Other Countries Have Fixed Their Social Security Programs

The annual Social Security trustees’ report came out this month, and it tells the same old story everybody knows: The program is financially unsustainable. Benefits are automatically scheduled to be cut by 23 percent in 2033, and Congress made an already bad situation slightly worse by passing a giveaway to government workers during the lame-duck session last year.

Less known is that other countries have successfully reformed their social security programs. A new report from Romina Boccia and Ivane Nachkebia from the Cato Institute sheds light on these positive stories from abroad.

As they point out, the basic reason for U.S. Social Security’s insolvency is the aging population, which is a common characteristic across the developed world. As countries get richer, people live longer and choose to have fewer kids, on average, which strains government retirement programs designed under earlier demographic conditions.

Other rich countries have hit the breaking point on their retirement programs before the U.S. Boccia and Nachkebia point to four countries that have successfully reformed their social security programs to be sustainable today:

• Germany. The German system is probably most similar to U.S. Social Security in its structure. Its Statutory Pension Insurance program is based on earnings replacement, like Social Security, and most senior income in Germany comes from government benefits. But unlike in the U.S., German politicians have reformed the program in response to changing demographics. They adopted an automatic balancing mechanism called the “sustainability factor” that links benefit growth to the ratio of retirees to workers, so that “benefit growth automatically reduces in response to adverse demographic trends.”
• Canada. Our northern neighbors have a system that allows for considerable personalization, in contrast with the U.S. one-size-fits-all approach. Canada has one nearly universal retirement program, Old Age Security (OAS), that provides a flat monthly benefit. Then, there is a means-tested Guaranteed Income Support (GIS) program that gives more to lower-income retirees. There is also the Canada Pension Plan, which is earnings-related. Canada also has universal savings accounts, which are tax-advantaged accounts that can be used for anything but are often used to save for retirement. Canada has a very low senior poverty rate, despite spending only 2.59 percent of its GDP on OAS and GIS. The U.S. spends 5.1 percent of its GDP on Social Security.
• Sweden. Yesteryear’s bastion of socialism, Sweden ran out of other people’s money in the 1990s and reformed its welfare state. The Swedish retirement program is partially privatized, with a Social Security–style system supplemented by savings invested in the market. Many benefits are means-tested, and the eligibility age is indexed to life expectancy. People who immigrated to Sweden are often entitled to fewer benefits, as each year below 40 years of residency proportionally reduces payouts. Sweden also has an automatic stabilizer that reduces benefit growth if liabilities exceed assets in the fund. Sweden has the lowest senior deprivation rate in the EU, despite spending less than 1 percent of its GDP on means-tested programs for seniors.
• New Zealand. The Kiwis’ system is the most different from the U.S. Unlike every other OECD country, New Zealand does not have any mandatory retirement program funded by dedicated taxes at all. It has the New Zealand Superannuation program, which is funded with general revenue and provides a flat benefit. Then, the government encourages participation in the voluntary KiwiSaver program. People can opt out if they choose.

These approaches are different from one another, but all of them are more sustainable than Social Security. It’s also important to note what these countries didn’t do: rely on tax increases to keep benefits growing. The CBO estimates that Congress would need to raise the Social Security payroll tax rate by 35 percent to keep benefits fully funded in the long term. That’s not a good idea for workers or for the government. Look abroad for reforms to benefits that have worked.