Entitlement Reform Process: Other Countries' Experiences Provide Useful Insights for the United States
Published: 2008-01-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Looking to the future, our nation faces large and growing structural deficits and escalating federal debt due primarily to rising health care costs and known demographic trends. Slowing the growth of entitlements is an essential part of the solution to these challenges. GAO was asked to identify useful insights from the entitlement reform processes in other countries. Specifically, GAO was asked to analyze (1) other countries' major efforts to reform entitlement programs, (2) the pressure(s) that led countries to undertake the reforms, (3) how reform proposals were developed, and (4) to what extent enacted reforms built in triggers requiring future actions under certain conditions; and where such trigger mechanisms did not exist, whether some adjustments nonetheless occurred. GAO conducted a literature review focusing on developed, high-income Organisation for Economic Co-Operation and Development (OECD) countries facing similar fiscal challenges. To gain a more in-depth understanding of reform process, GAO selected three efforts for further study: Sweden's pension reform in 1998, Germany's pension reform in 2004, and the Netherlands' disability reform in 2005. For these cases GAO interviewed government officials, reform participants, and experts knowledgeable about the reforms. GAO is making no new recommendations in this report.
section_title: What GAO Found
paragraphs: Other countries' experiences suggest that reform of entitlement programs is difficult but also possible. Several countries more advanced in population aging and facing greater demographic challenges than ours have successfully undertaken reforms of major entitlement programs. Since the 1980s, almost all of the OECD countries have restructured their public pension programs; disability, unemployment, and other programs have also been reformed. Many reform efforts began or accelerated in an environment of economic and fiscal crisis. Other prompts included longer term concerns about population aging and economic competitiveness, and supranational factors such as a desire to meet the fiscal criteria for entry into the European Union. In many countries, reform occurred despite political processes that made it difficult. Consensus had to be built in coalition governments, and leaders had to work across parties to achieve a broad consensus for reform. Commissions were generally used to develop proposals, but this was only one stage in the reform process. Leaders needed to define the problem, persuading others that reform was needed and urgent. The challenge was to build a broad coalition to assure the reform's permanency while preserving the main policy initiatives sought in the reform process. In some reform efforts political leaders used the "bully pulpit" to educate the public but in some cases commissions also helped. Achieving a broad consensus across parties and groups was key to enacting and sustaining reform. Proposals were generally developed by ad hoc commissions established by governments with a strong commitment to reform. Commissions in case study efforts that developed proposals were small, with varying composition. They removed divisive issues from the usual political process, facilitating consultation and negotiation needed to devise a reform package. Commissions also helped to insulate policymakers from political risk. Reform processes were generally complex and often conflict-ridden before they ultimately succeeded in enacting legislation. Many reforms were iterative. Following reform enactment, a need for additional changes sometimes emerged. In some countries standing commissions were established to monitor pension systems and make recommendations for change. Some recent pension reforms have included mechanisms to automatically adjust benefits if adopted reforms prove insufficient to make programs sustainable.

section_title: Letter
paragraphs: Our nation faces a future fiscal challenge that poses severe and  Our nation faces a future fiscal challenge that poses severe and  unacceptable risks to the federal budget and our economy. Absent policy  unacceptable risks to the federal budget and our economy. Absent policy  change, in the future we face large and growing structural deficits and  change, in the future we face large and growing structural deficits and  escalating federal debt due primarily to rising health care costs and known  escalating federal debt due primarily to rising health care costs and known  demographic trends. Continuing on this imprudent and unsustainable  demographic trends. Continuing on this imprudent and unsustainable  fiscal path will gradually erode, if not suddenly damage, our economy, our  fiscal path will gradually erode, if not suddenly damage, our economy, our  standard of living, and ultimately our national security. Unless action is  standard of living, and ultimately our national security. Unless action is  taken, our current path will increasingly constrain our ability to address  taken, our current path will increasingly constrain our ability to address  emerging and unexpected budgetary needs and increase the burdens that  emerging and unexpected budgetary needs and increase the burdens that  will be faced by our children, grandchildren, and future generations of  will be faced by our children, grandchildren, and future generations of  Americans.  Americans.
Taken together, Social Security, Medicare, and Medicaid are the major  Taken together, Social Security, Medicare, and Medicaid are the major  drivers of our future fiscal challenge. While the appropriate level of  drivers of our future fiscal challenge. While the appropriate level of  revenues will be part of the debate about our fiscal future, making no  revenues will be part of the debate about our fiscal future, making no  changes to spending on Social Security, Medicare, Medicaid, and other  changes to spending on Social Security, Medicare, Medicaid, and other  drivers of the long-term fiscal gap would require ever-increasing tax  drivers of the long-term fiscal gap would require ever-increasing tax  levels—something that seems both inappropriate and implausible.  levels—something that seems both inappropriate and implausible.  Substantive reform of Social Security and our major health programs  Substantive reform of Social Security and our major health programs  remains critical to recapturing our future fiscal flexibility.  remains critical to recapturing our future fiscal flexibility.
Last year several proposals were made to establish special groups to help  Last year several proposals were made to establish special groups to help  develop proposals for entitlement reforms to address the long-term fiscal  develop proposals for entitlement reforms to address the long-term fiscal  challenge. On September 18, 2007, you jointly introduced a bill to establish  challenge. On September 18, 2007, you jointly introduced a bill to establish  a Bipartisan Task Force for Responsible Fiscal Action. Composed of  a Bipartisan Task Force for Responsible Fiscal Action. Composed of  Members of Congress and Administration officials, this group would be  Members of Congress and Administration officials, this group would be  asked to make recommendations on how to significantly improve the  asked to make recommendations on how to significantly improve the  government’s long-term fiscal imbalances. Others have also introduced  proposals to establish special groups with similar aims. At the Senate  Budget Committee’s October 31, 2007, hearing on the Bipartisan Task  Force proposal, I testified that this approach offers one potential means to  achieve the objective of taking steps to make the tough choices that will  be necessary to address the long-term fiscal challenge. As I have noted,  revenues will also have to be on the table as we address the long-term  fiscal challenge, but slowing the growth of entitlements is a necessary  component of the solution. Accordingly, I have called for the  establishment of a commission that would address the long-term fiscal  challenge by developing proposals to put Social Security on a sustainable  path and begin the reform of health care and the tax system.
You asked us to look at entitlement reforms in other countries with an eye  to identifying useful insights and possible “lessons learned” from their  reform process.
Specifically, you requested that we analyze  (1) other countries’ major efforts to reform entitlement programs,  (2) the pressure(s) that led countries to undertake the reforms,  (3) how reform proposals were developed (the structure or process  used—e.g., commissions or special groups within the government), and  (4) to what extent enacted reforms built in triggers requiring future actions  under certain conditions; and where such trigger mechanisms did not  exist, whether some adjustments nonetheless occurred.
We looked at the reform process in selected developed countries with a  focus on instances where the reform process had included commissions or  other special groups. We limited our review to developed, high-income  Organization for Economic Co-operation and Development (OECD)  countries facing similar but even more daunting long-term challenges and  demographic changes than the United States. From our literature review  we identified instances in other countries where enacted reforms to  programs such as pension or other social welfare programs were expected  or intended to slow cost growth and increase fiscal sustainability.  Although OECD countries have made many reforms to their health care  systems since the 1980s, and reform efforts continue, we found no country  that has been able to optimize the multiple goals of cost containment,  access, and quality over time. Some countries have already undertaken  national pension reform efforts to address demographic changes similar to  those occurring in the United States, and in a previously issued report we  drew lessons from their experiences. Based on this, we selected three  reform efforts for further study, including examples of both iterative and  noniterative types of process: Sweden’s pension reform in 1998; Germany’s  pension reform in 2004; and the Netherlands’ disability reform in 2005. In  these three cases we consulted with government officials, reform  participants, and others knowledgeable about the specifics of the reform  process.
We did not evaluate the effect of reforms on beneficiaries or on program  effectiveness. Consideration of any entitlement reform process should not  be taken to imply approval of the specifics of any given reform. We limited  our review to documents available in English. (For more information on  our scope and methodology, see app. I.) We conducted this work in  accordance with generally accepted government auditing standards from  July 2007 through January 2008.
subsections: section_title: Background
paragraphs: In all countries, entitlement programs such as public pension programs  and disability programs are politically sensitive and difficult to change.  The hard choices needed to change the path of these programs include  trade-offs that are likely to result in redistribution, creating “winners” and  “losers.” Such choices raise issues of fairness and access, embodying  varying views about the appropriate roles of government and individuals  in society. Reform may entail short-term sacrifice for long-term gain. Some  experts have expressed the view that entitlement reform in the United  States faces unique challenges due to the existence of multiple program  constituencies combined with a complex legislative process with many  hurdles to enactment.
Since the early 1990s, several commissions have been established to  develop entitlement reform proposals, and considerable public debate,  especially on Social Security reform, has taken place. (See app. II for more  information on historical U.S. commissions on entitlement reform.) Both  the current President and his predecessor discussed the need for Social  Security reform and participated in related town meetings on Social  Security, raising public awareness of the need for change. We have  developed criteria to help Congress evaluate Social Security reform  proposals. These criteria reflect the multiple and conflicting goals that  will have to be balanced in any reform package. To date, major structural  change to the entitlement programs that drive the long-term fiscal  challenge has not been enacted.
With regard to both Social Security and Medicare, consensus on the need  for reform and reform approaches remains elusive. For example, some do  not believe fundamental structural change to Social Security is necessary.  Among those who have developed proposals, some include individual  accounts and others do not. No major changes have been enacted to Social  Security since 1983, when reform legislation based on a proposal  developed by the Greenspan Commission was enacted in response to a  near-term crisis in program financing. In contrast, Medicare has been  modified frequently, but the most significant change was a 2003 expansion  of benefits to include prescription drugs. This step served to significantly  increase the fiscal imbalance in the Medicare program.
Challenges posed by the growth path of entitlement spending are not  unique to the U.S. Other developed countries have faced and continue to  face the challenges of unsustainable social welfare programs including  public pensions and health care. Moreover, many developed countries,  especially in Western Europe, face more daunting demographic shifts due  to population aging than the U.S. Figure 1 shows changes in the elderly  dependency ratio–the number of older people relative to those of working  age. As figure 1 shows, population aging in France, Germany, Italy, Japan,  Sweden, and the United Kingdom is already as advanced today as is  projected for the U.S. in 2020.
Spending on public pensions has presented major challenges in many  countries where such spending generally represents a larger share of the  total economy than in the U.S. Figure 2 shows this spending as a share of  gross domestic product (GDP) in selected high-income countries in 1990  and 2003.
As in the U.S., health care cost growth presents challenges in OECD  countries, with total healthcare spending, both public and private,  generally rising as a share of GDP in the last 10 years. Although total  health care spending in other countries is smaller as a share of the  economy than in the United States, a larger share of that spending is  public. On average, the public share of health spending in OECD countries  was 73 percent in 2005. For example, in 2005 public health spending as a  share of GDP in Germany was 8.2 percent, or 77 percent of total health  spending; in France 8.9 percent, or 80 percent of total health spending; and  in the U.K. 7.2 percent, or 87 percent of total health spending. In the U.S.,  public health spending was 6.9 percent of GDP, or 45 percent of total  health spending in 2005. Figure 3 shows public and private health  spending in 2005 for selected countries.
Health care cost containment is expected to continue to pose challenges in  other countries as well as in the U.S. Projections developed by the  Commission of the European Communities show that the management  and control of health care spending will be a critical part of overall efforts  in European Union (EU) countries to ensure progress towards more  sustainable public finances. This is also true outside the EU. For example,  in our recent study of accrual budgeting, we found that Australia projects  that health care spending will nearly double as a share of GDP by 2046- 2047. Similarly, the United Kingdom projects that its health spending will  increase from around 7 ½ percent of GDP in 2005-2006 to around 10  percent of GDP by 2055-2056. New Zealand projects a rise in the ratio of  health spending to GDP of 6.6 percentage points between 2005 and 2050  resulting in health spending of about 12 percent of GDP.
section_title: Many Countries Have Reformed Entitlement Programs and Reform Efforts Continue
paragraphs: Since the 1980s, many OECD countries have enacted reforms to politically  sensitive and popular entitlement programs such as public pensions,  disability, unemployment, social welfare (social assistance) programs, and  health care. Like the U.S., many other developed countries have  experienced and expect to continue to experience a rate of cost growth in  their public health programs that exceeds the growth rates of their  economies. Unlike the United States, however, many other countries have  made major changes to their public pension programs in the last two  decades. (For a summary of selected reform efforts, see app. III.)
In the 1980s, some countries sought to address future financial shortfalls  in their public pension programs by increasing contributions, but since the  early 1990s many pension reform efforts have sought to reduce future  public finance commitments. As shown in figure 2, spending on public  pensions in some other developed countries is much larger than in the  United States. Contribution rates are also higher. In the U.S., contribution  rates for Social Security are 12.4 percent of taxable income. In Sweden  and Germany, rates in 2006 were over 18 percent; in the Netherlands over  25 percent; and in Italy over 30 percent. Governments have either  undertaken far-reaching, structural pension reforms or adopted a series of  smaller reforms which, taken together, affect future pension entitlements  substantially. Although Sweden undertook a single major overhaul; more  typically, several rounds of reform took place as in Italy, France, Germany,  and Japan.
Since the early 1990s almost all the 30 OECD countries have made changes  to restructure their public pension programs with a clear trend toward  reduced benefit promises. In 16 OECD countries that implemented  significant reform in the last 10 years, OECD estimates that the benefit  promise was reduced by 22 percent. Italy, Sweden, France, Austria,  Germany, and Japan reduced replacement rates for workers with average  earnings by at least 6 percent. In assessing future fiscal risk of individual  European Union member countries, a 2007 European Commission report  cited pension reforms in Italy, Sweden, France, Austria, Denmark, and  Germany as having contributed to increased sustainability of public  finances.
Efforts to reform pensions are continuing. For example, in France the  current government is seeking changes including reductions to pension  benefits for certain civil servants; reform of civil service pensions was  previously attempted in 1995. The U.K., which restructured its public  pension program in the 1980s and has made numerous changes since then,  has recently enacted a new major reform following the work of the Turner  Commission. Among other changes, this reform combines an increase in  the retirement age with higher promised benefits to address an emerging  problem of poverty among the elderly. This tension between reducing  costs and the need to avoid increasing the number of elderly poor is  reflected in the OECD’s 2007 report on the status of pension reforms. This  report noted that in some countries further reforms are needed to ensure  fiscal sustainability while in others previous enacted reforms may have to  be revisited given the risk of old-age poverty for low-income workers.
Non-pension social welfare programs have also been subject to change,  with many reforms reducing benefits. For example, in 14 of 20 OECD  countries changes in disability policy between 1985 and 2000 included  reductions in compensation, with the Netherlands undertaking the largest  reductions. The Netherlands also undertook the largest policy change  with respect to increased integration of disabled people. More recent  disability reforms in the Netherlands were cited as contributing to curbing  long-term public spending in the European Commission’s 2006 report  assessing the sustainability of public finances. Since the early 1990s,  concerns about cost containment have played a role in reforms of  unemployment programs in countries such as Canada, France (2001), and  Germany (2003-2005). Reforms of social assistance (welfare) programs  were enacted in the Netherlands (2004). Efforts to reform other types of  programs continue as well. For example, Sweden is seeking further reform  of its sickness benefit, under which general tax revenue and employer and  employee contributions pay employees for sick days.
In some countries, reforms sought to make changes to related programs at  the same time. For example, the Hartz reforms in Germany integrated  unemployment and social assistance. In recent years the Netherlands has  undertaken reform of unemployment, social assistance, and health care as  well as disability. In Denmark a 2006 comprehensive reform package  known as the “Welfare Agreement” included changes to unemployment  policy, increases in the retirement age, and provisions for increased  investment in education. The Danish government described the Welfare  Agreement as part of a national reform strategy building on two decades of  reforms and was based in part on the work of a 2003 expert commission.
In our 2003 report on strategies to increase labor force participation  among older workers, we studied policies in three countries with high  levels of older worker participation and recent reforms—Japan, Sweden,  and the United Kingdom. All three countries had made changes to their  pension systems. Sweden and the United Kingdom had also tightened  eligibility requirements for disability insurance to reduce its use as a path  to early retirement. Officials in these countries agreed on the need for  comprehensive reforms, e.g., changes to national pension reforms should  be accompanied by reforms in the employer-provided pension system, in  related social insurance programs such as disability, and in labor market  policies.
OECD countries have made many reforms to their health care systems  since the 1980s, and reform efforts continue. For example, the  Netherlands has recently restructured its health system with a stated aim  of containing health care cost increases. We found no country that has  been able to optimize the multiple goals of cost containment, access, and  quality over time. As has been noted by the Deputy Head of OECD’s Health  Division, the challenge for OECD countries today is how to ensure their  health systems will be sustainable given population aging and a rate of  health care cost growth faster than the economy.
As in the United States, structural reform of health systems is highly  controversial, and the reform process may take time. The 2002 Rurup  Commission in Germany was charged with developing recommendations  to ensure sustainability for the social insurance system including pensions,  health care, and long-term care. Two opposing approaches for health care  financing were discussed, but the Commission was unable to reach  consensus on a proposal. Reform of the Netherlands health care system  in 2006 incorporated some elements similar to recommendations made by  a commission that concluded its work almost 20 years earlier.
section_title: A Variety of Pressures Have Led to Entitlement Reform in Other Countries
paragraphs: Several kinds of pressures—economic and fiscal crisis, the demographic  changes of population aging—have been cited as prompting entitlement  reform efforts. In many countries reforms occurred in environments of  economic and fiscal crisis. Long-term concerns about population aging  and economic competitiveness are commonly cited as prompting reforms,  especially of pension programs. Supranational factors such as a desire to  meet the fiscal criteria needed for entry into the European Monetary  Union have also been cited as constituting pressures for reform.
Many reform efforts began or accelerated in an environment of economic  and fiscal crisis. In the early 1990s, for example, the Swedish pension  reform process took on urgency as Sweden was experiencing its worst  recession since the 1930s, with growing public debt and a devaluation of  its currency. A Parliamentary Working Group established by the  government in 1991 developed the reform proposal that was ultimately  enacted in 1998. Similarly, the 2002 reform effort of the German pension  system was triggered by an economic downturn that worsened the  program’s financial condition and led to the establishment of the Rurup  Commission. Although the Commission reached no consensus on health  care and long-term care, the pension reforms it recommended were  enacted in 2004 and 2007. According to experts, pension reforms in  Australia, Canada, Denmark, Finland, Italy, and New Zealand all took  place in an environment of economic and fiscal crisis.
Long-term pressures are also frequently cited as motivating reforms. Our  2005 report found that demographic as well as fiscal factors necessitated  pension reform in many countries. 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. Population aging affects pension programs and  projections directly. Swedish and German government officials attributed  pension reforms primarily to concerns about the programs’ long-term  fiscal sustainability. Similarly, according to a Japanese government  official, since 1994, projections of Japan’s pension program’s financial  condition have necessitated a series of reforms largely due to further aging  of society.
Concerns about competitiveness in an era of globalization combined with  current and future population aging are also cited as leading to entitlement  reforms and influencing reform options. In the 1980s some pension  reforms raised payroll tax contribution rates, but in the 1990s a desire in  some countries to keep non-wage labor costs as low as possible tilted  options toward benefit reductions. For example, in Germany, avoiding  higher payroll tax contribution rates was one concern in their 1990s  reforms. Reforms that included benefit reductions and eligibility changes  in pension and non-pension social welfare programs, e.g., disability and  unemployment, sought to increase labor force participation rates as one  response to competitiveness concerns. The European Commission has  noted a need to increase employment rates, notably of older workers, as  an issue of prime importance in EU countries. The Commission has further  noted that in countries where a significant decrease in the benefit ratio,  i.e., average pensions over GDP per worker, is projected, raising  employment rates of older workers is especially important as this could  reduce the risk of possibly inadequate pensions in the future.
Supranational factors are also said to have played a part in bringing about  entitlement reforms. In some European countries, the desire of some  countries to meet fiscal criteria for entry into the European Monetary  Union (EMU) has been cited as a factor leading to reforms. For example,  Italy’s 1992 pension reform was undertaken as the country sought to join  the EMU. Entitlement reforms during the 1990s in countries such as  Netherlands, France, and Germany have similarly linked to these  countries’ efforts to meet the fiscal criteria for EMU membership. More  recently, the European Commission has encouraged its member countries  to adapt their public programs including entitlements such as pensions  and health care to be better able to cope with future economic challenges  as part of the “Lisbon Strategy” to ensure growth and jobs. Denmark’s  first progress report on its national reform program, developed as a  contribution to the Lisbon Strategy, focuses on its 2006 Welfare  Agreement.
Clearly, these various pressures are not mutually exclusive in Europe or  elsewhere. For example, according to a Japanese government official, the  1985 pension reform in Japan was introduced as part of a broader fiscal  reform in a context of the end of rapid economic growth, growing public  debt, and the aging of society. Neither are the pressures sufficient  explanations for why some countries enacted reform changes to increase  program sustainability while others did not. As a result, according to  OECD, some countries’ pension systems continue to need a major  overhaul.
section_title: How Reform Proposals Were Developed in Other Countries
paragraphs: Detailed reform proposals in other countries were generally developed by  commissions or other specially established groups. Proposal  development, however, is only one stage in what is often a long, difficult,  and conflict-ridden process. Before reform can be enacted and  implemented, policymakers and the public generally need to have a shared  understanding of the size, scope, and nature of the problem. Next, reform  options need to be developed, and reform packages that key stakeholders  can support need to be negotiated. This stage generally involves dialogue,  negotiation, and coalition building to reach a sufficient degree of  consensus across political parties and groups in society. Special groups  outside the normal political process such as commissions can be used to  create a space where the difficult negotiations needed to reach consensus  can take place. Such groups can mitigate political risk for reform  participants as well as educate the public, creating pressure for change.  Finally, a reform package needs to be enacted and implemented in  succeeding years. Whatever the reform process, leadership is key at all  stages for reform to be enacted and sustained. As one expert has put it,  for broad-ranging reform to occur, two conditions must exist: first, the  public must believe that change is needed, and second, leadership must be  able to transform this perception into an agenda that crystallizes the issues  and points to their solution.
subsections: section_title: Stage 1 of Reform: Framing the Problem
paragraphs: In reform efforts we examined, various events and actions helped define  the size and scope of the problem. In Sweden a commission helped to put  pension reform on the agenda. A large and diverse commission worked  from 1984 to 1990 without being able to reach consensus on a proposal,  but its analyses are credited with having laid the groundwork for later  reform, raising public awareness of the problem and leading policymakers  to conclude that major structural change was needed. (For more  information on the Swedish pension reform, see app. IV.)
It has been noted that the timing of reform depends on political  leadership—in the first instance leadership to make clear that there is a  crisis. In the Netherlands’ long and difficult disability reform process,  actions by political leaders defined the problem and communicated its  urgency. (For more information on the Netherlands’ disability reform, see  app. V.)
The Netherlands disability reform: the “1 million” measure. In the  early 1990s, government efforts to reform the disability program in the  Netherlands and reduce benefits had met with considerable political  opposition. Then-Prime Minister Lubbers made a speech in which he  declared that if the number of disability claimants exceeded 1 million, he  would resign. Analysts, including some who participated in later reform  efforts, cited this measure as having re-framed the public discussion about  disability. Although this number was never reached, the “1 million”  number became a widely accepted symbol of the need for reform in both  expert studies and public discussion. This continued to be the case as the  number of disability claimants rose and fell throughout the 1990s and into  the early 2000s.
Netherlands disability reform: televised hearings by the  Buurmeijer Parliamentary Commission led to a change in the  conversation about disability. In the mid 1990s, the Buurmeijer  Commission, a special parliamentary inquiry chaired by Social Democrat  Flip Buurmeijer, investigated the administration of disability by  employers and employee groups. According to experts, this kind of  parliamentary inquiry is rare and considered significant in Dutch politics.  The work of the Commission took many months and received widespread  public attention through nightly televised hearings. According to experts,  this Commission’s work had profound effects on the subsequent reform  process. The Commission’s recommendations influenced later legislation;  in the public discussion they raised issues as to whether the program was  meeting its goal of serving the truly needy. Ultimately, the reform process  in the Netherlands became a conversation about the appropriate roles and  responsibilities of government, employers, and employees in society.
In Germany Chancellor Schroeder developed a reform agenda he  termed “Agenda 2010” that was aimed at modernizing the German  social insurance system and labor market. The Schroeder government  established numerous commissions as part of this effort, including the  Hartz Commission on unemployment program reform and the Rurup  Commission on the sustainable financing of the social insurance system.  (For more information on the German pension reform, see app. VI.)
section_title: Stage 2: Proposal Development
paragraphs: In the three case study reform efforts we reviewed, once reform was on  the agenda, proposals were developed by commissions established by  governments with a strong commitment to reform. Commissions served as  a venue for negotiation and compromise leading to a reform package.  Commissions that developed proposals were generally small, but their  composition varied, as did their charters. Within the commissions,  leadership was also important. Negotiated behind closed doors, reform  packages were presented publicly prior to legislative enactment and  sometimes changed following participation in the reform process by other  stakeholders. According to OECD, most countries set up ad-hoc  commissions when pension reform processes are being launched.
Swedish 1991 Parliamentary Working Group. In Sweden, a small  parliamentary working group developed the reform package. This group  was chaired by a minister of the center-right government then in power,  who had participated in the earlier commission. The group’s small size and  limitation to political leaders were unusual, as was the exclusion of  representatives from employer groups and labor unions. The major parties  were represented. In contrast to the earlier 1984 commission, which had  been tasked with making program changes within the existing framework,  the 1991 group had a broad charter for reform. Between 1991 and 1994, the  group negotiated the outlines of a major structural pension reform,  keeping deliberations within the group. This outline became the basis of  legislation enacted in 1998.
The 2001 Donner Commission. In the Netherlands, the Donner  Commission crafted a disability reform package that included a  recommendation for major structural change. Established by a Minister  following many reform changes in the 1990s, the Commission was  composed of respected public figures from major parties who were able to  negotiate for those parties. Members were not currently active in national  politics and not identified with the disability issue. The commission  developed a reform proposal in meetings closed to the public and made  use of an expert staff. Observers attribute the enactment of reform to the  leadership of both the Minister who established the commission and  guided its proposal through the legislative process and the Commission  chair, Piet Donner.
The 2002 Rurup Commission. This German commission was chartered  with developing proposals to make the public pension system, the health  care system, and the long-term care social insurance sustainable. The  Commission was established by the Social Democratic government of  Chancellor Gerhard Schroeder as a means to garner support for reform  from both within his party and outside. The Commission was large (26  members), but broke into smaller sub-groups to address the three  programs. While it was unable to reach consensus on health care and long- term care, the commission did make recommendations for pension  reform. Led by experts, the pension sub-group worked closely with the  Commission chair, Bert Rurup, an academic identified with the Social  Democratic Party then in power. The Commission’s recommendation for a  “sustainability factor” in the pension system was enacted in 2004 by the  Social Democrats; its recommendation to raise the retirement age was  enacted in 2007 by a coalition of Christian Democrats and Social  Democrats.
In some reforms, the process of negotiation and proposal development  continued after the commission had concluded its work. For example, the  Donner Commission’s disability reform proposal was reviewed by an  institution representing employer groups, labor unions, and the  government. This review, a routine feature in the Dutch legislative  process, led to further changes before legislation was enacted. Similarly,  according to the Danish government, the 2006 Welfare Agreement was  based not only on the recommendations of the Danish Welfare  Commission but also on the work of two other groups, the Danish  Globalisation Council and a tripartite council of employer, employee (e.g.,  labor unions), and government representatives.
Although all three case study countries used ad hoc commissions,  commissions involved in a reform process can also be standing  institutions. Japan used Pension Councils coordinated by a government  ministry and composed of representatives of employers’ groups, labor  unions, academic researchers, and government officials to facilitate  pension reforms during the 1990s. Other countries also have standing  commissions. Whether ad hoc or standing, commissions or other  specially established groups are commonly used to develop reform  specifics because they can take divisive and controversial issues out of the  usual political process, facilitate consultation and negotiation, and help to  insulate policymakers from political risks inherent in supporting a reform  package.
Although commissions are a frequently used means to develop proposals,  governments have also taken other approaches. In some countries the  government developed reforms on a unilateral basis, i.e., without seeking  consensus through participation by opposition parties or other  stakeholders. Sometimes such efforts succeeded in creating changes; in  other cases, they did not. The 1980s pension reform in the U.K. was  enacted despite opposition and sustained over time with numerous  adjustments. However in France a unilateral approach did not lead to  legislative enactment. A 1995 civil service pension reform effort met with  sufficient opposition that it was not enacted. The same thing happened  with a 1994 pension reform effort in Italy, which led to a change in  government. In other cases, the public was involved in the reform  process. Canada’s 1997 pension reform included public consultations that  highlighted consensus principles for reform. In Japan’s 2000 reform,  reform alternatives were presented to the public in the early stages of  discussion. Indeed, a 2000 study noted that a process involving  consultation, negotiation, and public education has been used for pension  reform in highly industrialized countries in recent years.
section_title: The Process of Reform Is Complex and Not Sequential
paragraphs: In reforms we examined, the reform process as it unfolded did not  proceed in a simple or straightforward manner from problem definition to  negotiation and consensus-building to enactment. Rather, the reform  process at some points seemed more like a zigzag or “two steps forward,  one step back” than a straight line.
An important provision of the 1997/1999 pension reform by the Christian  Democrats in Germany was revoked by the successor Social Democratic  government. This same government subsequently undertook a structural  reform in 2001 and in 2002 established the Rurup Commission to address  unexpected shortfalls in pension financing.  In Sweden, following the work of the 1991 group, a second Parliamentary  Working Group worked out legislative details of the reform between 1994  and 1998 while leaders of the Social Democratic party worked to persuade  opponents within their party on the need for and contours of reform.
Similarly, the activities of consultation, negotiation, and public education  may occur at several points in the process, with commissions performing  multiple roles. For example, the Danish Welfare Commission both  developed recommendations used in the legislative process and educated  the public about the need for change. The 2002 Rurup Commission’s  recommendation to raise the retirement age is said to have led to a  controversial public debate, with this change enacted in 2007.
Reform is difficult. Commissions can help, but they are a tool in a larger  process, not a guarantee of reform success. For reform changes to be  enacted and sustained, a sufficient degree of consensus across the major  parties and acceptance by the general public of the need for change must  be achieved. Leadership is needed to bring this about. In Sweden and  Germany, formal and informal cross-party cooperation was key in moving  reform forward; in the Netherlands, disability reforms were enacted by  various coalition governments. Consultation took place with key  stakeholders either formally or informally. As experts have noted, the  tension is to build a broad coalition to assure the permanency of the  reform, while preserving the main policy initiatives sought in the reform  process.
section_title: The Reform Process May Continue Following Enactment of Legislation
paragraphs: Each country’s reform process was unique, but some re-adjustment or  fine-tuning often occurred over time. In some cases adjustments were  needed to address emerging implementation challenges. In other cases  change included new rounds of reform as the reform process became  iterative. In recent pension reforms, a trend has emerged toward including  automatic mechanisms, or triggers, which aim at insulating reforms from  policy change. These types of mechanisms are structured to reduce  benefits without legislative action under specified circumstances, e.g., if  demographic or economic trends prove unexpectedly unfavorable.
As reforms are implemented, unexpected challenges may emerge that call  for fine-tuning or other adjustments including due to unintended  consequences.
In Sweden, following the implementation of pension reform, changes to  individual account administration have been under discussion. Since  account inception, the number of Swedes making active investment  choices has dropped, with more people routing their money into the  government default option. A government committee has recommended  limiting investment options from over 700 accounts to around 200, and  converting the default fund into a fund that adjusts based on an  individual’s age. To date, no changes have been enacted.  In the Netherlands, one of the disability reforms sought to provide  employers with incentives to limit the number of their employees claiming  disability. However, some experts said that in response employers began  to seek ways to identify prospective employees who posed a risk of  becoming sick or disabled. Legislation was then passed preventing health  screenings in the hiring process.
The United Kingdom experienced substantial difficulties in the 1980s when  it implemented its pension reform, in part, by providing too little public  education and relying on its already existing regulatory system, which  proved to be inadequate. In what has become known as the ‘mis-selling’  controversy, high-pressure sales tactics were used to persuade individuals,  especially older workers, to take up individual accounts when they would  more likely have been better off retaining their occupation-based  pensions.
As we noted in our report on other countries’ pension reforms, the extent  to which new provisions are implemented, administered, and explained to  the public may affect the outcome of the reform.
In some cases the need to revisit is anticipated and initial legislation  provides for some form of periodic re-visiting under specified  circumstances. For example, Germany and Japan established “soft”  triggers as part of their pension reforms. The 2001 German reform  included a requirement that if projections did not meet specified  thresholds for maximum expected contribution rates or minimum  replacement rates in the future, government action would need to be  taken. Triggered in 2002, this mechanism led to the establishment of the  Rurup Commission. A similar mechanism in Japan requiring an  examination every 5 years of its pension program’s sustainability led to  additional rounds of reform. Other countries also have established  institutions to monitor pension fiscal sustainability and in some cases are  tasked with recommending adjustments as appropriate.
Reform processes can be described as one-time “big bang” reforms as in  Sweden; more commonly, reforms are iterative as in the Netherlands  disability reform or German pension reform. In our work on other  countries’ pension reforms, we noted that, in almost every country we  studied, debate continued about alternatives for additional reform  measures even after initial changes were enacted. It is clearly not a  process that ends with one reform, and it often requires more than one  type of reform. An iterative process can be understood as reflecting the  difficulties posed by reform of popular and politically sensitive programs.
Some have pointed out that frequent changes may have a downside. Some  officials we spoke with noted that although an iterative process may be  politically necessary, constant re-opening of issues is not ideal. In some  cases where several rounds of reforms occurred, frequent changes to  pension systems created public mistrust. For example, in Japan  noncompliance with the system became an issue in the public debate in  the early 2000s following a series of pension reforms driven by rapid  population aging. Swedish officials said that achieving a consensus on a  reform that would be politically sustainable was one reason that the  reform process took so long.
Because reform is so difficult, a major goal is to have a reform that will  last. Given that there is uncertainty about the future, some pension  reforms include mechanisms to reduce benefits (and in some cases also  increase revenues) without intervention by policymakers. In 2001 as part  of its reform changes Sweden enacted an automatic balancing mechanism  to adjust benefits if other reform changes prove insufficient to keep the  pension program in fiscal balance. The automatic balance mechanism is a  kind of “hard trigger” that comes into play under specified circumstances.  Following Sweden’s lead, several other countries have adopted similar  types of mechanisms, and these mechanisms are considered an emerging  trend in pension reform. Germany’s 2004 pension reform included a  “sustainability factor” as recommended by the Rurup Commission. The  sustainability factor automatically adjusts benefits based on the number of  workers to beneficiaries. Pension reforms in Japan, Italy, Canada and  other countries have also included automatic adjustment mechanisms. An  aim of this type of mechanism is to insulate reforms from future legislative  changes, thereby increasing trust in program sustainability and  compliance with the system. In addition, experts have noted that such  mechanisms could mitigate political risk for policymakers in the event  reductions are triggered.
The effects of such mechanisms generally remain to be seen. In Japan, a  mechanism adopted in 2004 to limit increases in contribution rates has  been triggered. According to one expert, the result has been accepted by  the public following a painful public debate.
Experts have expressed differing views concerning these types of  mechanisms as used in pension reforms. Some have expressed the view  that automatic mechanisms may be the best approach to slowing cost  growth in the entitlement programs driving the long-term fiscal challenge.  Others have noted that mechanisms could be subject to erosion should  they be triggered and the required benefit reductions prove politically  unacceptable. Those who support the concept of automatic mechanisms  note that in this event legislators always have the option of suspending the  mechanism and are unlikely to raise benefits above the levels that would  have been the case had the mechanism never been activated. In any case,  triggers may make it more difficult to ignore that a problem exists.
section_title: Implications for the United States
paragraphs: The experiences of other countries suggest that while reform is difficult, it  is also possible. Countries more advanced in population aging and facing  greater demographic challenges than ours have undertaken reforms of  major entitlement programs. In many countries, reform occurred despite  political processes that made it difficult. Consensus had to be built in  coalition governments, and leaders had to work across parties to achieve a  broad consensus for reform. Nonetheless, politically sensitive and popular  programs such as public pensions were reformed including those which  were (and are) more generous to individuals and constituted a larger share  of their economy than is the case in the U.S.
The experiences of other countries also underline that for reform to be  enacted and sustained, it needs broad-based support that reaches across  parties and groups. In the U.S. this means that reform will need to be done  on a broad bipartisan basis. For reform to be sustained, a broad public  consensus must be reached on the need for reform.
Other countries’ reform processes show that at all points in the process  leadership will be needed to create and sustain consensus. In other  countries leaders undertook many actions to begin the reform process and  move it forward to enactment and implementation. Leaders framed the  problem in new ways, persuaded the public and other policymakers that  reform was necessary and urgent, established commissions to develop  reform packages, and worked to build coalitions to support reform.  Throughout the process, leaders had to negotiate tensions between the  need to build broad coalitions while maintaining reform goals. In the U.S.,  presidential leadership will be key if reform is to happen.
As in the 1983 reform of Social Security, other countries’ experiences  show that commissions can be a useful tool. Commissions in other  countries moved reform forward by educating the public and also  provided a forum for developing reform packages. Commissions we  studied often met out of the public eye, thereby facilitating discussions  and negotiations that could then be supported by all those involved.  Establishing a commission, however, does not guarantee that a reform  package that can gain consensus will be developed. While commissions  can help, they are not a substitute for leadership or political will.
Other countries’ experiences show that for reform to occur, certain  elements must fall into place. For reform to occur and be sustained, the  public and policymakers in other countries were ultimately persuaded that  reform was necessary and urgent. Coalitions were built to support reform,  and a package that could gain support and a broad consensus was  negotiated and enacted. For reforms to be enacted and be sustained by  future governments, the involvement of major stakeholders whose support  was necessary for the success of the reform was needed, whether through  membership in the commission or through some other means. How this  happened differed from country to country—each country’s process was  unique. Taken as a whole, reform processes were generally complex and  often conflict-ridden before they ultimately succeeded in enacting  legislation.
One conclusion is that it is hard to know—before legislation is actually  enacted—how close any given process is to reaching its culmination. In  the U.S., past commissions and other public discussions on entitlement  reform have laid groundwork for reform even while appearing to “fail,”  e.g., no reform was enacted. For Social Security reform in this country,  options have been developed, and policymakers have had the opportunity  to learn from past initiatives that did not gain consensus. Public debate  has been ongoing for some time, with considerable and growing public  awareness that Social Security and Medicare are unsustainable. While no  one can know what needs to happen next, given leadership committed to  reform, it is possible that our reform process could be further along than it  may seem.
We are sending copies of this report to interested parties. Copies will also  be made available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov. This  report was done under the direction of Susan J. Irving, Director of Federal  Budget Analysis, Strategic Issues, who may be reached at (202) 512-9142 if  you have any questions about this report. Contact points for our Offices of  Congressional Relations or Public Affairs may be found on the last page of  this report. GAO staff who made major contributions to this report are  listed on appendix VII.
section_title: Appendix I: Scope and Methodology
paragraphs: To develop criteria for “major entitlement reforms” and to select case  studies and reform efforts for further review, we conducted a literature  review and consulted with experts.
We reviewed GAO reports on other countries’ entitlement reforms for  pension programs, labor market reforms, and disability reforms; OECD  reports on pension reforms, disability reforms, and long-term care  reforms; the WHO Health Care in Transition country profiles; International  Monetary Fund country profiles and studies of health care reforms by the  International Network Health Policy & Reform, which monitors health  policy trends and developments in 20 industrialized countries. We  reviewed materials from a 2007 OECD conference of budget officials from  several OECD countries involved in budgeting for entitlement programs  and concerned about the future cost implications of these programs.
We reviewed papers from a 2006 conference on entitlement reforms and  reform process in European countries including reforms to pensions,  unemployment, and health care programs.
We analyzed OECD information on pension reforms to identify countries  that had made the largest reductions in benefit promises. We reviewed the  2005/06 and 2007 sustainability assessments made by the European  Commission of EU for the sustainability of public finances in those  countries, focusing on countries where risk assessments indicated that  entitlement reforms had improved sustainability.
We consulted with the staff responsible for the GAO reports on  international entitlement reform and with OECD officials responsible for  pension reform and health care. We also consulted with an OECD official  who had convened a conference on budgeting for entitlement reforms and  with an academic expert on budgeting and public policy.
Although OECD countries have made many reforms to their health care  systems since the 1980s, and reform efforts continue, we found no country  that has been able to optimize the multiple goals of cost containment,  access, and quality over time. Some countries have already undertaken  national pension reform efforts to address demographic changes similar to  those occurring in the United States, and in a previously issued report we  drew lessons from their experiences.
Based on these reviews and consultations we narrowed our focus to highly  developed, relatively affluent OECD countries on the grounds that these  countries were more likely to have similar types of political pressures to  the U.S., but even more daunting long-term challenges and demographic  changes. We further limited our review to reforms enacted within the last  10 years that had aimed at slowing cost growth and increasing fiscal  sustainability. Finally, we selected the following reform efforts for further  review: pension reform in Sweden, Germany, Japan, Italy, France, U.K.,  and Canada; disability reform in the Netherlands; and reform of social  programs in Denmark.
To understand how reform proposals were developed and to understand  the dynamics of entitlement reform, we reviewed political science  literature on reform process in various countries including theoretical  studies of the stages of reform. We also reviewed studies from experts  including researchers at the Center for Strategic & International Studies  (CSIS), the Urban Institute, the International Labour Office (ILO), and the  Center for Retirement Research.
To analyze how reform proposals were developed and to supplement our  analysis of the other objectives, we selected three reform efforts for more  in-depth review. In selecting reform efforts we took into account  information from the literature review and recommendations by the  experts we consulted. We selected reform efforts representing a range of  approaches to reform process including whether any mechanisms for  revisiting changes or triggers were built into the reform. Each of the  reform efforts selected had included one or more commissions or other  specially established groups.
Sweden’s pension reform was an example of a major reform that has been  sustained without further structural change following a long process.
Germany’s pension reform was an example of an iterative process over an  extended period of time and also an example of a process that included a  trigger requiring actions under specified circumstances in its reforms.
The Netherlands’ disability reform was an example of an iterative process  of reform of a non-pension program and as an example of entitlement  reform in a country that has undertaken reform of multiple entitlements in  recent years.
In these countries we interviewed government officials knowledgeable  about the reform process, at least one commission participant or  commission staffer, and independent experts.
We did not evaluate the effect of reforms on beneficiaries or on program  effectiveness. Consideration of any entitlement reform process should not  be taken to imply approval of the specifics of any given reform. We limited  our review to documents available in English.
section_title: Appendix II: Summary of Selected U.S. Commissions
paragraphs: Restricted;  required  revenue  neutrality and  keeping  incentives for  homeownership  and charitable  giving, and  encouraging  savings;  required to  consider equity  and simplicity  too  32 (22/10)
17 (9/8)
16 (0/16);  Included 3  former Members  of Congress  10 (0/10)
9 (0/9); Chair  and Vice-Chair  were former  Senators; 1  former House  Representative  on panel; also  included 4  professors and 2  “tax  practitioners”
Yes, functionally;  technically  Breaux = Chair;  Thomas =  “Administrative  Chair”
Yes; all meetings  and hearings  were televised on  C-SPAN. All  commission  documents,  transcripts and  reports made  public on a CD.
Yes; failed to  reach consensus  on specific  recommendations (Jan. 1995)
No; proposed  recommendations  failed to gain  required 11 votes(Dec. 2001) (July 2004) (Nov. 2005)
No; but  recommended 5  broad principles  for crafting  “solutions to our  fiscal problems”
section_title: Appendix III: Summary of Selected Reform Efforts
paragraphs: Appendix III: Summary of Selected Reform  Efforts Pension reform:  Passed in 1994, details  passed in 1998;   implemented in 1999;   automatic stabilizer in  2001.
Pension reform:  2004.
Pension reform: 2004.
Retirement age: 2007.
Aging population;  predictions that the  system was  unsustainable in the  mid-1980s; a recession  in the early 1990s.
Population aging;  statutory  requirements for  periodic monitoring.
Population aging; high  non-wage labor costs;  economic downturn.
Process that led to  reform began in 1984.
Beginning in 1985,  pensions have been  reformed multiple  times due to  population aging and  lower economic  growth rates with the  goal of achieving  fiscal sustainability.
Incremental reforms  began to be  implemented in 1992  under the Kohl  government.
Swedish government  appointed a  commission to study  pension system in  1984, which met  through 1990; a  parliamentary working  group met from 1991  to 1994 to create  legislation; another  parliamentary group  focusing on  implementation details  met from 1994 to 1998.
National Pension  Council: a standing  government  commission.
German government  appointed a  commission in 2002  following an economic  downturn and financial  crisis in the public  pension system—and  a 2001 law required  the government to  take action when  projections were  unfavorable.
Pension reform: 1998.
Pension reform: 2007.
Pension reform: 2004.
Pension reform: 2003.
Growing levels of  pensioner poverty.
Population aging;  economic crisis in early  1990s; meeting Maastricht  criteria for entry into  European Monetary  Union.
Deficit in the pension  system and unfavorable  projections for the future  solvency of the system. increase in disability  benefit use.   the 1970s; also, in  1993, pension assets  were not enough to  pay benefits (benefits  funded by collecting  provinces' debt to  pension plan).
Pension reform in  Canada is difficult, and  thus uncommon,  because it requires  consent from the  provinces.
Pension system  changes had been  common in the UK and  have been seen as  unilaterally driven by  government in power;  recent reform included  public outreach.
Reform efforts began in  1992 and continued  through the decade.   These efforts were met  with controversy, including  strikes and protests.
Reform of public pensions  in 1993 stemmed from  discussions in the mid- 1980s.  Attempt at reform  of civil service pensions in  1995 was met with strikes  and ultimately failed. 2003  reform is seen as the  beginning of a series of  reforms.
No commission or  special group was used.   Reform was based upon  negotiations with Ministry  of Finance and provincial  ministers along with  information collected  from town hall meetings.
An independent  government  commission.
Italy has a standing  commission to monitor  expenditures.  This  commission is not seen as  having prompted 2004  reform.
Pension Advisory Council  was created in 2000.  This  is a standing body.
Composition of  commission/  special group(s)
1984 commission  included experts,  political party  representatives,  unions, business  organizations, and  government officials.    The 1991 group had  8 members  representing the  parties in power; 6 of  them were Parliament  Members.  The 1994  group had 8  members from the  parties that agreed to  the reform; 4 were  current Parliament  Members, 1 was a  former Member.
Government  assessment begins  with pension experts  from Ministry of  Health and Welfare.   They consult with  National Pension  Council (which  includes business  groups, trade unions,  and pension experts)  along with political  parties.
Pension reform was  handled by a subset of  26-member  commission; this  commission included  academic experts,  officials from lower  levels of government,  employer and union  representatives.
Parameters of  commission/  study group  1984 commission  was tasked with  examining the  challenges of the old  system, and making  recommendations  within the old  system's framework.  The 1991 group was  tasked with creating  legislative proposals  for a system that is  fiscally and politically  sustainable in the  long term.
The Rurup  Commission was  tasked to make  recommendations on  ways to achieve  sustainability in the  pension system, within  the parameters  established in 2001— payroll tax at no more  than 20% up to 2020  and no more than 22%  to 2030; replacement  at no less than 67% of  average net earnings.
Three members and a  small secretariat.  One  member from private  sector, one from unions,  one academic expert.
Not applicable for this  reform.
Includes representation from  government, labor,  business, and elderly  interest groups.
Commission charged  with looking at level of  pensions, level of  pension savings, level of  other savings among  pensioners, and to make  recommendations based  upon these findings;  commission produced  three reports.
Not applicable for this  reform.
Purpose of council is to  monitor French retirement  and put forth  recommendations based  upon negotiations with  involved partners.
section_title: Appendix IV: Pension Reform in Sweden
subsections: section_title: Reform Overview: Significance of the Reform
paragraphs: Sweden’s pension reform, a complete overhaul enacted in 1998,  restructured a pension system that was the hallmark of the Swedish social  welfare system and a result of political conflict in the 1950s. The reform’s  novelty is evident in its employment of a notional defined contribution  approach to the pay-as-you-go benefit component and an automatic  balance mechanism. In addition to the substantive reform, the process  that facilitated the changes is also noteworthy, namely the lengthy period  of deliberations that ultimately reconciled disparate interests and gathered  strong support in Parliament.
As a result of the reforms, Sweden’s pension system changed from a  traditional pay-as-you-go defined benefit plan, like the U.S. Social Security  program, to a system where participants’ benefits are more closely related  to their contributions. Like its predecessor, the new system uses pay-as- you-go financing; however, the former benefit scheme was replaced with  notional and individual accounts whose balances are based primarily on  work-related contributions, and a guaranteed minimum pension for low- income individuals (see table 1). Credits for child care, education, military  service, and sickness also contribute to an individual’s pension rights. The  system relies on a reserve fund for financing during periods of economic  or demographic changes that cause increased pension liabilities. If  liabilities exceed the reserve fund, a balancing mechanism will temporarily  adjust indexation of benefits and interest rates on the notional accounts,  thus preventing contribution rate increases.
section_title: Origins of Reform
paragraphs: By the mid-1980s, the actuarial predictions showed that the old system  was financially unsustainable. Accordingly, Swedes were losing faith in the  system. Demographic changes, increased longevity and an aging  population soon eligible for benefits, threatened to strain the system. In  1980, 21.9 percent of Swedes were age 60 or older, compared with 15.6  percent in the U.S.
Other considerations also played a role in reform. The benefit formula had  an “inequitable and unsystematic relationship” between benefits and  contributions according to one government official, implying that  decreased work did not necessarily mean reduced benefits. Furthermore,  the income ceiling for benefits was indexed to consumer prices, meaning  that as more people earned wages above the ceiling, the earnings-related  benefit would eventually become a flat rate.
Even before the reform effort of the 1990s, the contributory pension  system had been a focus for political conflict. The system, which was  enacted by a Social Democrat Parliament in 1960, was only gradually  accepted by non-Socialist parties. After an oil crisis in 1979, the non- Socialist Parliament unilaterally attempted to remove energy prices from  the pension benefit indexation formula. The effort failed and the Social  Democrats campaigned on the issue and regained control of Parliament in  1982. Once in power, the Social Democrats changed the index formula but  did not initiate other reforms, causing non-Socialists to believe the Social  Democrats abandoned their reform intentions.
section_title: The Reform Process
paragraphs: In 1984 the Social Democratic government appointed a pension committee  tasked with examining the challenges of the system, and proposing  reforms within the existing framework. The committee’s membership was  typical of a Swedish Parliamentary commission: it was large and included  representatives from political parties, unions, employers, experts, and  government. The committee’s deliberations lasted six years, culminating in  a report that proposed changes to survivors’ pensions, but not an overall  reform (see fig. 4). According to one expert, the report said the financial  problems would not peak until about 2010-2015 and therefore reform was  not an immediate need.
By the early 1990s, Sweden experienced its most serious recession since  the 1930s, marked by an increased deficit, high unemployment, near  failure of several major banks, and a devaluation of the currency. Starting  in 1990, Sweden’s budget surplus became a deficit, leading to a dramatic  escalation in government debt. The recession served as the final spur for  pension reform, making the issue a high priority in 1991 for the newly  elected center-right coalition in Parliament, who appointed a working  group on pensions.
This group was tasked with producing proposals for a new pension system  that would be financially solvent and broadly supported. Unlike the 1984  committee, the working group was small, consisting of two Social  Democrats and a representative from each of the six other parties in  Parliament at the time; everyone but the chairman and one of the working  group members were Members of Parliament. The small size of the group  was the result of a decision by the chairman, who also wrote the group’s  directives. The chairman was the Minister of Social Affairs at the time, and  a former member of the 1984 committee. According to a government  official, it is unusual for a minister to chair a working group, but it showed  the importance of the reform. The exclusion of interest groups such as  labor unions was justified by the work of the 1984 committee, who laid the  reform’s foundation by highlighting financial problems, leaving reform  negotiations to the politicians, according to an expert. Despite their lack of  direct participation, interest groups had close ties to the parties and  participated in occasional meetings of special groups known as reference  groups.
Prior to negotiating specific compromises, the working group came to an  agreement on broad principles, according to a group member. To prevent  the endless introduction of new debates, members agreed to reach  consensus before they consulted with nonmembers. An expert and a  working group member described the members as “social engineers” who  possessed the leadership, knowledge, and personal dynamics necessary to  produce legislation. During negotiations, both the majority coalition and  the Social Democrat opposition adjusted their preferred reform models in  exchange for preservation of their overall goals. For example, the Social  Democrats agreed to incorporate individual accounts into the system⎯an  inclusion important to conservatives⎯but Social Democrats advanced  their views by insisting that the accounts be kept to a relatively small  portion, 2.5 percent, of benefits. The strength of the Social Democrats as  the opposition party permitted responsibility for legislative outcomes to be  diffused between both the majority and the opposition, according to an  academic expert; each party could cite the other as the force necessitating  unpopular concessions. The deliberations resulted in a consensus and a  proposal outlining principles for reform.
A majority of Parliament ⎯five parties representing about 85 percent of  the electorate⎯passed the principles in 1994 just prior to an election.  However, the legislation did not contain specific legal provisions and  therefore only served as a guide for future legislation. Due to the relatively  early agreement on the reform principles and small size of the group, the  opportunity for interest groups and politicians to muster strong opposition  or support was limited, according to a working group member. Reform  debates were not public, a condition that prompted some criticism of the  process.
To formulate the details of the reform, a second working group, composed  of representatives from the five parties who supported the reform,  convened later that year following the return of the Social Democrats to a  majority in Parliament. As with the 1991 working group, there was little  public discussion of the 1994 group’s deliberations. During this period,  however, Social Democrat leaders faced opposition to the reforms within  their party, as some members believed the reforms veered too far from the  existing system the Social Democrats created. Party officials had to  persuade members to support the reforms, holding lengthy discussions.  Additionally, it took time to work with the Ministry of Finance, which did  not have a direct role in the proposal’s formation. During these  negotiations, Sweden’s National Insurance Board⎯the government agency  responsible for administering pensions at the time⎯began preparing for  implementing the reforms. In June 1998, Parliament passed the finalized  legislation. One group member told us that it was significant that the bulk  of the reform was accomplished all at once. Unlike incremental reforms,  one set of changes helps to reduce the public’s uncertainty and ensure the  trust and security that is vital for social insurance schemes, according to  one expert. To introduce the reforms to the public, the government  launched a three year information campaign, which included media  outreach and mailings of individual benefit projections. Payments under  the new system began with retirees born after 1937, who receive benefits  from both the old and new systems.
section_title: Post-Reform Implementation and Adjustments
paragraphs: Although the bulk of the reform was enacted in 1998, the government  faced challenges with implementation and ensuring the political insulation  and fiscal stability of the system. Because the new system is still  influenced by demographics, it was necessary to introduce an automatic  balancing mechanism to assure the system’s stability, a part of the system  discussed in the 1990s, but not enacted until technical details were  resolved in legislation passed in 2001. The mechanism was intended to  help protect the system from political recalibration during system  imbalances by automatically activating when necessary and therefore  minimizing intervention from Parliament.
The Swedish government also sought to refine the administration of  individual accounts. A committee was established in 2004 to evaluate  program guidance, clarity of investment options, system costs, and the  possibility of including life annuities in addition to the unit-linked funds  already being offered. The committee report showed that the number of  Swedes making active investment choices has dropped since the accounts’  inception, with more people routing their money into the default option  offered by the government. In addition to proposing steps to reduce  administrative costs, the committee recommended limiting investment  options from over 700 accounts to around 200, and converting the default  fund into a fund that adjusts based on an individual’s age. To date, the  government has not implemented any changes.
section_title: Legacy of the Reform
paragraphs: The reforms enacted in Sweden highlight the importance of coupling  universally acknowledged problem definitions with knowledgeable  leadership in order to pass reform. Specifically, the analysis performed by  the 1984 pension committee, a large group with broad membership, set the  stage for the legislative negotiations in the 1990s, according to an expert.  Economic conditions and eroded confidence in the old pension system  helped activate those deliberations in the 1990s. The 1991 working group,  which had the necessary social engineering skills and knowledge, used the  projections of program fiscal unsustainability to craft a major structural  reform that was agreeable to a strong majority of Parliament. Although  also a criticism, the autonomy of the 1991 working group and its small size  decreased the potential opportunities for derailing the legislation and  helped build consensus across party lines, according to one expert.
The result of the two decade and multi tier process was a complete  reconstruction of the pension system, designed with the aim of insulating  it from the temptation of constant political fine-tuning. As the reforms are  gradually phased in, the Swedish public’s true grasp and support of the  changes remains to be seen. Government survey data from the early 2000s  suggests the public’s understanding of the reform is not high, despite  outreach efforts. Although some criticism exists of the reform, officials  and experts believe it has public support and will be sustained. Another  government official stated that people who currently oppose the system  tend to base their opinions on politics and not because of lost benefits.  One result of the reform, according to a government official and member  of the working group, is that young Swedes who previously had no  confidence in the system now believe they will receive a small pension.  The complete impact of the reforms and any potential need for  reexamination will be more evident as the phase-in of the system is more  complete and baby boomers begin collecting benefits.
section_title: Appendix V: Disability Reform in the Netherlands
subsections: section_title: Reform Overview: Significance of the Reform
paragraphs: Since 1967, the disability program in the Netherlands has had a broad  definition of “disability” that included partial disability benefits. This broad  definition opened the disability system to high levels of use. For most of  the 1980s, 1990s and the first half of this decade, the proportion of the  labor force on long-term disability was over 10 percent. Because there was  broad support for the program and disabled individuals in general,  reforming the disability system was politically difficult. The disability  program had been a source of national pride for the Netherlands, referred  to as the “crown jewel” of its social programs. After multiple attempts at  reforming the system, a structural reform of the program was  implemented in 2006 that is seen as significant by government officials and  experts. The process leading to the reform was long and difficult, requiring  many attempts at reform and a shift in public perception of the disability  program. Figure 5 illustrates the key events that occurred in this reform  process.
section_title: Disability in the Netherlands Differs from that in the United States
paragraphs: The Netherlands disability system differs significantly from disability  programs in the United States and other countries. The disability program  in the Netherlands differs from Disability Insurance (DI) in the United  States in the following ways:    The Netherlands provides a “partial disability” benefit.
Individuals in the Netherlands can claim a benefit if one is “partially”  disabled, meaning that those who can still work and those who are still  working can receive benefits if working at a reduced capacity. Partial  disability is rated on a percentage basis; before 2006, beneficiaries had to  be at least 15 percent disabled to receive the benefit. No partial disability  benefit exists in the United States. In the United States, for a person to  receive DI benefits, the impairment must be of such severity that not only  is the person unable to do previous work but, considering his or her age,  education, and work experience, is unable to do any other kind of  substantial work that exists in the national economy.
There is virtually no waiting period for receiving benefits in the  Netherlands.  While a claimant in the Netherlands does not qualify for the disability  program at first, he or she immediately qualifies for benefits under  employer financed “sickness insurance” for up to 2 years. In the United  States, one must have or expect to have a disabling condition for at least    1 year and there is a mandated 5 month waiting period before receiving  benefits.
The disability program was originally administered by employer  and labor groups in the Netherlands until the mid-1990s.  In contrast, U.S. disability benefits are administered by the government.
Figure 6 shows the number of disability beneficiaries for each year since  the beginning of the disability program. Over this time, the number of  beneficiaries has generally increased. In the 1990s after a period of  decreasing beneficiaries, the number once again went up.
section_title: Origins and History of Reform
paragraphs: Number of those receiving disability increased in the 1980s and  remained high despite benefit reductions  Following a recession in the late 1970s, the Netherlands had an increased  rate of unemployment. Individuals—if they qualified—started to claim  disability benefits instead of unemployment benefits because disability  provided a more desirable benefit. For some, the benefit facilitated early  retirement. As the economy improved, however, similarly high levels of  disability beneficiaries continued. The government believed that this was  too costly and, if similar levels of disability receipt continued, costs would  continue to rise.
Reform of the disability system began in the 1980s and early efforts  focused on reducing disability benefits to reduce costs. These reforms  included ending tax exemptions for the disabled, a 10 percent reduction in  the disability benefit’s replacement rate, and a decrease in the earnings  base (which is used to calculate disability benefits). While the amount paid  for individual benefits decreased, government data show that the number  of beneficiaries increased in this decade.
Policy reform in 1990s focused on return-to-work measures as  public perceptions of the program changed  The number of people on disability continued to be high during the 1990s,  with studies showing that the disability system was used as an option for  early retirement and unemployment (“stress” was also cited as a reason  for receiving disability benefits). Concerns about the effect of population  aging also created pressure for change, as this could lead to even more use  of the disability program.
A change in policy reform from benefit reductions to return-to-work  provisions was accompanied by political events that helped to change  public perception of the disability system and made the public more  amenable to reform.
In 1990, Prime Minister Ruud Lubbers (a Christian Democrat who served  as Prime Minister from 1982 through 1994) stated that the Netherlands was  “sick” and threatened to resign if the number of those in the disability  program in the Netherlands reached 1 million. Experts agreed that  1million was an arbitrary number, but it became an accepted measure of  the need for reform. While this threshold was never surpassed, his  statement generated public interest and concern over the disability  program, and the “1 million” measure continued to shape discussion of the  program past Prime Minister Lubbers’ tenure. Throughout the 1990s and  beyond, experts noted that whenever the number on disability approached  1 million, public discussion of the disability system increased.
In 1991, major retrenchments of the disability program were proposed by  the governing coalition, a combination of the center-right Christian  Democratic party and the center-left Social Democratic party. These  proposals were met with disfavor, leading to large protests. According to  experts, the governing coalition was threatened with a loss of power and  did not follow through with the proposed reforms. One expert said that  this series of events was the catalyst for a shift in focus on the part of the  government to reforming the administration of the disability system  instead of a further reduction in benefits.
In 1993, a special parliamentary commission known as the Buurmeijer  Commission had an impact on public perceptions of the disability  program. The Buurmeijer Commission was a parliamentary group that  held hearings on social insurance programs including the disability  program. The chair was Flip Buurmeijer, a Social Democratic member of  Parliament. The commission led to policy recommendations, but experts  say that its most important legacy was informing the public and changing  its perception of the disability system. The hearings exposed fraud and  abuse in the disability program and showed the public how both employer  and employee interests benefited from misuse of the disability benefit.  One expert said that the commission identified this moral hazard, which  convinced the public that change was needed.
The commission had several features that experts said gave it the power to  change public opinion. First, parliamentary commissions are a rarity in  Dutch government, used primarily to investigate scandals and thus  significant attention was paid to the disability hearings. Second, the  hearings were broadcast on national television and viewed by many,  creating public awareness of fraud in the disability system.
Following the Buurmeijer Commission, reforms were implemented to  address the disability system’s problems. Several laws were passed in the  1990s containing provisions that aimed at returning disabled employees to  the labor force. Examples of these included: laws mandating that  employers pay the employee for an initial period of time; incentives for  employers to retain and recruit disabled workers; and requiring  reintegration plans for disabled individuals to be submitted to a  government organization.
However, experts said in most cases, reforms resulted in only limited  effects on new disability cases. Some of the laws during this period had  unintended consequences. One example given by an expert is a law that  intended to provide incentives to employers to limit the number of  employees that claimed disability while employed with them. As a result,  employers began to screen potential employees and, according to experts,  would not hire those who posed a risk of becoming sick or disabled. In  response, the government enacted a law that prevented employers from  performing health screenings for new employees. Other disability reforms  that proved controversial or problematic were repealed. Some laws did  have more lasting effects, including a 1998 PEMBA law, which indexed  employers’ contributions to the disability system based on their risk.
section_title: Structural Reform Implemented in 2006, Prompted by the Donner Commission
paragraphs: In 2000, the Minister of Social Affairs and the Minister of Interior Affairs of  the moderate governing coalition established a commission chaired by  Piet Hein Donner, a member of the Council of State. This commission  (known as the “Donner Commission”) was the starting point for the most  recent reform, which was enacted in 2005 and implemented in 2006.
According to one expert who was involved with the Donner Commission,  the commission was formed in an environment of political stalemate.  Parties in the coalition government could not agree on a path for reform.  Unions and employer groups were unsatisfied with progress on reform  and they were considering developing a proposal. As the number of  beneficiaries approached 1 million, the Minister of Social Affairs believed  that forming a commission would produce meaningful reform that could  break through the stalemate and the influence of unions and employers on  disability policy.
The Donner Commission was a small group that included members of  each of the principal parties. Five of the seven members represented the  five largest political parties in the Dutch government at the time,  although—with the exception of Donner—the members did not hold  national political offices. The sixth was an academic expert and the  seventh was a civil servant who acted as a government liaison. In addition,  there was a three person secretariat that produced reports and proposals  for discussion by the commission. According to an expert familiar with the  commission, the members were able to negotiate the reform package for  their respective parties. The meetings of the commission were closed to  the public. The commission drafted a report which included a set of  recommendations, the primary one being an elimination of the partial  disability benefit. The recommendations received much attention from the  media once they were made public.
Experts and government officials noted several reasons why the Donner  Commission was successful at designing a reform that was adopted and  appears to be effective. One expert said that the Donner Commission was  formed in part because the “normal” political channels would be unable to  reach an agreement on disability reform due to the controversy  surrounding it. The commission also built consensus among different  political parties; the fact that the commission had members from multiple  parties also made the recommendations more difficult to ignore, according  to one expert.
Following the issuance of the Donner Commission’s recommendations,  the government asked that the Social and Economic Council (SER)  provide comments on the proposals. The SER is a standing body that  includes equal representation from labor, employers’ groups, and  government-appointed members that represent the public interests. The  SER comments, either when requested by the government or by choice, on  social and economic policy. In March 2002, the group issued its response  to the Donner Commission’s recommendations, unanimously  recommending maintaining a partial disability benefit. According to an  expert, vetting the recommendations through the SER brought about  consensus because there was input to the reform from interests outside  the government.
In July 2002, the center-right Balkenende government came to power. One  expert noted that the Minister of Social Affairs was committed to disability  reform. However, in October 2002, another round of elections occurred,  necessitating a delay in enactment of disability reform. The reform was  considered by Parliament in an environment of fiscal crisis, as the  Netherlands was in a recession. Government officials said that these fiscal  issues were not the drivers of reform, but that the environment of fiscal  crisis made reform of the disability program more politically feasible.
Legislation was passed in 2005 and implemented in 2006 that contained  elements of recommendations from both the Donner Commission and the  SER. Experts said that the recent reform has had an initial impact of  reducing the number of those on the disability program.
This reform removed the partial disability benefit from the disability  program and created a separate system for those on partial disability. In  addition to establishing the separate partial disability system, reforms  occurring in the same period:  increased the threshold to claim partial disability from 15 percent disabled  to 35 percent disabled;  increased the benefit for those who were totally and permanently disabled  from 70 percent of predisability wage to 75 percent of predisability wage;  and    mandated medical reassessment for those under age 50 receiving disability  benefits.
While it is not possible to cite the exact impact of the 2006 disability  reform, there has been a decrease in the number of people in the disability  program along with a reduction in the number of new beneficiaries. The  Netherlands government data show that the total number on disability  dropped from 963,800 in 2004 to 845,000 in 2007. The data also show that  inflow into the disability program has decreased in this period, from 74,800  in 2004 to 56,000 in 2007.
section_title: Expectations: The Future of Reform
paragraphs: Experts said that there were pressures to soften the reform, although they  disagreed as to whether there would be significant changes. According to  government representatives, the Parliament is examining possible changes  in the future to the benefit for those under age 18 who are covered by the  program, due to recent increases in use of the program by this age group.  In addition, a longitudinal study is currently underway that seeks to  determine what happens to workers who claim a disability over time  under the new policy. Of particular interest to the authors is whether  changes in the disability policy make it more likely for individuals to apply  for other social programs, such as unemployment or welfare.
section_title: Appendix VI: Pension Reform in Germany
subsections: section_title: Reform Overview: Significance of the Reforms
paragraphs: In Germany, as elsewhere in Europe, population aging and the  accompanying increase in the number of retirees relative to workers have  financially strained the pay-as-you-go (PAYGO) defined-benefit public  pension program. For this reason, policymakers have reformed the  pension program over the last 15 years, first by introducing measures that  made it less generous while preserving the basic structure of the system in  1992 and 1999, then by changing its structure in 2001. The monolithic  PAYGO pension program then became a multipillar one with the addition  of supplementary pension schemes—specifically, fully funded private and  occupational schemes. Further changes in 2004 and 2007 sought to put the  pension system on a financially sustainable path.
The reforms occurred incrementally as in the majority of countries around  the world, but were significant in the sense that, taken together, they  considerably transformed the world’s oldest defined-benefit public  pension program, according to experts. The reforms were initiated by the  Christian Democratic Party/Christian Social Union (CDU/CSU) but  continued when the Social Democratic Party (SPD) came to power in the  late 1990s, as well as when a “Grand Coalition” brought the two parties  together in government in 2005. The reforms took place in diverse political  environments that were sometimes consensual, sometimes more  adversarial.
section_title: Origins and History of the Reforms
paragraphs: By the mid-1980s, long-term demographic projections showed that the  public pension system would be financially unsustainable unless  contribution rates were increased dramatically, or benefits cut  substantially, according to an expert. The government of Chancellor  Helmut Kohl introduced reforms in 1989— which became effective in  1992—under favorable economic conditions. Experts generally view these  reforms as consensual, with the main opposition party—the SPD—and the  governing CDU/CSU party agreeing on the measures. Changes included  indexing benefits to net wages instead of gross wages, which effectively  decreased benefits because higher contributions and taxes reduced net  wages relative to gross wages; increasing the normal retirement age from  63 to 65; and actuarially adjusting pensions, reducing incentives for early  retirement, so those opting to receive benefits before 65 would face  permanent reductions.
However, the German reunification of 1989 made it clear that these  reforms would not be sufficient to make the pension system financially  sustainable for the next two decades, as expected. The unification brought  a large number of new claimants from the former East Germany into the  pension system, quickly putting pressure on its budget, according to  government officials. Also, high contribution rates and the associated  increase in nonwage labor costs became big issues in the mid-1990s  following the economic recession of 1992-93. The political debate after  1995 emphasized pressures from globalization and European monetary  integration. In particular, it focused attention on how high contribution  rates would hinder Germany’s competitiveness in the global economy and  prevent job creation.
New reforms passed in 1997—becoming law in 1999—but were politically  contentious. The federal elections in 1998 increased partisanship as the  reelection prospects of Chancellor Kohl, who had been in power since  1982, became uncertain, according to an expert. The reform provisions  included gradually bringing women’s and unemployed individuals’ normal  retirement age in line with men’s at 65. However, in the charged political  climate, the Social Democrats and labor unions opposed, and subsequently  reversed, the introduction of a demographic factor that would have  reduced the replacement rate of pensions.
The failure to reduce nonwage labor costs provided momentum for further  reforms once the SPD came into office under the leadership of Chancellor  Gerhard Schroeder. Paradoxically, the new government’s package of  legislation in 2001 contained more drastic measures than those they  opposed a few years earlier, as the following examples illustrate.
The Riester reforms transformed the public pension system into its  current multipillar structure, with the traditional earnings-related statutory  PAYGO pensions constituting the first pillar; occupational pensions  making up the second; and the funded private pensions representing the  third pillar. These private pensions were made voluntary, but the  government sought to encourage people to take them up by offering direct  subsidies or tax advantages. The relatively good performance of the stock  market in the 1990s and the idea that everyone could benefit from it played  a role in the promotion of these private pensions, according to an expert.  The successful introduction of individual accounts in other countries,  especially Sweden, which was viewed as a model by the Social Democrats,  also played a role.
The Riester reforms stipulated a gradual reduction of the PAYGO first  pillar pensions by modifying the adjustment formula. They also set to  stabilize contributions rates at no more than 20 percent before 2020 and   22 percent before 2030 for the first pillar to avoid negative effects on  employment and growth. In addition, the reform package fixed a target for  the replacement rate, promising that pensions would not fall below            67 percent of average net earnings, from the current 70 percent. The  replacement rate was actually redefined insofar as it assumed the average  worker would invest 4 percent of his or her gross earnings in the new  voluntary supplementary pensions. Some experts view this replacement  rate target more as a symbolic concession that “modernizers” within the  SPD made to the “traditionalists” and to labor unions. The modernizers  also managed to reach a consensus with the opposition led by the CDU.
The reforms included a built-in reexamination clause that called for  government action if contribution and replacement rate targets were not  expected to be met. This mechanism was triggered soon after as the  pension system experienced a financial crisis in 2002-2003, which  eventually led to further reforms.
A deep economic downturn in 2002-03 caused, to a large extent, this  financial crisis in the pension system. Unexpectedly high unemployment  rates and dismal economic growth created a sense of urgency for reforms,  according to an expert. In November 2002 immediately after winning a  second term in the federal elections, Chancellor Schroeder’s government  set up a commission. The Rurup Commission was charged to make  recommendations on ways to achieve sustainability in the pension system,  as well as in health and long-term care insurance schemes. The  commission was a way for the government to build consensus for further  changes in these programs. It gave more legitimacy to reforms as the  government lacked the strong mandate it enjoyed during its first term,  with the CDU-led opposition clearly dominating the upper house—or  second chamber—of Parliament, the Bundesrat, according to government  officials. By deferring responsibility—and blame—to a commission of  experts, the “modernizers” within the Social Democratic Party also sought  to overcome intraparty opposition.
The Rurup Commission was composed of 26 members with  representatives of various interests in society, including labor unions and  employers’ organizations, and officials from lower levels of government.  The subcommission on public pensions had about a third of the total  number of members. It was successful in pushing for broad reforms,  unlike the other two subcommissions on health and long-term care  insurance, partly because the group agreed early on to avoid extreme  ideological positions and find a rational, rule-bound middle ground  acceptable to everyone, according to a member of this group. The  subcommission on health insurance, on the other hand, was deeply  divided and could not achieve a majority behind a policy model.  Moreover, the media focused its attention on the bitter debates over health  insurance financing as those became public, even though commission  members were supposed to avoid public commentary and position taking,  according to government officials. This allowed the pension group to work  without close public scrutiny.
All but one of the recommendations of the Rurup Commission regarding  pensions—the 2004 reforms—became legislation fairly rapidly. Building  on the Riester reforms, the new provisions included supplementing the  pension benefit adjustment formula with a new “sustainability factor” to  reflect changes in the number of workers supporting the system relative to  pensioners; and loosening the rules and regulations governing the Riester  pensions to encourage greater participation. The sustainability factor  would lead to smaller pension adjustment, hence smaller increase in  benefits, whenever the ratio of contributors to pensioners declines. The  pension adjustment would be allowed to go down to zero but not lower to  prevent pensions from declining, in nominal terms. The commission’s  projections showed that individuals choosing to invest in supplementary  pensions, either in the second or third pillar, would be able to maintain a  constant replacement rate. The sustainability factor was introduced to  ensure that the pension system would be self-sustaining, balancing itself  automatically in line with demographic development and employment  levels. The expectation was that such a mechanism reduces the need for  future reexamination and helps “depoliticize” the system.
The 2004 reforms also stipulated that the government should report to the  legislative bodies—the Bundestag and Bundesrat—every 4 years on  whether targeted replacement rates for 2020 and 2030 are at risk, given the  contributions rates, and if so, propose remedies.
Only one recommendation of the Rurup Commission—the gradual  increase in the retirement age from 65 to 67—was adopted later in 2007 by  the current coalition government, which includes both the SPD and the  CDU. The fact that this highly unpopular measure was postponed for  several years can be interpreted as a sign that the reformers in the  Schroeder government recognized the need to reach a compromise with  its opponents, both inside and outside of the party, according to a German  expert. But it was more a symbolic concession in the sense that the  provision had not been scheduled to come into effect before 2011.
section_title: The Reforms and the Public
paragraphs: According to an OECD official, the pension reforms were technical but  efforts were made over several years to ensure that the public understood  them. Experts also told us that the need for change in the public pension  system in Germany has been discussed widely since the early 1990s.  Successive governments in the last 15 years have made citizens aware of  the necessity of reforms by using the recurring themes of population aging  and high labor costs hampering economic growth. Reforms took place  incrementally over this period of time. Overall, there was a mix of behind- the-scene work on the specifics and public information.
Since 2004, every year individuals receive a report detailing their pension  information. Financial institutions offering private pensions must also  provide information on possible investments, portfolio structure, and risk  potential to their clients before contracts are signed.
section_title: Expectations: The Future of Reform
paragraphs: Government officials and some experts expect these reforms to be, on the  whole, sufficient to ensure the sustainability of the pension system for the  near future, and therefore do not foresee significant changes to the  system. Officials seem cautiously optimistic that with time and the tax  incentives and subsidies provided for supplementary pensions, people will  enroll at sufficiently high rates. Experts estimate that the demand for  Riester pensions doubled in 2004 after a slow start, then again in 2005 to  reach more than 20 percent of all workers covered by the statutory first  pillar, with another steep increase in 2006. Taken together, the three  pillars of the pension system should ensure adequate pensions, according  to officials.
However, some characteristics of the system may lead to certain groups of  people retiring with insufficient pensions. For example, supplementary  private pensions are voluntary rather than mandated, and even though the  take-up rate has been increasing, individuals may fail to contribute to them  on a regular basis throughout their working life. Moreover, the market  returns on these private pensions may be too modest. Also, low-income  individuals may have less incentive to contribute to private pensions  despite the high subsidies provided to them because these pensions would  affect their eligibility for other means-tested payments, such as the  minimum social security guarantee for old age.
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were James McTigue, Assistant Director; Linda Baker, Analyst-In-Charge;  Lisa Henson; Jeff Niblack; Lindsay Welter; and Seyda Wentworth.