minimally adequate 

level of income is to provide some form of minimum guaranteed benefit. 

All countries with individual accounts that we reviewed provide such a 

benefit. This can be increasingly important as individuals assume risks 

with the investment of funds in their individual accounts. Some experts 

believe that a minimum pension guarantee could encourage investors to 

select riskier investments or spend their assets more quickly. For example, 

in countries with a large flat-rate pension, individuals may make risky 

investment decisions because they can rely on the guarantee if their risk 

taking brings poor results. In countries where additional benefits are 

added on to the individual account payment to meet a minimum standard 

(“top-up” benefits) individuals may minimize their voluntary contributions 

in order to receive a higher benefit from the government. There is some 

belief that this may occur in Chile, where low-income workers might try to 

stop making contributions after meeting the contribution year 

requirement. Individuals in countries with a means-tested benefit may 

spend down their retirement assets quickly to qualify for the benefit. This 

has occurred in Australia, and as result, that country plans to increase the 

age when individuals can access their individual account funds from 55 to 

60 between 2015 and 2025. In any of these cases, the government could 

incur increased costs because it ensures that individuals have at least a 

certain level of income. The financial risk to the government will be 

greater in countries that have a larger guarantee. However, the protection 

of individuals against poverty could also be greater in these countries. 

Outside of providing a minimum pension guarantee, countries have taken 

additional measures to help ensure an adequate retirement income.31 To 

prevent fees from eroding small account balances, some of these countries 

also exclude low-income workers from participation requirements in the 

individual account program. Another approach to help protect low-income 

 31In addition to the measures discussed in this section, other factors, such as regulations on 

investments, administrative and marketing costs, and fees (including those during payout), 

can affect the amount of retirement income individuals will receive and subsequently the 

adequacy of their benefits. Countries’ use of these measures is discussed in the following 

section. 
Page 25 GAO-06-126 Social Security Reforms Abroad 

workers occurs in Mexico, where the federal government provides a flatrate contribution on behalf of workers.32

It is important to consider the payout options available from individual 

accounts, as these can also affect income adequacy throughout retirement. 

For example, an annuity payout option can help to ensure that individuals 

will not outlive their assets in retirement.33 However, purchasing an 

annuity can leave some people worse off if, for example, premiums are 

high or inflation erodes the purchasing power of benefits. Several 

countries also allow for phased withdrawals, sometimes with restrictions, 

helping to mitigate the risk of individuals outliving their assets and 

becoming dependent on the government’s basic or safety net pension. 

Some countries offer a lump-sum payment under certain circumstances. 

For example, Chile and Mexico allow lump sums for persons who have 

account balances above a certain amount.34 Australia allows a full lumpsum payout for all retirees age 55 and above (age 60 and above by 2025). 

Countries also protect individuals by regulating how the funds in their 

accounts can be invested. Initially, several countries offered individuals 

choices among a limited number of investment funds and often restricted 

the portion of assets that could be invested in certain products, such as 

publicly traded equities, private equities, and foreign securities. Later, 

however, the options were expanded in most countries to allow more 

investment diversification, but they still include some restrictions. 

Additionally, as investment options have expanded, some countries have 

incorporated other protections. For example, Chile and Mexico have 

incorporated investment options that take into account individuals’ ages 

and risk tolerance. Chile requires each pension administrator to offer four 

 32The Mexican government makes a contribution to individuals’ accounts of 5.5 percent of 

minimum wage (a contribution of about $0.24 per workday in Mexico City). 

33The countries we reviewed require a range of annuity options, including, for example, 

inflation-indexed, joint and survivor, and gender-neutral. Different types of annuities will 

help to protect against certain risks; however, they may not be the best option for certain 

individuals. Certain annuities, such as those with joint and survivor or guarantee period 

provisions provide an opportunity for individuals to leave some benefits to their heirs. 

Other annuities do not provide such an opportunity. 

34Chile allows a lump sum of the amount by which the account balance exceeds a specified 

level—the amount needed to pay a pension equivalent to 70 percent of pensionable salary 

and at least 120 percent of the minimum pension. Mexico allows a lump sum of the 

remaining balance if the individual account will pay a pension at least 30 percent more than 

the minimum guarantee. 

Effective Regulation, 

Implementation, and Education 

Can Protect Individuals 
Page 26 GAO-06-126 Social Security Reforms Abroad 

types of funds with varying degrees of risk, including a higher risk fund 

and a fund invested in fixed-rate instruments. Pension administrators may 

offer a fifth higher risk fund, available to workers more than 10 years from 

the age of retirement. Mexico recently allowed pension fund managers to 

offer more than one investment fund and included options to help provide 

workers with an adequate rate of return at acceptable risk. Sweden limits 

individuals to selecting at most five funds from among all the qualified 

investment funds that choose to participate—over 650 funds as of 2004. 

Some experts have suggested that having such a large number of funds 

available may discourage active choice. About two-thirds of participants 

made an active investment choice in 2000. Since 2001, however, about 

85 percent of new entrants have left their money in the default fund—a 

separate fund for those who do not wish to make a fund choice.35 This 

default option can be an important safeguard. However, depending on who 

makes the default decisions, it may be open to some of the same issues as 

pension fund reserves, such as political pressures for certain investment 

criteria in order to meet other social objectives. 

To further protect individuals, most of the countries with individual 

accounts have some sort of limit on the fees that fund managers can 

charge. Nonetheless, it is unclear how these restrictions may affect an 

individual’s account balance and returns. Chile allows funds to charge fees 

on new accounts, and individual account contributions, and for phased 

withdrawals of funds during retirement. In addition to imposing this type 

of limit, Poland has a ceiling on the amount of some types of charges. 

Sweden has variable ceilings on charges, and the United Kingdom has a 

fixed ceiling charge on its stakeholder pension.36 Sweden uses a formula to 

calculate the size of fees that are permitted to help ensure that fees are not 

too high. Additionally, it plans to spread certain fixed costs over the first 

15 years of the program, helping avoid high fees in the early years. Limits 

on the level of fees can also affect fund managers. In the United Kingdom, 

for example, regulations capping fees may have discouraged some 

providers from offering pension funds. 

 35Sweden is undergoing a study that may include a discussion on the idea of decreasing the 

number of funds in which accounts are directed—from over 650 to about 20. 

36Stakeholder pensions provide individuals with the option of contracting out of the 

national second tier social security system to participate in the tax-relieved defined 

contribution individual pension accounts. 
Page 27 GAO-06-126 Social Security Reforms Abroad 

Countries have also taken steps to lower administrative costs that 

contribute to the fees participants are charged. For example, regulations 

regarding how often individuals are permitted to move assets from one 

investment fund to another can also protect program participants by 

helping contain program costs that arise when people switch funds 

frequently. Many countries restrict the number of times an individual can 

switch. Mexico reportedly has lower administrative costs than some other 

Latin American countries, in part because it limits individuals to annual 

switching. Chile permitted people to switch fund managers three times a 

year, but later restricted switching to two times a year to help lower costs. 

Poland provides an incentive for individuals to stay with a pension fund 

manager for at least 2 years by requiring fund managers to charge lower 

fees for these contributors. Sweden does not restrict the number of times 

individuals can change their investments. To help keep costs low, 

however, Sweden aggregates individuals’ transactions to realize 

economies of scale.37

Some countries’ experiences highlighted weaknesses in regulations on 

how pension funds can market to individuals.38 Poland’s and the United 

Kingdom’s regulations did not prevent problems in marketing and sales. 

Poland experienced sales problems, in part, because it had inadequate 

training and standards for its sales agents, which may have contributed to 

agents’ use of questionable practices to sign up individuals. The United 

Kingdom had a widely-publicized “mis-selling” scandal that resulted in 

over a million investors opening individual accounts when they would 

more likely have been better off retaining their occupation-based 

pensions. Insurance companies were ordered to pay roughly $20 billion in 

compensation. In contrast, Sweden protects individuals from excessive 

marketing by not allowing pension funds access to information about 

individuals’ investments. Instead, funds rely on mass advertising and 

provide reports and disclosures to investors through a clearinghouse. 

 37Designers of an individual account program must make critical decisions about who 

would assume the new administrative and recordkeeping responsibilities, how much 

choice or discretion individuals would have in selecting and changing their investment 

options, and how workers would receive their benefits. For additional information 

concerning options for administering individual account programs, see GAO, Social 

Security Reform: Administrative Costs for Individual Accounts Depend on System 

Design, GAO/HEHS-99-131 (Washington, D.C.: June 18, 1999). 

38Marketing also contributes to the overall program costs, and a portion of these costs are 

often passed on to participants. 
Page 28 GAO-06-126 Social Security Reforms Abroad 

Countries’ individual account experiences reveal pitfalls to be avoided 

during implementation. For example, Hungary, Poland, and Sweden had 

difficulty getting their data management systems to run properly and 

continue to experience a substantial lag time in recording contributions to 

individuals’ accounts. Sweden purchased a new computer system after the 

program it intended to use proved insufficient for managing individual 

accounts, resulting in an unexpected cost of $25 million. Once a recordkeeping system is in place, however, problems may persist. For example, 

Poland had some difficulty matching contributions with contributors 

because it allowed two different identification numbers to be used for 

reporting purposes. In such cases, workers’ contributions were not being 

credited to their accounts. Additionally, Poland experienced problems 

with its computer system that resulted in a backlog. The government was 

required to make interest payments to funds for delays in contribution 

transfers. According to a report from the International Labour 

Organization (ILO), the government initially failed to make 95 percent of 

the transfers to private funds and as of 2002 was still unable to make 

20 percent to 30 percent of required monthly transfers.39

In countries where workers have a choice of whether to participate in the 

individual account program, it is important that policymakers make timely 

decisions about other details concerning the administration and 

implementation of the program, so that workers can make informed 

choices. Hungary and Poland reportedly implemented their individual 

account systems without having made such decisions, including those 

concerning annuities. Both countries required annuity payouts, but the 

markets did not have the appropriate type of annuity available. For 

example, inflation-adjusted and gender-neutral annuities were not 

available in Hungary. Experts suggest that while these decisions may not 

have seemed important initially, the lack of information could make it 

difficult for workers to decide whether to participate in the individual 

account program and to assess their potential retirement security. 

Not only is information important to help workers make initial decisions 

about participation in an individual account program, but it should be 

provided on an ongoing basis. It is also of increasing importance as 

 39International Labour Organization, Pension Reform in Central and Eastern Europe, 

Vol. 1: Restructuring with Privatization: Case Studies of Hungary and Poland. 

(Budapest, International Labour Office, 2002). For a general discussion of such 

implementation issues, see GAO, Social Security Reform: Implementation Issues for 

Individual Accounts, GAO/HEHS-99-122 (Washington, D.C., June 18, 1999). 
Page 29 GAO-06-126 Social Security Reforms Abroad 

national pension systems become more complex. Several countries require 

disclosure statements about the status of a pension fund.40 The inclusion of 

fees charged on these disclosure statements could help individuals to 

make more informed decisions when choosing a fund manager. Some 

countries have done a better job than others of providing fund 

performance information. For example, Australia requires its fund 

providers to inform members through annual reports clearly detailing 

benefits, fees and charges, investment strategy, and the fund’s financial 

position. In contrast, Hungary reportedly did not have clear rules for 

disclosing operating costs and returns, making it hard to compare funds’ 

performances. Other more general information about individual account 

savings is also important. In the United Kingdom, individuals must decide 

whether they should participate in the state earnings-related pension 

program, their employer-sponsored pension plan, or an individual account. 

To help individuals make this decision, the Financial Services Agency 

publishes decision trees on its Web site. Decision trees in the United 

Kingdom ask basic questions about pension arrangements to help 

individuals make their own choices. Individuals may find that these are 

somewhat complicated, however, in part because the United Kingdom’s 

system is complex. In Mexico, a government entity provides information to 

workers on the mandatory pension system and includes information about 

the importance of reviewing commissions and returns when making a 

pension fund choice. 

While countries have made efforts to inform the public about the 

individual account program and the different options they will have 

available, little research on the effectiveness of these campaigns has been 

conducted. There has been research, however, looking at the overall 

financial literacy of individuals across many OECD countries. The OECD 

recently conducted a study on financial literacy and found that most 

respondents to financial literacy surveys in member countries have a very 

low level of knowledge concerning finances, often seeming to think that 

they know more about financial issues than they really do.41 For example, 

about two-thirds of Australian respondents to a survey indicated that they 

 40Some countries also provide annual statements that include information about different 

pieces of an individual’s retirement benefits, such as the PAYG and individual account 

benefits. 

41OECD, Directorate for Financial and Enterprise Affairs, Committee on Financial Markets, 

Financial Education Report: Overview and Analysis of Selected Non-School Financial 

Education Programmes: Executive Summary, DAF/CMF(2005)6/REV2, (Paris: June 23, 

2005). 
Page 30 GAO-06-126 Social Security Reforms Abroad 

understand the concept of compound interest. However, only 28 percent 

correctly answered a question using the concept.42 Countries have realized 

the growing need for more financial literacy, and several countries provide 

or are planning to provide general information about pensions and savings 

for retirement. 

Demographic challenges and fiscal pressure have necessitated national 

pension reform in many countries. Though the reform efforts we examined 

all had the common goal of improving financial sustainability, countries 

adopted different approaches depending on their existing national pension 

systems and the prevailing economic and political conditions. That is why 

reforms in one country are not easily replicated in another, or if they are, 

may not lead to the same outcome. Countries have different emphases, 

such as benefit adequacy or equity; as a result, what is perceived to be 

successful in one place may not be viewed as a viable option somewhere 

else. Although some pension reforms were undertaken too recently to 

provide clear evidence of results, the experiences of other developed 

countries do suggest some lessons for U.S. deliberations on Social 

Security’s future. 

Some of these lessons are common to all types of national pension reform 

and are consistent with findings in previous GAO studies. Restoring longterm financial balance invariably involves reducing projected benefits, 

raising projected revenues, or both. Additionally, with early reform, 

policymakers are more likely to avoid the need for more costly and 

difficult changes later. Countries that undertook important national 

pension reform well before undergoing major demographic changes have 

achieved or are close to achieving, financially sustainable national pension 

systems. Others are likely to need more significant steps because their 

populations are already aging. 

No matter what type of reform is undertaken, the sustainability of a 

pension system will depend, in large part, on the long-term health of the 

national economy. As the number of working people for each retiree 

declines, average output per worker would have to increase in order to 

sustain average standards of living. Reforms that encourage employment 

 42Roy Morgan Research, ANZ Survey of Adult Financial Literacy in Australia: Final 

Report. (Melbourne, Australia, May 2003). This study included a telephone survey of 

3,548 adults and in-person interviews with 202, but the report did not indicate response 

rates. 

Concluding 

Observations 
Page 31 GAO-06-126 Social Security Reforms Abroad 

and saving, offer incentives to postpone retirement, and promote growth 

are more likely to produce a pension system that delivers adequate 

retirement income and is financially sound for the long term. 

Regardless of a country’s approach, its institutions need to effectively 

operate and supervise the different aspects of reform. A government’s 

capacity to implement and administer the publicly managed elements of 

reform and its ability to regulate and oversee the privately managed 

components are crucial. Good public understanding of pension issues is 

needed to provide reasonable assurance that people plan ahead to have 

adequate income in retirement and to help ensure that pension reforms 

have enough public support to be sustainable. In addition, education of the 

public becomes increasingly important as workers and retirees face more 

choices and the national pension system becomes more complex. This is 

particularly true in the case of individual account reforms, which require 

high levels of financial literacy and personal responsibility. 

In nearly every country we studied, debate continues about alternatives 

for additional reform measures. It is clearly not a process that ends with 

one reform and often requires more than one type of reform. This may in 

part be true because success can only be measured over the long term, but 

problems may arise and need to be dealt with in the short term. The 

positive lessons from other countries’ reforms may only truly be clear in 

years to come. 

We provided a draft of this report to the Social Security Administration, 

the State Department, and the Department of the Treasury. SSA and 

Treasury provided technical comments on the draft; the State Department 

did not provide comments. We also provided copies of the draft to OECD 

staff and other external reviewers, who provided technical comments. In 

response to these technical comments, we modified the draft where 

appropriate. 

We are sending copies of this report to the Commissioner of Social 

Security, the Secretary of State, and the Secretary of the Treasury. We will 

also make copies available to others on request. In addition, the report will 

be available at no charge on GAO’s Web site at http://www.gao.gov/. 

Agency Comments 
Page 32 GAO-06-126 Social Security Reforms Abroad 

If you or your staff have any questions about this report, please contact me 

at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix III. 

Barbara D. Bovbjerg, Director 

Education, Workforce, and Income Security Issues 
Appendix I: Scope and Methodology 

Page 33 GAO-06-126 Social Security Reforms Abroad 

We reviewed national pension reforms that occurred since 1970 in all 

30 Organisation for Economic Co-operation and Development (OECD) 

countries and Chile. We included Chile in our study because it was the 

first country to undertake national pension reform that resulted in 

individual accounts. On the basis of our preliminary research, we 

identified three types of reform—adjustments to the existing pay-as-you-go 

(PAYG) program, national pension reserve funds, and individual account 

programs—that illustrate a variety of circumstances and experiences with 

national pension reform across these countries.1

 While we reviewed each 

type of reform separately for this report, we do indicate when countries 

have undergone more than one of these types of reform. 

We did not conduct an evaluation or audit of any country’s national 

pension program or its reform efforts; rather, we relied on the work of 

officials in individual countries and international organizations with 

expertise in this area. We did, however, draw some lessons based on our 

review, as well as including the lessons that others have drawn. We 

attempted to report the most current status of a country’s reform by using 

the most recently available data. Some countries may have undergone 

changes to their systems subsequent to the publication of the literature we 

reviewed, however. In many countries reforms are implemented over an 

extended period of time, so the results are yet to be apparent. We also 

contacted supreme audit institutions or reviewed their Web sites to see if 

they have done similar work. However, much of their work was of the 

audit nature and not relevant for our study. 

To obtain information on other countries’ national pension reforms, we 

reviewed the types of reforms undertaken in OECD countries and Chile. 

We selected the OECD countries in part because they are most 

comparable to the United States. Additionally, the OECD has relatively 

comparable data for its member countries. We conducted background 

research and interviews to identify the types of reforms, if any, the 

selected countries had undertaken. We primarily used information from 

the following sources to identify countries’ reforms and characteristics of 

national pension systems: the Social Security Programs Throughout the 

World publications, provided through a cooperative effort by the Social 

 1

This list of types of reform is not comprehensive. Some countries, Norway, for example, 

recently adopted legislation requiring employers to provide pensions (usually defined 

benefit programs) for employees. 

Appendix I: Scope and Methodology 

Methodology 
Appendix I: Scope and Methodology 

Page 34 GAO-06-126 Social Security Reforms Abroad 

Security Administration and the International Social Security Association; 

publications from the International Social Security Association and 

updates from its Social Security Worldwide database; and publications 

from OECD, World Bank, International Monetary Fund, and the European 

Union’s Economic Policy Committee. 

After identifying the countries to be reviewed and the types of reform they 

had undertaken, we conducted a review of relevant literature on these 

countries’ national pension reforms, including the following sources: 

• OECD Economic Surveys; 

• OECD publications on national pension reform and other related issues; 

• World Bank’s Pension Reform Primer; 

• Relevant government agency publications and Web sites from selected 

countries; 

• Reports from U.S. and international policy groups; and 

• Reports from U.S., international, and country-specific experts. 

We also interviewed officials and interest group representatives in 

Washington, D.C.; Paris; and London. We met with pension experts and 

country specialists at the OECD, the World Bank, and French and British 

experts, officials, and interest group representatives, as well as 

international pension experts in the United States. We formulated the 

lessons learned in our report from those identified by experts and officials 

and based on our own analysis of countries’ reforms. Generally, we 

aligned our lessons with GAO’s criteria for evaluating national pension 

reform, identifying key lessons related to fiscal sustainability, adequacy 

and equity, and implementation and administration of reform. 

We relied mainly on OECD data for information on country demographics, 

economics, and information related to the national pension programs. 

OECD collects much of its data from its member countries and validates 

its reports with these countries. For example, OECD recently published a 

description of each OECD member country’s mandatory pension system, 

including the results of modeling that projects the net replacement rates 

expected from old-age pension benefits once all reforms enacted through 
Appendix I: Scope and Methodology 

Page 35 GAO-06-126 Social Security Reforms Abroad 

2002 have been fully implemented.2 OECD has also undertaken studies of 

the projected level of public spending on national old-age pension 

programs through 2050 based on national estimates and common OECD 

economic assumptions.3

 In cases where national governments have 

completed more recent estimates, we cited those rather than the earlier 

OECD estimates. Also, we do not make a link between specific national 

pension reforms and changes in the economy or of any specific reform 

measure and the sustainability of the program. This is because most 

countries have undergone more than one type of reform at different points 

in time, making causes and effects difficult to determine. 

To assess the reliability of the data on countries’ national pension systems, 

we (1) interviewed officials at the OECD including those in the Statistics 

Directorate and the Economics Department responsible for compiling 

these data based on information provided by government officials in 

OECD member countries, and (2) performed some basic reasonableness 

checks of the data against other sources of information. We determined 

that the data are sufficiently reliable for the purpose of making broad 

comparisons of the United States’ and other countries’ pension systems. 

To ensure the reliability of its data, OECD also compares and investigates 

alternative sources of data, uses an internal peer and supervisory review 

process, and a process through which draft reports are reviewed and 

validated by member governments prior to publication. Nonetheless, 

OECD officials note several limitations in the data, including the fact that 

the data are largely self-reported by each country and are affected by 

differences in exchange rates, methods for analyzing national account data 

and tracking price inflation, as well as different methods used to predict 

longevity and economic growth. OECD works to develop comparable data 

by, for example, developing purchasing power parity factors, harmonized 

price indexes, and projections of old-age pension spending based on 

common economic assumptions. Because of, these limitations, we were 

unable to determine the reliability and precision of estimates for each 

country. We conducted our review from August 2004 through September 

2005 in accordance with generally accepted government auditing 

standards. 

 2

OECD, Pensions at a Glance: Public Policies across OECD Countries (Paris: 2005). 

3

See, for example, Thai Than Dang, Pablo Antolin, and Howard Oxley, Fiscal Implications 

of Ageing: Projections of Age-Related Spending, ECO/WKP(2001)31 (Paris: OECD, Sept. 

19, 2001), and, OECD, Sustainable Development in OECD Countries: Getting the Policies 

Right, (Paris: 2004). 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 36 GAO-06-126 Social Security Reforms Abroad 

Below are tabular data concerning OECD countries and Chile. Table 3 

provides background information concerning each country’s 

demographics, economy, and political structure. Table 4 provides basic 

information about each country’s national pension system, including 

information about spending on mandatory old-age pension programs, 

contribution rates, the extent to which mandatory pensions replace 

workers’ earnings, and the size of voluntary supplementary private and 

occupational pensions. Table 5 provides examples of various adjustments 

to PAYG pension programs. Table 6 provides information on national 

pension reserve funds for countries that have established such funds. 

Table 7 provides information on individual account programs that 

countries have adopted as part of their mandatory national pension 

systems. 

Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 37 GAO-06-126 Social Security Reforms Abroad 

Table 3: Background on OECD Countries and Chile 

 

Number of people 

in the workforce for 

every person aged 

65 or over 

Percentage of 

elderly people 

receiving less than 

half the median 

income 

Country 

Estimated 

population 

in millions, 

July 2005 2005 2050

Percentage of 

population 

aged 55-64 

employeda

GDP 

per 

capitab

Aged 66

to 75

Aged 76 

and over 

Government 

structurec

Australia 20 3.9 1.6 50 $30,700 21 29 Democratic, federalstate system 

recognizing the 

British monarch as 

sovereign 

Austria 8 2.9 1.3 30 31,300 8 12 Federal Republic 

Belgium 10 2.5 1.5 28 30,600 11 19 Federal 

parliamentary 

democracy under a 

constitutional 

monarch 

Canada 33 4.2 1.9 53 31,500 4 5 Confederation with 

parliamentary 

democracy 

Chile 16 Not 

available 

Not 

available

Not

available

10,700 Not 

available

Not 

available 

 Republic 

Czech 

Republic 

10 3.5 1.2 42 16,800 1 4 Parliamentary 

democracy 

Denmark 5 3.4 2.0 61 32,200 4 9 Constitutional 

monarchy 

Finland 5 3.3 1.5 50 29,000 7 16 Republic 

France 61 2.7 1.3 37 28,700 10 11 Republic 

Germany 82 2.6 1.5 39 28,700 10 11 Federal republic 

Greece 11 2.0 1.2 42 21,300 22 28 Parliamentary 

republic 

Hungary 10 2.6 1.0 29 14,900 6 5 Parliamentary 

democracy 

Iceland 0.3 4.8 2.5 87d 31,900 Not 

available

Not 

available 

 Constitutional 

republic 

Ireland 4 4.3 1.9 49 31,900 31 43 Republic 

Italy 58 2.2 0.9 30 27,700 15 16 Republic 

Japan 127 2.5 1.1 62 29,400 20 24 Constitutional 

monarchy with a 

parliamentary 

government 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 38 GAO-06-126 Social Security Reforms Abroad 

 

Number of people 

in the workforce for 

every person aged 

65 or over 

Percentage of 

elderly people 

receiving less than 

half the median 

income 

Country 

Estimated 

population 

in millions, 

July 2005 2005 2050

Percentage of 

population 

aged 55-64 

employeda

GDP 

per 

capitab

Aged 66

to 75

Aged 76 

and over 

Government 

structurec

Luxembourg 0.5 3.2 1.7 28d $58,900 4 9 Constitutional 

monarchy 

Mexico 106 6.8 2.3 54 9,600 24 37 Federal republic 

Netherlands 16 3.8 2.2 44 29,500 2 2 Constitutional 

monarchy 

New Zealand 4 4.2 1.7 64 23,200 0.4 0.5 Parliamentary 

democracy 

Norway 5 3.6 2.1 69 40,000 6 20 Constitutional 

monarchy 

Poland 39 3.1 1.0 29 12,000 4 5 Republic 

Portugal 11 3.1 1.2 51 17,900 25 35 Parliamentary 

democracy 

Slovak 

Republic 

5 4.0 1.0 25 14,500 Not 

available

Not 

available 

 Parliamentary 

democracy 

South Korea 48 4.5 0.9 58 19,200 Not 

available

Not 

available 

 Republic 

Spain 40 2.7 1.3 41 23,300 15 9 Parliamentary 

monarchy 

Sweden 9 2.8 2.0 69 28,400 5 12 Constitutional 

monarchy 

Switzerland 7 3.4 2.1 66 33,800 10 13 Federal republic 

Turkey 70 5.1 1.4 33 7,400 17 15 Republican 

parliamentary 

democracy 

United 

Kingdom 

60 3.2 1.8 56 29,600 11 19 Constitutional 

monarchy 

United 

States 

296 4.1 2.3 60 40,100 20 30 Constitution-based 

federal republic 

Source: OECD, Central Intelligence Agency (CIA), Social Security Administration. 

a

For 2003, unless otherwise noted. Amounts are rounded to the nearest whole number. 

b

For 2004, based on purchasing power parity. 

c

Government structure definitions from the United States’ CIA. For definitions of the government 

structures see, The World Factbook, 2005 on the CIA’s webpage, 

http://www.cia.gov/cia/publications/factbook/index.html, guide to country profiles section—

government type. 

d

Figure for 2002. 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 39 GAO-06-126 Social Security Reforms Abroad 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 40 GAO-06-126 Social Security Reforms Abroad 

Table 4: Information concerning Countries’ National Pension Systems 

 

Projected funding 

for national pension 

system as a 

percentage of GDP Employee/employer contributions 

Country 

Projected increase in 

spending on old-age 

pensions from 2000 

to 2050 as a 

percentage of GDPa

2000 2050

Average contributions as 

a percentage of earningsb

Annual ceiling for 

contributions in U.S. dollars

Australia 1.6 3.0 4.6 9.0f $87,900 

Austria 2.2 9.5 11.7 22.8 51,800 

Belgium 3.3 8.8 12.1 16.4 No ceiling 

Canada 5.8 5.1 10.9 9.9 29,100 

Chile NA NA NA 10.0 16,900 (as of Jan. 2003) 

Czech Republic 6.8 7.8 14.6 28.0 No ceiling 

Denmark 2.7 6.1 8.8 1.9g No ceilingg

Finland 4.8 8.1 12.9 22.9 to 33.0 No ceiling 

France 3.9h 12.1 16.0h 16.4 37,100 

Germany 5.0 11.8 16.9 19.5 77,300 

Greece 10.0i 12.5 22.5 20.0 29,400j

Hungary 1.2 6.0 7.2 26.5 3 times gross average earnings 

Iceland NA NA NA 15.6k No ceiling 

Ireland NA NA NA 16.8l No ceiling 

Italy -0.3 14.2 13.9 32.7 105,500m

Japan 0.6 7.9 8.5 13.6 67,500 

Luxembourg 1.9n 7.4n 9.3n16.0 105,200 

Mexico NA NA NA 11.3 No ceiling 

Netherlands 4.8 5.2 10.0 25.8 36,900 

New Zealand 5.7 4.8 10.5 0.0p Not applicable 

Norway 8.0 4.9 12.9 21.9 No ceiling 

Poland -2.5q 10.8 8.3 32.5 18,400
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 41 GAO-06-126 Social Security Reforms Abroad 

Projected net replacement rates as a percentagec,d 

Half of 

average earnings 

Average 

earnings

Two times 

average earnings

Assets of voluntary 

supplementary pension funds as 

a percentage of GDP, 2002e

77 52 36 Not available (NA)

91c 93c79c 4.4

83 63 43 5.6

89d 57d31d 47.6

NA NA NA NA

88 58 35 3.3

96d 54d36d 28.5

91 79 78 NA

98 69 59 NA

62 72 67 3.8

100 100 100 NA

87 90 93 5.2

96 66 57 100.5

63 37 22 NA

89 89 89 2.0

80 59 44 NA

125 110 104 NA

50c 45c44c 4.9

82 84 84 106.0o

77 40 22 15.1

86 65 50 4.6

70c 70c70c 4.4
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 42 GAO-06-126 Social Security Reforms Abroad 

 

Projected funding 

for national pension 

system as a 

percentage of GDP Employee/employer contributions

Country 

Projected 

increase in 

spending on oldage pensions 

from 2000 to 2050 

as a percentage 

of GDPa 2000 2050

Average contributions as 

a percentage of earningsb

Annual ceiling for 

contributions in U.S. dollars

Portugal 4.5r 8.0r 12.5r23.1 No ceiling 

Slovak Republic NA NA NA 26.0 No ceiling

South Korea 8.0 2.1 10.1 9.0 37,100

Spain 8.0 9.4 17.4 28.3 41,000s

Sweden 1.6t 9.2 10.8 18.5 46,700u

Switzerland NA NA NA 16.8 to 27.8v No ceiling

Turkey NA NA NA 20.0 23,100u

United Kingdom -0.7 4.3 3.6 23.8 1% rate applies above $55,300

United States 1.8 4.4 6.2 12.4 87,000w
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 43 GAO-06-126 Social Security Reforms Abroad 

Projected net replacement rates as a percentagec,d

Half of 

average earnings 

Average 

earnings

Two times 

average earnings

Assets of voluntary 

supplementary pension funds as 

a percentage of GDP, 2002e

116 80 86 13.4

58 60 66 NA

65 44 34 2.2

89 88 83 6.0o

90 68 74 4.2

71c 67c 41c 125.5

113 103 84 NA

78d 48d30d73.3o

61d 51d39d57.2

Source: OECD and Social Security Administration. 

a

National estimate of increase needed to fund projected benefits using national models and common 

OECD economic and demographic assumptions as published by OECD in 2005, except as noted. 

b

Total of employer and employee contributions for old-age, survivor, and disability coverage, except 

as noted. In many cases these rates apply to a specified range of earnings rather than all earnings. 

As of 2004 for Europe, Asia, and the Pacific; as of 2003 for the Americas, except as noted. 

c

In some countries estimates for men and women differ. In these cases the values shown are for men. 

Specifically, the estimates for women in Austria are 86 percent, 85 percent, and 72 percent for half 

average earnings, average earnings, and twice average earnings, respectively. The estimates for 

women in Mexico are 50 percent, 30 percent, and 28 percent. The estimates for women in Poland are 

62 percent, 49 percent, and 49 percent. The estimates for women in Switzerland are 72 percent, 68 

percent, and 42 percent. The estimates for women in Turkey are 111 percent, 101 percent, and 82 

percent, respectively. 

d

In some countries voluntary pension programs play an important role and substantially increase net 

replacement rates. In Canada estimated net replacement rates, including voluntary schemes, are 109 

percent, 95 percent, and 69 percent for half average earnings, average earnings, and twice average 

earnings, respectively. In Denmark comparable estimates are 125 percent, 82 percent, and 67 

percent. In the United Kingdom the estimates are 90 percent, 70 percent, and 58 percent. In the 

United States the estimates are 106 percent, 92 percent, and 84 percent, respectively.

e

Aggregate supplementary private and occupational voluntary pension fund assets as a percentage of 

GDP in 2002 unless otherwise noted. 

f

Mandatory employer contribution to superannuation program. General government revenue funds 

PAYG program.

g

Up to 2,682 kroner per year per employee for labor-market supplementary pension ATP plus 1 

percent for Special Pension without a ceiling, but Special Pension contributions were suspended in 

2004 through 2007. 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 44 GAO-06-126 Social Security Reforms Abroad 

h

Estimate for 2040; 2050 estimate not available. In contrast, official reports suggest a 4.4 percent 

increase on unchanged labor market policies for the period 2000 to 2040. 

i

National projection forecasts an increase of 12.2 percentage points. 

j

No ceiling for workers first insured after January 1, 1993.

k

Includes maternity/paternity, work injury, and unemployment benefits as well as old-age, survivor, 

and disability coverage. 

l

For weekly earnings above 356 euros, about $445. Percentage rate depends on level of earnings. 

Includes sickness, maternity, work injury, unemployment, and adoptive benefits. 

m

No ceiling for workers first insured before January 1, 1996. 

n

From an estimate published by European Union’s Economic Policy Committee in 2001. 

o

As of 2001. 

p

Costs of most programs covered by general fund revenue. 

q

Assumes 2 percent growth in the revaluation factor. 

r

Estimate published by OECD in 2001, noting that this estimate is less comparable than estimates for 

other countries. 

s

Ceiling of $114 per day for some occupational classes. 

t

Assumes a 1.6 percent revaluation factor. 

u

Ceiling for employee contributions. 

v

Rate depends on age and gender. 

w

$90,000 as of 2005. 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 45 GAO-06-126 Social Security Reforms Abroad 

Table 5 provides examples of adjustments to national PAYG pension 

programs undertaken by OECD countries and Chile. The table primarily 

includes examples of reforms that increased contributions to the programs 

or decreased benefits. It does not provide a comprehensive list of such 

reforms. 

Table 5: Examples of Adjustments to PAYG Programs, 1970-2004 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

Australia None identified 60 to 65 for 

women 

None identified None identified None identified None identified Means testing 

reintroduced in 

mid 1980s 

Austria 9.0% to 9.5% 

beginning in 

1989 and to 

10.25% for 

employees by 

2004 

 None 

identified 

1993: 10 to 15 

years for full 

retirement; 

2003: 15 to 40 

years by 2028; 

1997: 15 to 18 

years for early 

retirement 

None identified 1993: new 

adjustment 

formula based 

on net wages 

None identified Reduced access 

to early 

retirement with 

later age 

requirement, 

reduced benefits, 

and incentives 

for delayed 

retirement 

Belgium None identified 60 to 65 for 

women 

20 to 35 years for 

early retirement 

Adoption of 

price index 

None identified None identified Minimum work 

life for early 

retirement 

increased from 

24 to 35 years; 

age limit for early 

retirement 

increased from 

55 to 58 

Canada 5.85% to 9.9% 

phased in 

beginning in 

1998 

None 

identified 

All years less 

15% of lowearning years 

Valorization 

based on ratio 

of the earning 

year’s 

maximum 

pensionable 

earningsc

 

None identified None identified Means testing for 

basic flat benefit 

at high income 

levels 

Chile Increased to 

average of 

50% of 

covered wages 

by 1974; later 

reduced to 

33%, then 20% 

60 to 65 for 

men; 55 to 

60 for 

women 

None identified None identified None identified None identified None identified 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 46 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

Czech 

Republic 

 None 

identified 

60 to 63 for 

men; 57 to 

63 for 

women, but 

lower 

depending 

on the 

number of 

children 

raised 

None identified Move to price 

indexation plus 

increases of at 

least one-third 

of real wage 

growth 

None identified None identified None identified 

Denmark Increased by 

1% of wages 

recently—other 

increases in 

past; gradual 

increase in 

pension 

contribution 

rates from 0 to 

9% from 1993 

to 2004, 5% to 

9% for blue 

collar workers 

effective 2004 

None 

identified 

None identified None identified None identified None identified Imposed 

actuarially fair 

adjustment for 

retiring early, 

decreasing cost 

to government 

and benefits to 

early retirees 

Finland Worker 

contributions to 

employmentbased 

pensions 

introduced, 

then increased 

0.7% to 2.2% 

of wages, and 

3.7% of wages 

above a set 

level 

63 to 65 4 to 10, then to 

whole work life 

None identified From wages to 

80% prices and 

20% of wages, 

but no 

adjustment in 

1994 

Pension 

benefits linked 

to life 

expectancy 

beginning in 

2009 

Lower accrual 

rates for early 

retirees; and 

minimum age for 

early retirement 

raised from 58 to 

60, then to 62 

years; flat 

monthly base 

benefit 

eliminated in 

favor of a 

pension-tested 

benefit 

France New tax for 

pensions: 1% 

of all incomes 

None 

identified 

10 to 25 years for 

calculation and 

37.5 to 40 years 

required 

contributions 

From wages to 

prices 

From wages to 

prices; no 

adjustment in 

1994 

Point system for 

calculating 

earningsrelated benefits 

None identified 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 47 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

Germany Successive 

increases, e.g., 

1991 increase 

of 2.5% and 

1.7% in 1994; 

upper earnings 

limit indexed to 

wages 

60 to 65 for 

women by 

2004 

None identified None identified From gross to 

net wages, then 

prices 

Point system for 

calculating 

earningsrelated benefits 

in 

supplementary 

schemes, 

including a 

demographic 

factor 

Adopted 

penalties for 

early retirement 

and incentives 

for later 

retirement 

Greece Major increase 

in 1992 

60 to 65 for 

women 

Minimum years 

13.5 to 15 years, 

1990 

None identified None identified None identified Benefit 

calculation factor 

80% to 60% 

Hungary None identified 60 to 62 for 

men; 56 to 

62 for 

women 

Increase in 

number of years 

for early and full 

retirement benefit

None identified From wages to 

half wages and 

half prices 

None identified Increased 

penalties for 

early retirement 

by raising the 

minimum age 

and increasing 

the minimum 

number of years 

for early 

retirement 

Iceland None identified None 

identified 

None identified None identified None identified None identified Flat-rate 

component of the 

basic pension 

was abolished 

and replaced 

with a wholly 

income-related 

benefit 

Ireland Earnings cap 

on employer 

contributions 

eliminated 

(effective April 

2001) 

None 

identified 

None identified None identified None identified None identified None identified 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 48 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

Italy Increase in 

1995-97 

period; from 

24.5% to 

32.7% of gross 

earnings, but 

in part this 

reflected relabeling other 

contributions 

as social 

security 

contributions 

60 to 65 for 

men; 55 to 

60 for 

women 

through 

1995, 

under new 

NDC: age 

65, but 

early 

retirement 

as early as 

57 

Increased 

minimum number 

of years for 

seniority 

pension and 

old-age 

pension 

Earnings 

growth to 

moving 

average of 

nominal GDP 

growth over 5 

years 

From minimum 

wage to prices; 

partial 

suspension of 

price indexation

NDC plan 

adopted 1995, 

but to be 

phased in 

slowly 

Minimum years 

required for 

benefit 15 to 20 

years, but reset 

to 5 years for 

NDC 

Japan 17.35% to 

18.3% by 2017 

government 

share to 

increase from 

one-third to 

one-half of 

cost; also 

extended 

contributions 

base to include 

bonuses 

(1994) 

60 to 65 for 

men and 59 

to 65 for 

women 

25 to 40 in 1986 

reform 

None identified Gross wages to 

net wages 

(1994), then 

from wages to 

prices, then 

prices less 

demographic 

and longevity 

adjustments 

projected to be 

0.6% and 0.3% 

per annum 

In 2004 

legislation 

introduced 

automatic 

adjustment to 

benefits in 

response to 

macroeconomic 

changes in the 

working age 

population and 

life expectancy 

Accrual rate for 

earnings-related 

pension from 1% 

per year to 

0.7125%; 

benefits to be 

reduced 20% by 

2025; increased 

penalties for 

early retirement, 

incentives for 

later retirement 

Luxembourg Contribution 

rates are 

increased 

based on 

actuarial 

review every 

7 years 

None 

identified 

None identified Higher, not 

lower, 

revaluation 

factors for 

prior years’ 

earnings 

None identified None identified Increases in 

benefits, not 

decreases: 

supplements, 

higher accrual 

rates 

Mexico 20% to 26% None 

identified 

10 to 25 years of 

contributions 

required for 

minimum benefit 

None identified None identified None identified None identified 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 49 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

Netherlands Increase in 

1995-1997 

period and 

2002 to 2004 

None 

identified 

Shift from 

calculation based 

on final salary to 

one based on 

average salary 

None identified Indexing 

suspended 

temporarily in 

late 1980s 

None identified Imposed taxes 

on quasimandatory 

occupationbased pension 

early retirement 

benefits to 

increase 

penalties for 

early retirement 

and achieve 

actuarial 

neutrality 

New Zealand No employer/ 

employee 

contributions to 

PAYG 

62 to 65 None identified None identified None identified None identified The link to 80% 

of average 

wages (for 

couple) 

abolished; 

relative value is 

now below 70% 

Norway Generally each 

May 

Parliament 

increases 

contributions 

by increasing 

the base 

amount used 

to set taxable 

wages (no 

indexation). 

Retirement 

age 

lowered 

from 70 to 

67 in 1973 

None identified None identified None identified None identified 45% to 42% of 

base times 

average pension 

points; maximum 

points per year 8 

1/3 to 7 

Poland None identified None 

identified 

None identified None identified Indexation 

suspended 

2005; 

scheduled to be 

adjusted every 

3 years; earlier 

if inflation is 5% 

or more 

NDC reform 

adjusts benefits 

to reflect 

contributions, 

longevity, and 

growth in 

wages; 

replacement 

rate expected to 

drop from 73% 

to 24% by 2050

None identified 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 50 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

Portugal None identified 62 to 65 for 

women 

From best 10 of 

last 15 years to 

entire work life; 

Increase in 

minimum 

contribution 

period 

None identified None identified None identified Accrual rate will 

be reduced from 

2.2% to 2% 

Slovak 

Republic 

Increase in 

1995-1997 

period 

60 to 62 for 

men; 53 to 

62 for 

women 

Highest 5 of last 

10 years to point 

system 

considering 

working life 

None identified None identified Adoption of a 

points system 

with 

adjustments for 

point values 

None identified 

South Korea Increase in 

1995-1997 

period and 

continued 

gradual 

increases 

through 2025 

60 to 65 by 

2033 

15 years in 1990, 

then 10 years, 

then lifetime 

earnings in point 

system 

None identified None identified None identified None identified 

Spain Various 

ceilings on 

contributions 

raised to the 

highest level 

Closed 

earlier plan 

with 

retirement 

age 60 to 

new 

entrants; 

new 

entrants 

retire at 

age 65 

8 years of 

contributions to 

last 15 years 

None identified None identified None identified Reduced early 

retirement 

benefits 

Sweden None identified Increase 

from 65 to 

66; 

decrease to 

61 with 

actuarial 

penalty 

None identified None identified None identified NDC reform 

adjusts benefits 

to reflect 

contributions, 

longevity, and 

economic 

performance 

None identified 

Switzerland None identified 62 to 65 for 

women 

None identified None identified None identified Demographic 

conversion 

factor reduced 

from 7.2% to 

6.65% by 2016 

None identified 

Turkey None identified 55 to 60 for 

men; 50 to 

58 for 

women 

Minimum 

contributions 

5,000 to 7,000 

days 

None identified None identified None identified Reduction in 

benefits for 

recipients who 

work 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 51 GAO-06-126 Social Security Reforms Abroad 

Country 

Increase in 

contribution 

rates or 

coverage 

Change in 

retirement 

agea

Change in years 

of earnings 

considered in 

benefit 

calculation 

Change in 

indexation for 

calculation of 

initial benefitb 

Change in 

indexation for 

benefits 

during 

retirement 

Economic and 

demographic 

adjustment 

mechanisms 

Other decrease 

in benefits 

United 

Kingdom 

Employees’ 

contributions 

9% to 10%; 

also rates 

increased by 

1 percent for 

employers and 

employees on 

earnings 

above a 

threshold 

60 to 65 for 

women 

from 2010 

to 2020 

From 20 best 

years to all 

working years for 

earnings-related 

pension 

None identified Basic state 

pension 

indexed to 

prices, 1980 

None identified Earnings-related 

pension reduced 

from 25% of best 

20 years 

earnings to 20% 

of lifetime 

earnings 

United 

States 

10.8% to 

12.4% 

65 to 67 None identified Wage index 

amended to 

include 

deferred 

compensation 

beginning in 

1991 

(increases 

benefits) 

Delayed the 

June 1983 costof-living 

adjustment until 

December 1983

None identified Cut windfall 

benefits to those 

with benefits 

from employment 

not covered by 

the program 

Source: OECD, International Social Security Association, SSA, World Bank, and country publications. 

a

Changes in retirement age generally both increase contributions and decrease benefits. Workers 

contribute for a longer period and receive benefits for a shorter period if they work longer. 

b

This is the index used for adjusting earlier years’ earnings when calculating an initial earnings-related 

pension benefit. In the United States, for example, earnings in a given year under age 60 are 

adjusted to reflect the increase in average wages from that year to the year in which the worker 

reaches age 60. Earnings from age 62 to age 67 are adjusted using a price index. 

c

This is indexed to growth in average earnings during the 3, then 4, then 5-year period ending at 

retirement. 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 52 GAO-06-126 Social Security Reforms Abroad 

Table 6: National Pension Reserve Fund Reforms 

Country Year 

Reserve as 

percentage of 

GDP Reserve Fund management 

Restrictions on 

class of 

investments 

De-accumulation 

trigger or date 

Belgium Established 

2001 

Not available 

(NA) 

 Silver Fund 100% in 

government 

securities 

None identified 

Canada Established 

1997 

2.3%a Canadian Pension Plan Investment 

Board (CPPIB) 

30% limit on foreign 

securities beginning 

in 2001 

None identified 

Denmark Established 

1964 

25%b Arbejdsmarkedets Tillaegspension 

(ATP)—corporation with board 

appointed by various employee & 

employer associations 

The Board annually 

sets investment 

guidelines 

 None identified 

Finland Implemented 

1999 

4.5%a None Identified None identified 

France Implemented 

2004 

1.2%a Pensions Reserve Fund (Fonds de 

Reserve des Retraites, FRR) 

Equities of firms 

headquartered 

outside European 

Economic Area 

limited to 25% 

2020 

Greece Established 

2002 

NA NA None Identified None identified 

Ireland Established 

2001 

9.6%c Autonomous National Pensions 

Reserve Fund Commission 

(NPRFC) 

None of the assets 

can be invested in 

Irish government 

securities 

2025 

Japan Established 

1942, reformed 

2001 

28.2%a Government Pension Investment 

Fund (GPIF)d

Minister set 

requirement that 

holdings of domestic 

bonds must be 

greater than foreign 

bonds; foreign 

equities must 

represent less than 

two-thirds of 

domestic equity 

investments; and 

holdings in foreign 

stocks must be 

greater than foreign 

bonds 

None identified 

Korea Established 

1988 

13.0%a National Pension Fund None identified None identified 

Luxembourg Late 1980s 23.6%a NA None identified None identified 

Netherlands Established 

1998 

NA AOW-spaarfonds (AOWSF) None identified 2020 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 53 GAO-06-126 Social Security Reforms Abroad 

Country Year 

Reserve as 

percentage of 

GDP Reserve Fund management 

Restrictions on 

class of 

investments 

De-accumulation 

trigger or date 

New Zealand Established 

2001 

1.6%a Guardians of New Zealand 

Superannuation Fund 

None legislated, 

investment policy 

set and reviewed 

annually 

2020 

Norway Established 

1990 

65%c Norwegian Government Petroleum 

Fund (NGPF)c

 

100% in foreign 

securities 

 None identified 

Portugal Established 

1989, reformed 

2002 

3.4%b Fundo de Estabilização Financeira 

da Segurança Social, FEFSS 

None identified None identified 

Spain Established 

1997 

2.6%c None None identified 

Sweden Established 

1960, reformed 

1999 

23.6%a Autonomous AP-fonden (APF) 

boards 

A limit of 5 percent 

in unlisted 

securities; no one of 

the 4 funds can hold 

more than 2% of the 

value of equities in a 

single company; No 

more than 40% in 

investments with 

unhedged foreign 

currency exposure; 

At least 30% in 

highly rated fixed 

income securities 

None identified 

United States Reformed 1983 14.1%a Old-Age and Survivor’s Insurance 

Trust Fund trustees 

100% in 

government 

securities; no 

foreign securities 

Shortfall in 

program cash flows

Source: OECD, World Bank, and annual reports for specific funds. 

a

As of 2003. 

b

As of 2000. 

c

As of December 31, 2004. 

d

Also known as the Investment Fund of Social Security Reserves or (IFSSR). 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 54 GAO-06-126 Social Security Reforms Abroad 

Table 7: Individual Account Reforms 

Country 

Year 

implemented 

Mandatory or 

voluntary for new 

entrants to 

workforce? 

Funded with revenue 

redirected to accounts or 

new revenue? 

Transition costs 

funding Contribution rates

Australia 1992 Mandatory employerbased plan New revenue No transition costs 9% (employer)

Chile 1981 Mandatory Redirected Built budget surpluses in 

advance of reform: raised 

taxes on consumption, 

sold state-owned 

enterprises, and 

borrowed from the public 

10% (employee)

Denmarkd 2002 Mandatory New Revenue No transition costs 1% gross income, 

but contributions 

suspended for 2004 

through 2007

Hungary 1998 Mandatory Redirected revenue, 

parametric changes to 

decrease PAYG liabilities 

Central budget 8% (employee)

Icelande 1997 Mandatory employerbased plan New Revenue No transition costs Varies 

Mexico 1997 Mandatory Redirected General 

government 

budget 

6.5%f

Poland 1999 Mandatory Redirected Public borrowing 7.3% (employee)

Slovak 

Republic 

2005 Mandatory Redirected Sale of nationalize 

companies to the private 

sector 

10.0%

Sweden 1999 Mandatory Redirected In part through reductions 

in PAYG benefits with 

adoption of NDC 

2.5%

Switzerlandh 1985 Mandatory employerbased plan New revenue No transition costs 14%-36%i 

United 

Kingdom 

1988 Voluntary opt-out Redirected General revenue Varies by age from 

2.1% to 5.25% over 

middle earnings 

range
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 55 GAO-06-126 Social Security Reforms Abroad 

Who administers the 

individual account 

program? 

Who 

manages the 

individual 

accounts? 

Minimum rates of 

return guarantees Payout options 

Total amount invested 

in the accounts at the 

end of 2004 as 

percentage of GDP 

Administrative costs 

and charges—

reduction in final 

capital and pensiona

Centrelink through 401 

customer service centers 

Employer No Annuity, lump sum, 

phased withdrawal 

76% estimated as of 

September 2004 

26%

Pension fund managers Pension funds Relative rate of 

returnb 

Annuity, programmed 

or phased withdrawal, 

or a combinationc

 

59% 16%

The Labor-Market 

Supplementary Pension 

Institution, an 

independent organization 

headed by a bipartite 

board of directors 

Board of 

Directors and 

Council 

representing 

the Social 

Partners (ATP) 

No Installments over 10 

years, lump sum for 

small accounts 

3% NA 

Pension funds Pension funds No—abolished in 

2002 

Annuity, lump sum if 

less than 180 months 

of contributions 

2% NA

Independent pension 

funds 

Pension funds None Identified Annuity NA NA

Social Insurance Institute Pension funds No Annuity, phased 

withdrawal (based on 

life expectancy) 

NA 22%

Social Insurance Institute Pension funds Relative rate of 

returng

 

Annuity 6% 14%

Social Insurance Institute Private asset 

managers 

Relative rate of 

return 

Annuity, phased 

withdrawal 

NA NA

Premium Pension 

Agency 

Pension funds No Annuity 7% 15%

Occupational Pension 

Institutes 

Jointly by 

employers and 

employees 

2.5% (reduced 

from 4%) 

Annual payment 

equal to 7.2% of 

accumulated funds, 

with interest 

117% (2000) NA

The Pensions Regulator Variety of 

private 

pension 

providers 

No 25% can be a lump 

sum; annuity required 

by age 75 

NA 19%j

Source: OECD, SSA, World Bank, and country publications. 
Appendix II: Information on OECD Countries 

and Chile, Their Pension Systems, and 

Reforms 

Page 56 GAO-06-126 Social Security Reforms Abroad 

a

Estimates include fees on investments, record-keeping services, marketing, and profits. Data from 

Estelle James, Gary Ferrier, James Smalhout, and Dimitri Vittas, Administrative Costs and the 

Organization of Individual Account Systems: A Comparative Perspective, in Robert Holzmann and 

Joseph Stiglitz, eds., New Ideas About Old Age Security (Washington, D.C.: World Bank, 2001), 

except as noted. 

b

The minimum rate of return is no less than 2 percentage points below the average for all pension 

funds of the same type. 

c

Combinations may be a phased withdrawal with deferred annuity, or immediate annuity with phased 

withdrawal. 

d This row covers Denmark’s Special pension savings scheme (SP) as amended in 2000. SP 

contributions in 1999 and 2000 were redistributed among workers to help equalize benefits. Denmark 

also provides a Labor Market Supplementary Plan (ATP) based on deferred annuities. The amount of 

contributions is based on the number of hours worked rather than earnings. The level of benefits is 

based in part on the rate of return in the centrally managed investment fund. Since 2002 the accrual 

of pension rights has been based on a guaranteed interest rate of 2 percent, but if actual returns are 

higher, the level of benefits can be increased. 

e

Iceland made its occupation-based pension system, with a defined benefit structure, compulsory in 

1974. In 1997, Iceland passed legislation that codified the principle of a mandatory payment of at 

least 10 per cent of wages and salaries in order to acquire pension rights, and it also allows for the 

occupation-based pension program to create defined contribution individual accounts as a 

complement to defined benefit pensions. However, in practice, employers have not yet established 

these. Voluntary supplementary individual accounts are also available. The occupation-based 

pensions have a contribution rate of 10 percent of an employee’s wages. A minimum pension of at 

least 56% of lifetime average salary is paid for a contribution period of 40 years (equivalent to 1.4% of 

average lifetime salary per contribution year) and is paid for life. 

f

The employer, employee, and government together contribute 6.5 percent, and the employee 

contributes an additional 5 percent contribution to an individual housing account (a scheme known as 

Infonavit) which reverts to the retirement account when it is not used. 

g

The minimum rate of return is either 50 percent of the average rate or 4 percent lower than the 

average for all funds during 24 consecutive months, whichever is lower. 

h

The 1985 mandatory employer-based pensions built upon the pre-existing voluntary occupational 

plans. 

i

Employee contributions vary based on age and gender, ranging from 7 percent to 18 percent on 

earnings between about $19,900 and $59,800. Employers have to at least match these contributions. 

j

Estimate from OECD, OECD Economic Surveys 2004: Poland (Paris: June 2004). 
Appendix III: GAO Contact and Staff 

Acknowledgments 

Page 57 GAO-06-126 Social Security Reforms Abroad 

Barbara D. Bovbjerg (202) 512-7215 or bovbjergb@gao.gov 

In addition to the contact named above, Alicia Puente Cackley, Assistant 

Director; Benjamin P. Pfeiffer; Joseph Applebaum; Thomas A. Moscovitch; 

Nhi Nguyen; Nyree M. Ryder; Roger Thomas; Seyda G. Wentworth; 

Corinna A. Nicolaou; Lise Levie; and Pat Elston made key contributions to 

this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Glossary 

Page 58 GAO-06-126 Social Security Reforms Abroad 

Individual accounts supplement Social Security benefits and would draw 

contributions from new revenue streams. 

(See Income adequacy.) 

An insurance product that provides a stream of payments for a preestablished amount of time in return for a premium payment—the amount 

being converted into any annuity. For example, a life annuity provides 

payments for as long as the annuitant lives. Only insurance companies can 

underwrite life annuities in the United States. Other financial 

intermediaries, such as banks and stock brokerage firms, may sell 

annuities issued by insurance companies. 

Cohort of people born after World War II. This includes Americans born 

from 1946 through 1964; 76 million strong, they represent the longest 

sustained population growth in U.S. history. Other countries generally use 

the term “baby boomers” to describe this generation. 

Individual accounts that would result in some reduction of or offset to 

Social Security benefits because contributions to those accounts would 

draw on existing Social Security revenues. 

A measure of the change over time in the prices, inclusive of sales and 

excise taxes, paid by urban households for a representative market basket 

of consumer goods and services. The CPI is prepared by the U. S. 

Department of Labor and used to compute Social Security cost of living 

adjustment (COLA) increases. 

A worker in covered employment, that is, a job through which the worker 

has made contributions to Social Security. 

The amount by which the government’s spending exceeds its revenues in a 

given period, usually a fiscal year. The federal deficit is the shortfall 

created when the federal government spends more in a fiscal year than it 

receives in revenues. To cover the shortfall, the government sells bonds to 

the public. 

Glossary 

Add-on 

Adequacy 

Annuity 

Baby boomers 

Carve-out 

Consumer price index 

(CPI) 

Covered worker 

Deficit 
Glossary 

Page 59 GAO-06-126 Social Security Reforms Abroad 

A type of retirement plan that guarantees a specified retirement payment 

and in which the plan’s sponsor assumes the risk of providing these 

benefits. Defined benefit plans promise their participants a steady lifetime 

retirement income, generally based on years of service, age at retirement, 

and salary averaged over some number of years. Defined benefit plans 

express benefits as an annuity but may offer departing participants the 

opportunity to receive lump-sum distributions. Defined benefit plans are 

one of two basic types of employer-sponsored pension plans. 

A type of retirement plan that establishes individual accounts for 

employees to which the employer, participants, or both make periodic 

contributions. Defined contribution plan benefits are based on employer 

and participant contributions to and investment returns (gains and losses) 

on the individual accounts. Employees bear the investment risk and often 

control, at least in part, how their individual account assets are invested. 

An estimate of the number of dependents per worker, generally defined as 

the ratio of the elderly (ages 65 and older) and/or the young (under age 15) 

to the population in the working ages (ages 15-64) or to the projected size 

of the labor force. 

A person who is eligible for benefits or care because of his or her 

relationship to an individual. Under the Social Security Act, “dependent” 

means the same as it does for federal income tax purposes; i.e., someone 

for whom the individual is entitled to take a deduction on his personal 

income tax return, generally an individual supported by a tax filer for over 

half of a calendar year. 

The age at which individuals qualify for reduced retirement benefits if they 

choose to collect benefits before the normal retirement age; the current 

early retirement age for Social Security is 62. Individuals who choose to 

take retirement benefits early will have their monthly benefits 

permanently reduced, based on the number of months they receive checks 

before they reach full retirement age. 

(Also called normal or statutory retirement age.) The age at which 

individuals qualify for full, or unreduced, retirement benefits from Social 

Security and employer-sponsored pension plans. The normal retirement 

Defined benefit (DB) 

Defined contribution (DC) 

Dependency ratio 

Dependent 

Early retirement age 

Full retirement age (FRA) 
Glossary 

Page 60 GAO-06-126 Social Security Reforms Abroad 

age for Social Security was 65 for many years. For workers and spouses 

born in 1938 or later and widows/widowers born in 1940 or later, the 

normal retirement age increases gradually from age 65 until it reaches age 

67 in the year 2022. Among OECD countries, based on full implementation 

of laws enacted as of 2002, the retirement age ranges from 60 (in France 

and Korea) to 67 (in Iceland, Norway, and the United States). 

A pension system that is fully funded is one in which sufficient 

contributions have been put aside so that assets accumulated to date are 

equal to the value of benefits accrued to date. Defined contribution 

pensions and individual retirement accounts are fully funded by definition. 

Funds moved from the General Fund of the Treasury to other programs 

that are usually funded with earmarked revenue, sometimes to maintain 

the solvency of those programs. General funds, constituting about twothirds of the budget, have no direct link between how they are raised and 

how they are spent. General fund receipts include income and excise 

taxes. 

A commonly used measure of domestic national income. GDP measures 

the market value of output of final goods and services produced within a 

country’s territory, regardless of the ownership of the factors of 

production involved, i.e., local or foreign, during a given time period, 

usually a year. Earnings from capital invested abroad (mostly interest and 

dividend receipts) are not counted, while earnings on capital owned by 

foreigners but located in the country in question are included. GDP may be 

expressed in terms of product—consumption, investment, government 

purchases of goods and services, and net exports—or it may be expressed 

in terms of income earned-wages, interest, and profits. It is a rough 

indicator of the economic earnings base from which government draws its 

revenues. 

Helping workers maintain living standards during retirement by replacing 

income from work at an adequate level and to prevent destitution in old 

age. The U.S. Congress expected that Social Security benefits would 

eventually provide more than a “minimal subsistence” in retirement for 

full-time, full-career workers. Various measures help examine different 

aspects of this concept, but no single measure can provide a complete 

Full funding 

General revenue transfers 

Gross domestic product 

(GDP) 

Income adequacy 
Glossary 

Page 61 GAO-06-126 Social Security Reforms Abroad 

picture. Such measures include poverty rates, replacement rates, and the 

proportion of the population that depends on others for income support. 

(See Price indexation, Wage indexation.) 

These are fully funded accounts that are administered by either employers, 

the government, or designated third parties and are owned by the 

individual. The level of retirement benefits depends largely on the amount 

of contributions made by, or on behalf of, an individual into the account 

during his or her working life, investment earnings, and the amount of fees 

the individual is required to pay. 

The relationship of benefits to contributions—for example, implicit rates 

of return on Social Security contributions or money’s worth ratios. 

These are set up to partially prefund PAYG national pension programs. 

Governments commit to make regular transfers to these investment funds 

from, for example, budgetary surpluses. To the extent that these 

contribute to national saving, they reduce the need for future borrowing or 

for large increases in contributions to pay scheduled benefits. Funds can 

be invested in a combination of government securities and domestic as 

well as foreign private sector securities. Because of differences in 

accounting practices, some countries report reserve funds as part of 

national budgets, while others do not include them in federal figures 

Total saving by all sectors of the economy: personal saving, business 

saving (corporate after-tax profits not paid as dividends), and government 

saving (the budget surplus or deficit—indicating dissaving—of all 

government entities). National saving represents all income not consumed, 

publicly or privately, during a given period. Net national saving is gross 

national saving less consumption of fixed capital (depreciation). 

PAYG pension programs in which "notional" accounts track both incoming 

contributions and investment earnings, but these exist only on the books 

of the managing institution. At retirement, the accumulated notional 

capital in each account is converted to a stream of pension payments using 

Indexation 

Individual account 

Individual equity 

National pension reserve 

funds 

National saving 

Notional defined 

contribution (NDC) 

program 
Glossary 

Page 62 GAO-06-126 Social Security Reforms Abroad 

a formula based on factors such as life expectancy at the time of 

retirement. 

The two U.S. Social Security programs—Old-Age and Survivors Insurance 

(OASI) and Disability Insurance (DI)—that provide monthly cash benefits 

to beneficiaries and their dependents when the beneficiaries retire, to 

beneficiaries’ surviving dependents, and to disabled worker beneficiaries 

and their dependents. 

System of financing in which contributions that workers and/or employers 

make in a given year are used to fund the payments to beneficiaries in that 

same year, and the system’s trust funds are kept to a relatively small 

contingency reserve.1

Tax imposed on some or all of workers’ earnings that can be imposed on 

employers, employees, or both. In the United States, payroll taxes are used 

to finance the Social Security and Medicare programs. Employers and 

employees each pay Social Security taxes equal to 6.2 percent of all 

employee earnings up to a cap and pay Medicare taxes of 1.45 percent, 

with no cap. Payroll taxes are also known as FICA (Federal Insurance 

Contributions Act) taxes or SECA (Self-Employment Contributions Act), if 

the taxpayer is self-employed. All OECD countries except New Zealand 

levy payroll taxes to support their pension programs, though the rates and 

the shares borne by employers and employees vary, as do the minimum 

and maximum level of earnings subject to the tax and the kinds of 

programs funded. 

A method by which benefits are adjusted at periodic intervals by a factor 

derived from an index of prices; some Social Security reform proposals in 

the United States would price-index earnings to compute benefits, instead 

of using wage indexing. Over time, increases in wages have been greater 

and are expected to continue to be greater than increases in prices. 

Indexing earnings to prices instead of wages would, therefore, reduce the 

 1

By comparison, the federal budgetary term “pay-as-you-go” (PAYGO) refers to a 

requirement that all direct spending and tax legislation for a fiscal year must be deficitneutral in the aggregate. 

Old-Age, Survivors, and 

Disability Insurance 

(OASDI) 

Pay-as-you-go (PAYG:) 

Payroll tax 

Price indexation (Compare 

with Wage indexation.) 
Glossary 

Page 63 GAO-06-126 Social Security Reforms Abroad 

average lifetime earnings used in the formula, which, in turn, would 

reduce benefits. 

Usually expressed annually, the rate of return is the gain or loss generated 

from an investment, expressed as a percentage of the value at the time of 

the initial investment. 

The ratio of retirement benefits (from Social Security or employersponsored plans) to preretirement earnings. Analysts often compare 

current benefits with a recipient’s previous wages to judge the adequacy of 

Social Security payments. 

Under a social insurance program, the society as a whole insures its 

members against various risks they all face, and members pay for that 

insurance at least in part through contributions to the system. Social 

insurance programs, including Social Security, are designed to achieve 

certain social goals. 

The federal agency that administers all Social Security related programs, 

including the Supplemental Security Income (SSI) and the Disability 

Insurance (DI) programs. 

For Social Security, a condition of financial viability in which the program 

can meet its full financial obligations as they come due. Specifically, the 

ability to pay full benefits using existing revenue sources and trust fund 

balances. When a program does not meet these conditions, it is said to be 

insolvent. 

For Social Security, sustainable solvency means the ability to pay benefits, 

based on current law projections of revenue and outlays, beyond Social 

Security’s Board of Trustees’ 75-year forecast and make Social Security 

permanently solvent. Also defined as having a stable and growing trust 

fund ratio with program revenues increasing faster than outlays at the end 

of the 75-year period. The European Union and OECD have examined the 

fiscal sustainability of national pension systems based in part on 

projections of the change in the percentage of countries’ GDP to be spent 

on old-age pensions from 2000 to 2050 under current law. 

Rate of return 

Replacement rate 

Social insurance 

Social Security 

Administration (SSA) 

Solvency 

Sustainable solvency 
Glossary 

Page 64 GAO-06-126 Social Security Reforms Abroad 

Refers to the additional revenue required to implement substitute 

individual account plans. Under some individual account plans, portions of 

Social Security contributions would be diverted to the accounts. However, 

under Social Security’s pay-as-you-go financing, some of those 

contributions would also be needed to pay for current benefits. Making 

account deposits while also meeting current benefit costs requires 

additional revenue, which we refer to as transition costs. 

(Compare Price indexation.) A method by which benefits are adjusted at 

periodic intervals. Under its current formula, SSA uses the national 

average wage indexing series to index a person under age 60’s lifetime 

earnings when computing that person’s Social Security benefits. Earnings 

from age 62 to age 67 are adjusted using a price index. 

Transition costs 

Wage indexation 

 (130403) 
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