Individual Accounts for Social Security Reform Outcome-Oriented DC Solutions: International Perspectives on the U.S. Debate

Pension Section News – Number 64 | May 2007

Individual Accounts for Social Security Reform Outcome-Oriented DC Solutions

International Perspectives on the U.S. Debate

By John Turner (Published by W.E. Upjohn Institute For Employment Research)

Reviewed by: Steven Siegel, ASA

"Congress did not act last year on my proposal to save Social Security. ..."

–President George W. Bush in his Jan.31, 2006 State of the Union address.

With this chastisement of Congress on the eve of this year's State of the Union address, a year of intense politicking on Social Security Reform came to a fruitless and abrupt end. Intended as perhaps the highest priority on the Bush administration's second term economic agenda, the original proposal and subsequent reformulations met with less than an enthusiastic response from the public. As a result, Social Security Reform has quickly vanished from the daily headlines. Yet, the debate on Social Security solvency remains a crucial one for many Americans who either currently or will in the future rely on Social Security benefits for a significant portion of their financial resources. And with the 2008 presidential election season quickly approaching, the Social Security platforms of leading candidates promise to be among the key determinants of their electability.

Actuaries have a particular vested interest in this issue as demonstrated by a survey issued by the Pension Section's Research Committee last year. Close to 2,400 actuaries responded to this survey seeking their opinion on the long–term solvency of Social Security in the United States and proposals that address it. The survey also revealed that actuaries do not speak in one voice on this issue–opinions in the survey ran the gamut from calls for complete privatization of the system to outright rejection of privatization in any form.

With this mind, I would highly recommend actuaries, who would like to learn more about this issue, read John Turner's excellent book on international perspectives of individual accounts. In clear and concise language, Turner, a senior policy advisor at the AARP Public Policy Institute, explores the first–hand experience of other countries that have implemented, either partially or in full, aspects of social security reform that have been proposed for the U.S. system.

Early on, Turner acknowledges the vast international spectrum of governmental policies for encouraging pension coverage, and then categorizes those policies into four major categories that I found particularly helpful. Using this as a framework, Turner takes the reader through different national systems with an emphasis on the relevance of the experiences of Sweden and the United Kingdom in terms of the most likely types of overall reform approaches.

Turner effectively interweaves the experiences of these countries with the overarching risks of reform that he delineates earlier in the book. This provides a balanced view of the benefits, pitfalls, and lessons of reform that only come from empirical observation. For instance, in the section dealing with the risks of individual management of investments, Turner writes, "Experience with individual accounts as part of social security in Sweden indicates that many employees do not make an investment choice, and thus the structure of the default fund is an important aspect of the system design." The message here is clear: any reform approach that shifts responsibility to individuals must have well–thought out and safe defaults for those motivated to make choices, but not financially sophisticated enough to do so as well as those that are simply negligent. Related to this, I found Turner's discussion and citation of studies exploring the psychological effects of individual accounts insightful for gauging the public's ultimate appetite for reform.

Finally, for those who have relied on the popular media for much of their information, Turner methodically deconstructs a number of myths that have persisted as part of the debate. These myths serve as a cautionary note for how the truth can be obscured for the sake of political expedience. It's worth it to read the book for this section alone.

The U.S. Social Security system has depended on the sage advice and leadership of actuaries since its inception in 1935 with President Franklin Roosevelt's signing the Social Security Act into law. This legacy of actuarial leadership continues today and with the approaching election, it is important to arm yourself with facts to make an informed judgment–no matter where you fall on the political spectrum. Read this book and then decide for yourself.

Steve Siegel is research actuary for the Society of Actuaries. He can be contacted at