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All countries in the Organisation for Economic Co-operation and Development (OECD) have, to some extent, altered their national pension systems, consistent with their different economic and political conditions. Chile has also undertaken this task.

This report argues that the experiences of those countries that have already undertaken national pension reform efforts to address demographic changes similar to those occurring in the United States, can provide lessons for U.S. policymakers.

Many countries are grappling with demographic change and its effect on their national pension systems and long-term fiscal posture. With increasing longevity and declining birthrates, the number of workers for each retiree is falling in most developed countries. These trends can strain the finances of national pension programs, particularly those in which contributions from current workers fund payments to current beneficiaries - a form of financing known as pay-as-you-go (PAYG).

Demographic and economic challenges are less severe in the United States than in many other developed countries - the birthrate is not as low, people are more likely to stay in the labour force for a greater number of years, and immigration continues to provide young workers. Yet projections show that the Social Security programme faces a significant long-term financing problem.

The observations made by this report include:

• the experiences of the countries studied highlight the importance of considering how modifications to PAYG programmes will affect the programmes’s financial sustainability, its distribution of benefits, the incentives it creates, and the extent to which the public understands the new provisions
• to reconcile PAYG program revenue and expenses, most OECD countries have both increased contributions and reduced benefits, often in part by increasing retirement ages
• although several countries have yet to make their programmes financially sustainable, some have come close to doing so. Some countries (Sweden and Italy, for example) have succeeded in large part by automatically linking benefits to factors such as worker contributions, changes in demographics, and growth in the national economy. Generally, the countries that have come closest to achieving sustainability have also undertaken other types of reform, such as the individual account programs in Sweden and Australia
• where countries created national reserves to partially prefund PAYG pension programmes, many lessons can be drawn, including the importance of early action and sound governance. In some countries where requirements for prefunding through national reserves have been in place for a long time and have been complemented by other reform measures, significant amounts of money have already accumulated
• countries that protect national reserve funds from being directed to meet nonretirement objectives are better equipped to fulfill their future pension commitments
• effective governance of national funds also requires that governments commit to making regular transfers into these funds. Countries that count on budget surpluses to finance their reserve funds will need strong and sustained budgetary discipline to accumulate enough reserves to prepare for future pension spending requirements
• important lessons can be learned regarding the administration of individual accounts, including the need for effective regulation and supervision of the financial industry to minimise investment risks that individuals face
• some countries have done a better job than others in providing information about their individual account programmes. Additionally, although studies in some countries indicate that many individuals have only limited knowledge about their retirement prospects, several countries have programs to provide information on investment choices and retirement income options

The countries that have adjusted their existing PAYG national pension programmes demonstrate a broad range of approaches for both reducing benefits and increasing contributions in order to improve the programmes financial sustainability. Their experiences also provide lessons about the potential effects of some adjustments on the distribution of benefits, including the maintenance of a safety net and incentives to work and save. They also emphasise the care required in implementing and administering reforms and ensuring that the public understands the new provisions. [adapted from authors]

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