Social Security Reform: Preliminary Lessons from Other Countries' Experiences
Published: 2005-06-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Many countries, including the United States, are grappling with demographic change and its effect on their national pension systems. The number of workers for each retiree is falling in most developed countries, straining the finances of national pension programs, particularly where contributions from current workers fund payments to current beneficiaries--known as a "pay-as-you-go" (PAYG) system. Although demographic and economic challenges are less severe in the U.S. than in many other developed countries, projections show that the Social Security program faces a long-term financing problem. Because some countries have already undertaken national pension reform efforts to address demographic changes similar to those occurring in the U.S., we may draw lessons from their experiences. The Chairman of the Subcommittee on Social Security of the House Committee on Ways and Means asked GAO to testify on preliminary results of ongoing work on lessons learned from other countries' experiences reforming national pension systems. GAO focuses on (1) adjustments to existing PAYG national pension programs, (2) the creation or reform of national pension reserve funds to partially pre-fund PAYG pension programs, and (3) reforms involving the creation of individual accounts.
section_title: What GAO Found
paragraphs: Based on preliminary work, all countries in the Organisation for Economic Co-operation and Development (OECD), as well as Chile, have, to some extent, reformed their national pension systems, consistent with their different economic and political conditions. While reforms in one country may not be easily replicated in another, their experiences may nonetheless offer lessons for the U.S. Countries' experiences adjusting PAYG national pension programs highlight the importance of considering how modifications will affect the program's financial sustainability, its distribution of benefits, the incentives it creates, and public understanding of the new provisions. Nearly all of the countries we are studying reduced benefits, and most have also increased contributions, often by increasing statutory retirement ages. Countries included provisions to ensure adequate benefits for lower-income groups, though these can lessen incentives to work and save for retirement. Also, how well new provisions are implemented, administered, and explained to the public may affect the outcome of the reform. Countries with national pension reserve funds designed to partially pre-fund PAYG pension programs provide lessons about the importance of early action and sound governance. Funds that have been in place for a long time provide significant reserves to strengthen the finances of national pension programs. Countries that insulate national reserve funds from being directed to meet other social and political objectives are better equipped to fulfill future pension commitments. In addition, regular disclosure of fund performance supports sound management and administration, and contributes to public education and oversight. Countries that have adopted individual account programs--which may also help pre-fund future retirement income--offer lessons about financing the existing PAYG pension program as the accounts are established. Countries that have funded individual accounts by directing revenue away from the PAYG program while continuing to pay benefits to PAYG program retirees have expanded public debt, built up budget surpluses in advance, cut back or eliminated the PAYG programs, or some combination of these. Because no individual account program can entirely protect against investment risk, some countries have adopted individual accounts as a relatively small portion of their national pension system. Others set minimum rates of return or provide a minimum benefit, which may, however, limit investment diversification and individuals' returns. To mitigate high fees, which can erode small account balances, countries have capped fees, centralized the processing of transactions, or encouraged price competition. Although countries have attempted to educate individuals about reforms and how their choices may affect them, some studies indicate that many workers have limited knowledge about their retirement prospects.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our preliminary findings  concerning other countries’ experiences with national pension reform.  Many countries, including the United States, are grappling with  demographic change and its effect on their national pension systems. With  rising longevity and declining birth rates, the number of workers for each  retiree is falling in most developed countries.  A rising dependency ratio is  straining the finances of national pension programs, particularly programs  in which contributions from current workers fund payments to current  beneficiaries—a form of financing known as “pay-as-you-go” (PAYG).  Demographic and economic challenges are less severe in the U.S. than in  many other developed countries—the birth rate is not as low, a greater  number of older people stay in the labor force, and immigration continues  to provide young workers. Yet projections show that the Social Security  program faces a long-term financing problem. Because some countries  have already undertaken national pension reform efforts to address  demographic changes similar to those occurring in the U.S., we may draw  lessons from their experiences. It is important to remember, however, that  reforms in one country may not be easily replicated in another or may not  lead to the same outcome.
We are in the process of preparing a report covering the experiences of  countries that may be applicable to our own debate over reforms to the  U.S. Social Security program—the 30 members of the Organisation for  Economic Co-operation and Development (OECD) plus Chile, the nation  that pioneered the use of individual accounts. My remarks today are  based on an ongoing study and our observations are preliminary. We are  focusing on (1) adjustments to existing PAYG national pension programs,  (2) the creation of national pension reserve funds to help finance PAYG  pension programs, and (3) reforms involving the creation of individual  accounts.
To date our study has included interviews with, and analysis of materials  provided by, officials and interest group representatives in Washington,  D.C., Paris, and London. We met with pension experts and country  specialists at the OECD as well as French and British experts, officials,  and interest group representatives. We conducted our review in  accordance with generally accepted government auditing standards.
In summary, all OECD countries have, to some extent, reformed their  national pension systems, and may offer lessons for the U.S. Countries’  experiences adjusting PAYG national pension programs highlight the  importance of considering how modifications will affect the program’s  financial sustainability, its distribution of benefits, the incentives it  creates, and public understanding of the new provisions. Nearly all of the  countries we are studying reduced benefits, and most have also increased  contributions, often by increasing statutory retirement ages. Countries  with national pension reserve funds designed to partially pre-fund PAYG  pension programs provide lessons about the importance of early action  and effective management. Some funds that have been in place for a long  time have accumulated significant reserves to strengthen the finances of  national pension programs. Countries that insulate pension reserve funds  from being directed to meet social and political objectives may be better  equipped to fulfill future pension commitments. In addition, regular  disclosure of fund performance supports sound management and  administration, and contributes to public education and oversight.  Countries that have adopted individual account programs—which may  also help pre-fund future retirement income—offer lessons about  financing the existing PAYG pension program as the accounts are  established. Countries that have funded individual accounts by directing  revenue away from the PAYG program while continuing to pay benefits to  PAYG program retirees have expanded public debt, built up budget  surpluses in advance of the reform, cut back or eliminated the PAYG  programs, or some combination of these. Important lessons regarding the  administration of individual accounts include the need for effective  regulation and supervision of the financial industry to protect individuals  from avoidable investment risks. In addition, public education is  increasingly important as the national pension system becomes more  complex.
subsections: section_title: Background
paragraphs: Social Security’s projected long-term financing shortfall stems primarily  from the fact that people are living longer and having fewer children. As a  result, the number of workers paying into the system for each beneficiary  is projected to decline. This demographic trend is occurring or will occur  in all OECD countries. Although the number of workers for every elderly  person in the U.S. has been relatively stable over the past few decades, it  has already fallen substantially in other developed countries. The number  of workers for every elderly person in the U.S. is projected to fall from 4.1  in 2005 to 2.9 in 2020. In nine of the OECD countries, this number has  already fallen below the level projected for the U.S. in 2020. This rise in the  share of the elderly in the population could have significant effects on  countries’ economies, particularly during the period from 2010 to 2030.  These effects may include slower economic growth and increased costs  for aging-related government programs.
Historically, developed countries have relied on some form of a PAYG  program and have used a variety of approaches to reform their national  pension systems. In many cases, these approaches provide a basic or  minimum benefit as well as a benefit based on the level of a worker’s  earnings. Several countries are preparing to pay future benefits by either  supplementing or replacing their PAYG programs. For example, some have  set aside and invested current resources in a national pension reserve fund  to partially pre-fund their PAYG program. Some have established fully  funded individual accounts. These are not mutually exclusive types of  reform. In fact, many countries have undertaken more than one of the  following types of reform:    Adjustments to existing pay-as-you-go systems. Typically, these are  designed to create a more sustainable program by increasing contributions  or decreasing benefits, or both, while preserving the basic structure of the  system. Measures include phasing in higher retirement ages, equalizing  retirement ages across genders, and increasing the earnings period over  which initial benefits are calculated. Some countries have created notional  defined contribution (NDC) accounts for each worker, which tie benefits  more closely to each worker’s contributions and to factors such as the  growth rate of the economy.
National pension reserve funds. These are set up to partially pre-fund  PAYG national pension programs. Governments commit to make regular  transfers to these investment funds from, for example, budgetary  surpluses. To the extent that these contribute to national saving, they  reduce the need for future borrowing or large increases in contribution  rates to pay scheduled benefits. Funds can be invested in a combination of  government securities and domestic as well as foreign equities.
Individual accounts. These fully funded accounts are administered either  by employers or the government or designated third parties. The level of  retirement benefits depends largely on the amount of each person’s  contributions into the account during their working life, investment  earnings, and the amount of fees they are required to pay.
We are applying GAO’s Social Security reform criteria to the experiences  of countries that are members of the OECD as well as Chile, which  pioneered individual accounts in 1981. We are assessing both the extent to  which another country’s circumstances are similar enough to those in the  U.S. to provide a useful example and the extent to which particular  approaches to pension reform were considered to be successful. Countries  have different starting points, including unique economic and political  environments. Moreover availability of other sources of retirement  income, such as occupation-based pensions, varies greatly. Recognizing  this, GAO uses three criteria for evaluating pension reforms:    Financing Sustainable Solvency. We are looking at the extent to which  particular reforms influence the funds available to pay benefits and how  the reforms affect the ability of the economy, the government’s budget,  and national savings to support the program on a continuing basis.
Balancing Equity and Adequacy. We are examining the relative balance  struck between the goals of allowing individuals to receive a fair return on  their contributions and ensuring an adequate level of benefits to prevent  dependency and poverty.
Implementing and Administering Reforms. We are considering how  easily a reform is implemented and administered and how the public is  educated concerning the reform.
Because each country is introducing reforms in a unique demographic,  economic, and political context these factors will likely affect reform  choices and outcomes. For instance, several European countries we are  reviewing have strong occupation-based pension programs that contribute  to retirement income security. In addition, some countries had more  generous national pensions and other programs supporting the elderly  than others. All countries also provide benefits for survivors and the  disabled; often these are funded separately from old age benefit programs.  Some countries are carrying out reforms against a backdrop of broader  national change. For example, Hungary and Poland were undergoing large  political and economic transformations as they reformed their national  pension systems. All of these issues should be considered when drawing  lessons.
In addition to the adjustments that countries have made to their existing  PAYG systems, many countries have undergone other changes as well,  indicating that change may not be a one-time experience. (See table 1.)  Understanding the outcomes of a country’s reform requires us to look at  all of the changes a country has made.
section_title: Adjustments to Existing PAYG Programs Show Importance of Sustainability, Safety Nets, and Incentives to Work and Save
paragraphs: The experiences of the countries that have adjusted their existing PAYG  national pension programs highlight the importance of considering how  modifications will affect the program’s financial sustainability, its  distribution of benefits, the incentives it creates, and the extent to which  the public understands the new provisions.
subsections: section_title: PAYG Adjustments Prove Important to Financial Sustainability
paragraphs: To reconcile PAYG program revenue and expenses, nearly all the  countries we studied have decreased benefits and most have also  increased contributions, often in part by increasing retirement ages.  Generally countries with national pension programs that are relatively  financially sustainable have undertaken a package of several far-reaching  adjustments. The countries we are studying increased contributions to  PAYG programs by raising contribution rates, increasing the range of  earnings or kinds of earnings subject to contribution requirements, or  increasing the retirement age. Most of these countries increased  contribution rates for some or all workers. Canada, for example, increased  contributions to its Canadian Pension Plan from a total of 5.85 percent to  9.9 percent of wages, half paid by employers and half by employees.  Several countries, including the UK, increased contributions by expanding  the range of earnings subject to contributions requirements.
Nearly all of the countries we are studying decreased scheduled benefits,  using a wide range of techniques. Some techniques reduce the level of  initial benefits; others reduce the rate at which benefits increase during  retirement or adjust benefits based on retirees’ financial means.
Increased years of earnings. To reduce initial benefits several countries  increased the number of years of earnings they consider in calculating an  average lifetime earnings level. France previously based its calculation on  10 years, but increased this to 25 years for its basic public program.
Increased minimum years of contributions. Another approach is to  increase the minimum number of years of contributions required to  receive a full benefit. France increased the required number of years from  37.5 to 40 years. Belgium is increasing its minimum requirement for early  retirement from 20 to 35 years.
Changed formula for calculating benefits. Another approach to decreasing  the initial benefit is to change the formula for adjusting prior years’  earnings. Countries with traditional PAYG programs all make some  adjustment to the nominal amount of wages earned previously to reflect  changes in prices or wages over the intervening years. Although most of  the countries we are studying use some kind of average wage index,  others, including Belgium and France, have adopted the use of price  indices. The choice of a wage or price index can have quite different  effects depending on the rate at which wages increase in comparison to  prices. We see variation in the extent to which wages outpace prices over  time and among countries.
Changed basis for determining year-to-year increases in benefits. In many  of the countries we are studying, the rate at which monthly retirement  benefits increase from year-to-year during retirement is based on increases  in prices, which generally rise more slowly than earnings. Others,  including Denmark, Ireland, Luxembourg, and the Netherlands, use  increases in earnings or a combination of wage and price indices. Hungary,  for example, changed from the use of a wage index to the Swiss method— an index weighted 50 percent on price changes and 50 percent on changes  in earnings.
Implemented provisions that provide a closer link between pension  contributions and benefits. Countries that have adopted this approach  stop promising a defined level of benefits and instead keep track of  notional contributions into workers’ NDC accounts. Unlike individual  accounts, these notional defined accounts are not funded. Current  contributions to the program continue to be used largely to pay benefits to  current workers, while at the same time they are credited to individuals’  notional accounts. When these programs include adjustments that link  benefits to factors such as economic growth, longevity, and/or the ratio of  workers to retirees, they may contribute to the financial sustainability of  national pension systems.
Several countries, such as Sweden and the UK, have undertaken one or  more of these adjustments to their PAYG programs and have achieved, or  are on track to achieve relative financial sustainability. Others, including  Japan, France, and Germany, may need additional reforms to fund future  benefit commitments.
section_title: Maintenance of a Safety Net and Work and Saving Incentives Proved Important
paragraphs: All of the countries have included in their reforms provisions to ensure  adequate benefits for lower-income groups and put into place programs  designed to ensure that all qualified retirees have a minimum level of  income. Most do so by providing a targeted means-tested program that  provides more benefits to retirees with limited financial means. Two  countries—Germany and Italy—provide retirees access to general social  welfare programs that are available to people of all ages rather than  programs with different provisions for elderly people.
Twelve countries use another approach to providing a safety net: a basic  retirement benefit. The level of the benefit is either a given amount per  month for all retirees or an amount based on years of contributions to the  program. In Ireland, for example, workers who contribute to the program  for a specified period receive a minimum pension. Chile set a minimum  pension equal to the minimum wage—about one-quarter of average  earnings as of 2005. In addition, several of the countries we are studying  give very low-income workers credit for a minimum level contribution.  Other countries give workers credit for years in which they were  unemployed, pursued postsecondary education, or cared for dependents.
In selecting between the many reform options, policy makers need to  strike a careful balance among the following objectives: provide a safety  net, contain costs, and maintain incentives to work and save. Costs can be  high if a generous basic pension is provided to all eligible retirees  regardless of their income. On the other hand, means-tested benefits can  diminish incentives to work and save. The UK provides both a basic state  pension and a means-tested pension credit. Concerned about the decline  in the proportion of preretirement earnings provided by the basic state  pension, some have advocated making it more generous. Others argue that  focusing safety-net spending on those in need enables the government to  alleviate pensioner poverty in a cost effective manner. However, a  guaranteed minimum income could reduce some peoples’ incentive to  save. In view of this disincentive, the UK adopted an additional means- tested benefit that provides higher benefits for retirees near the minimum  income level. This benefit, called the savings credit, allows low-income  retirees near the minimum pension level to retain a portion of their  additional income. However, any loss of income due to means-testing still  diminishes incentives to save. Without changes to pension rules, the  proportion of pensioners eligible for means-tested income is expected to  increase to include almost 65 percent of retiree households by 2050.
section_title: Implementation, Administration, and Public Education Are Important
paragraphs: The extent to which new provisions are implemented, administered, and  explained to the public may affect the outcome of the reform. Poland, for  example, adopted NDC reform in 1999, but the development of a data  system to track contributions has been problematic. As of early 2004, the  system generated statements indicating contributions workers made  during 2002, but there was no indication of what workers contributed in  earlier years or to previous pension programs. Without knowing how  much they have in their notional defined accounts, workers may have a  difficult time planning for their retirement. Some governments have had  limited success in efforts to educate workers about changes in provisions  that will affect their retirement income. For example, a survey of women  in the UK showed that only about 43 percent of women who will be  affected by an increase in the retirement age knew the age that applied to  them.
section_title: Early Action and Effective Management Help Make National Pension Reserve Funds Successful
paragraphs: Another type of pension reform is the accumulation of reserves in national  pension funds, which can contribute to the system’s financial  sustainability depending on when the funds are created or reformed and  how they are managed. Countries that chose to partially pre-fund their  PAYG programs decades ago have had more time to amass substantial  reserves, reducing the risk that they will not meet their pension  obligations. A record of poor fund performance has led some countries to  put reserve funds under the administration of relatively independent  managers with the mandate to maximize returns without undue risk.
subsections: section_title: Early Action Matters
paragraphs: Establishing reserve funds ahead of demographic changes—well before  the share of elderly in the population increases substantially—makes it  more likely that enough assets will accumulate to meet future pension  obligations. In countries such as Sweden, Denmark, and Finland, which  have had long experiences with partial pre-funding of PAYG programs,  important reserves have already built up. These resources are expected to  make significant contributions to the long-term finances of national  pension programs. Other countries that have recently created pension  reserve funds for their pension program have a tighter time frame to  accumulate enough reserves before population aging starts straining  public finances. In particular, the imminent retirement of the baby-boom  generation is likely to make it challenging to continue channeling a  substantial amount of resources to these funds. France, for example, relies  primarily on social security surpluses to finance its pension reserve fund  set up in 1999, but given its demographic trends, may be able to do so only  in the next few years. Similarly, Belgium and the Netherlands plan on  maintaining a budget surplus, reducing public debt and the interest  payments associated with the debt, and transferring these earmarked  resources to their reserve funds. However, maintaining a surplus will  require sustained budgetary discipline as a growing number of retirees  begins putting pressure on public finances.
section_title: Effective Management Can Contribute to Financial Sustainability
paragraphs: Examples from several countries reveal that pre-funding with national  pension reserve funds is less likely to be effective in helping ensure that  national pension programs are financially sustainable if these funds are  used for purposes other than supporting the PAYGO program. Some  countries have used funds to pursue industrial, economic, or social  objectives. For example, Japan used its reserve fund to support  infrastructure projects, provide housing and education loans, and  subsidize small and medium enterprises. As a result, Japan compromised  to some extent the principal goal of pre-funding.
Past experiences have also highlighted the need to mitigate certain risks  that pension reserve funds face. One kind of risk has to do with the fact  that asset build-up in a fund may lead to competing pressures for tax cuts  and spending increases, especially when a fund is integrated in the  national budget. For example, governments may view fund resources as a  ready source of credit. As a result, they may be inclined to spend more  than they would otherwise, potentially undermining the purpose of pre- funding. Ireland alleviated the risk that its reserve fund could raise  government consumption by prohibiting investment of fund assets in  domestic government bonds.
Another risk is the pressure that groups may exert on the investment  choices of a pension reserve fund, potentially lowering returns. For  example, Canada and Japan have requirements to invest a minimum share  of their fund portfolio in domestic assets, restricting holdings of foreign  assets to stimulate economic development at home. Funds in several  countries have also faced pressure to adopt ethical investment criteria,  with possible negative impacts on returns. In recent years, some countries  have taken steps to ensure that funds are managed to maximize returns,  without undue risk. Canada, for example, has put its fund under the  control of an independent Investment Board operating at arm’s length  from the government since the late 1990’s. Several countries, including  New Zealand, have taken steps to provide regular reports and more  complete disclosures concerning pension reserve funds.
section_title: Individual Account Reforms Show the Importance of Funding Decisions and Ensuring Benefit Adequacy
paragraphs: Countries that have adopted individual account programs—which may  also help pre-fund future retirement income—offer lessons about  financing the existing PAYG pension program as the accounts are  established. Some countries manage this transition period by expanding  public debt, building up budget surpluses in advance of implementation,  reducing or eliminating the PAYG program, or some combination of these.  In addition, administering individual accounts requires effective regulation  and supervision of the financial industry to protect individuals from  avoidable investment risks. Educating the public is also important as  national pension systems become more complex.
subsections: section_title: Approach to Funding Individual Accounts Affects Sustainability of National Pension System
paragraphs: It is important to consider how different approaches to including  individual accounts may affect the short-term and long-term financing of  the national pension system and the economy as a whole. A common  challenge faced by countries that adopt individual accounts is how to pay  for both a new funded pension and an existing PAYG pension  simultaneously, known as transition costs. Countries will encounter  transition costs depending on whether the individual accounts redirect  revenue from the existing PAYG program, the amount of revenue  redirected, and how liabilities under the existing PAYG program are  treated.
The countries we are examining offer a range of approaches for including  individual accounts and dealing with the prospective transition costs.  Australia and Switzerland avoided transition costs altogether by adding  individual accounts to their existing national pension systems, which are  modest relative to those in the other countries we are studying. Some  countries diverted revenue from the existing PAYG program to the  individual accounts. The resulting shortfall reflects, in part, the portion of  the PAYG program being replaced with individual accounts and the  amount of PAYG revenue being redirected to fund the accounts. For  example, transition costs may be less in countries such as Sweden or  Denmark where the contribution to individual accounts is 2.5 percent of  covered earnings and 1 percent, respectively, than for Poland or Hungary,  which replaced a larger portion of the PAYG program.
All of the countries we are reviewing also made changes to their PAYG  program that were meant to help reduce transition costs, such as  increasing taxes or decreasing benefits. In addition, Chile built a surplus in  anticipation of major pension reform, and Sweden had large budget  surpluses in place prior to establishing individual accounts. Countries also  transfer funds from general budget revenues to help pay benefits to  current and near retirees, expanding public borrowing. If individual  accounts are financed through borrowing they will not positively affect  national saving until the debt is repaid, as contributions to individual  accounts are offset by increased public debt. For example, Poland’s debt  is expected to exceed 60 percent of GDP in the next few years in part  because of its public borrowing to pay for the movement to individual  accounts.
It is sometimes difficult for countries to predict their transition costs. In  particular, countries that allow workers to opt in or out of individual  account programs have had difficulty estimating costs. For example,  Hungary and Poland experienced higher than anticipated enrollment from  current workers in their individual account programs, leaving the existing  PAYG program with less funding than planned. As a result, both countries  had to make subsequent changes to their individual account and PAYG  programs.
section_title: Balancing Opportunities to Realize High Returns and Benefit Adequacy Is Important
paragraphs: Countries adopting individual accounts as part of their national pension  system have had to make trade-offs between giving workers the  opportunity to maximize returns in their accounts and ensuring that  benefits will be adequate for all participants. Some countries set a  guaranteed rate of return to reduce certain investment risks and help  ensure adequacy of benefits. These guarantees may, however, result in  limited investment diversification with a potentially negative impact on  returns. In Chile, for example, fund managers’ performance is measured  against the returns of other funds. This has resulted in a “herding” effect  because funds hold similar portfolios, reducing meaningful choice for  workers. All the countries with individual accounts provide some form of  a minimum guaranteed benefit so retirees will have at least some level of  income. Some experts believe that a minimum pension guarantee could  raise a moral hazard whereby individuals may make risky investment  decisions, minimize voluntary contributions, or, as in the case of Australia  where the minimum guarantee is means-tested, may spend down their  retirement assets quickly.
It is important to consider the payout options available from individual  accounts, as these can also have substantial effects on adequacy of income  throughout retirement. For example, an annuity payout option can help to  ensure that individuals will not outlive their assets in retirement.  However, purchasing an annuity can leave some people worse off if, for  example, the annuities market is not fully developed, premiums are high,  or inflation erodes the purchasing power of benefits. Several countries  also allow for phased withdrawals, in some cases with restrictions, helping  to mitigate the risk of individuals outliving their assets and becoming  reliant on the government’s basic or safety-net pension. Some countries  offer a lump-sum payment under certain circumstances, such as small  account balances, and Australia allows a full lump-sum payout for all  retirees.
section_title: Effective Regulation, Implementation, and Education Can Protect Individuals
paragraphs: Important lessons can be learned regarding the administration of  individual accounts, including the need for effective regulation and  supervision of the financial industry to protect individuals from avoidable  investment risks. Some countries have expanded their permitted  investment options to include foreign investments and increased the  percentage of assets that can be invested in private equities. The  experiences of countries we are studying also indicate the importance of  keeping administrative fees and charges under control. The fees that  countries permit pension funds to charge can have a big influence on the  amount of income retirees receive from their individual accounts. Several  countries have limits on the level and types of fees providers can charge.  Additionally, the level of fees should take into consideration the potential  impact not only on individuals’ accounts, but also on fund managers. In  the UK, for example, regulations capping fees may have discouraged some  providers from offering pension funds. To keep costs low, Sweden  aggregates individuals’ transactions to realize economies of scale.
Some countries’ experiences highlighted weaknesses in regulations on  how pension funds can market to individuals. The UK’s and Poland’s  regulations did not prevent problems in marketing and sales. Poland  experienced sales problems, in part because it had inadequate training and  standards for its sales agents, which may have contributed to agents’ use  of questionable practices to sign up individuals. The UK had a widely- publicized “mis-selling” scandal involving millions of investors. Many  opened individual accounts when they would more likely have been better  off retaining their occupation-based pension. Insurance companies were  ordered to pay roughly $20 billion in compensation.
Countries’ individual account experiences reveal pitfalls to be avoided  during implementation. For example, Hungary, Poland, and Sweden had  difficulty getting their data management systems to run properly and  continue to experience a substantial lag time in recording contributions to  individuals’ accounts. In addition, Hungary and Poland did not have an  annuities market that offered the type of annuity required by legislation.
Education becomes increasingly important as the national pension  systems become more complex. It is particularly important for workers  who may have to make a one-time decision about joining the individual  account program. Several countries require disclosure statements about  the status of a pension fund, and some provide annual statements. To help  individuals choose a fund manager, one important component of these  statements should be the disclosure of fees charged. Some countries have  done a better job of providing fund performance information than others.  For example, Australia requires its fund providers to inform members  through annual reports clearly detailing benefits, fees and charges,  investment strategy, and the fund’s financial position. In contrast, Hungary  did not have clear rules for disclosing operating costs and returns, making  it hard to compare fund performance.
section_title: Concluding Observations
paragraphs: Demographic challenges and fiscal pressure have necessitated national  pension reform in many countries. Though one common goal behind  reform efforts everywhere is to improve financial sustainability, countries  have adopted different approaches depending on their existing national  pension system and the prevailing economic and political conditions. This  is why reforms in one country are not easily replicated in another, or if  they are, may not lead to the same outcome. Countries have different  emphases, such as benefit adequacy or individual equity; as a result, what  is perceived to be successful in one place may not be viewed as a viable  option somewhere else.
Although some pension reforms were undertaken too recently to provide  clear evidence of results, the experiences of other countries may suggest  some lessons for U.S. deliberations on Social Security reform. Some of  these lessons are common to all types of national pension reform and are  consistent with findings in previous GAO studies. Restoring long-term  financial balance invariably involves cutting benefits, raising revenues, or  both. Additionally, with early reform, policy makers can avoid the need for  more costly and difficult changes later. Countries that undertook  important national pension reform well before undergoing major  demographic changes have achieved, or are close to achieving, financially  sustainable national pension systems. Others are likely to need more  significant steps because their populations are already aging.
No matter what type of reform is undertaken, the sustainability of a  pension system will depend on the health of the national economy. As the  number of working people for each retiree declines, average output per  worker must increase in order to sustain average standards of living.  Reforms that encourage employment and saving, offer incentives to  postpone retirement, and promote growth are more likely to produce a  pension system that delivers adequate retirement income and is financially  sound for the long term.
Regardless of a country’s approach, its institutions need to effectively  operate and supervise the different aspects of reform. A government’s  capacity to implement and administer the publicly managed elements of  reform and its ability to regulate and oversee the privately managed  components are crucial. In addition, education of the public becomes  increasingly important as workers and retirees face more choices and the  national pension system becomes more complex. This is particularly true  in the case of individual account reforms, which require higher levels of  financial literacy and personal responsibility.
In nearly every country we are studying, debate continues about  alternatives for additional reform measures. It is clearly not a process that  ends with one reform. This may be true in part because success can only  be measured over the long term, but problems may arise and need to be  dealt with in the short term. The positive lessons from other countries’  reforms may only truly be clear in years to come.
Mr. Chairman and Members of the Subcommittee, this concludes my  prepared statement. I’d be happy to answer any questions you may have.
section_title: GAO Contacts and Staff Acknowledgements
paragraphs: For further information regarding this testimony, please contact Barbara  D. Bovbjerg, Director, Education, Workforce, and Income Security Issues  at (202) 512-7215. Alicia Puente Cackley, Assistant Director,   Benjamin P. Pfeiffer, Thomas A. Moscovitch, Nyree M. Ryder,   Seyda G. Wentworth and Corinna A. Nicolaou, also contributed to this  report.
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