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. 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.