Major pension reform around the world is inevitable,” Australian senator Nick Sherry told participants from 34 countries at a March 9-10 conference in New York City on global pension issues cosponsored by the Cato Institute and The Economist.
Sherry, a senator of the left-leaning Labour Party, advised politicians not to delay reform. “It is often tempting for governments of the day to ignore or put off reform. This is not an option,” said Sherry at the conference, “Solving the Global Public Pensions Crisis II: The Privatization Revolution.” Sherry declared that “failure to reform will inevitably lead to a major ‘crunch’ which will hurt most those who can least afford it, those on low and middle incomes.” Successful reform such as Australia’s “super-annuation” system can lead to large income gains for the least advantaged—for example, the 31 percent projected rise in retirement incomes for low-wage Australians.
In an examination of pension privatization in Latin America, Cato’s Jacobo Rodríguez gave a long-term overview of Chile’s experience with personal retirement accounts, and Fernando Solis Soberón discussed his role as founder of Mexico’s semiprivatized system.
The most promising changes were announced by Boris Nemtsov, vice speaker of the Russian Duma, and Sun Jianyong, deputy director-general of China’s Depart-ment of Social Insurance Funds Supervision. They said that citizens in their respective countries are coming to see personal retirement accounts as a step forward both for pension reform and for the development of a market economy as a whole.
Thomasz Frontczak, president of AIG Poland, spoke of the “flexibility through diversity” that Poland’s new private system has brought that former Warsaw Pact nation. Swedish economist Göran Normann outlined changes enacted in 1998 creating a two-tiered pension system with personal accounts funded with 2.5 percent of workers’ incomes.
Klaus Friedrich, chief economist for Germany’s Dresdner Bank, said that a traveler to Germany could declare, “I have seen the future and it doesn’t work.” With a worker-to-retiree ratio approaching one to one and little political leadership for reform, Germany may be hard-hit as the demographic chickens come home to roost. Milton Ezrati, former chief investment officer for Nomura Capital Management, said that Japan faces similar problems but expressed confidence that Japan will move to reform quickly once the pressure of national demographics becomes unavoidable. Many workers are evading Japan’s payroll taxes, currently at 17.35 percent and slated to rise to over 34 percent by 2025. When the usually law-abiding Japanese act this way, Ezrati declared, change is afoot.
Despite differences of time and geography, one point became clear: once a system of personal accounts has been put in place, not even radical changes in political leadership can overcome workers’ desire to keep those changes. Chile has elected its first socialist president since Salvador Allende, but repealing personal accounts is not on the agenda. The United Kingdom replaced the Conservative Party with Tony Blair’s New Labour Party, but as Conservative member of Parliament David Willetts explained, individual investment is more likely to expand than to contract under Labour. Australia’s Sherry, now a member of the opposition, noted that “all research shows that compulsory private superannuation is popular, enjoying a 60 percent plus rating.”
In an examination of America’s Social Security system, Michael Tanner, director of Cato’s Project on Social Security Privatization, outlined the case for a Chilean-style system of personal accounts. Former representative Tim Penny (D-Minn.) discussed the politics of Social Security reform, and author Charles Murray argued that the social welfare system needs to be revised because of its negative effects on human well-being.
Penny’s and Murray’s remarks are in the April edition of CatoAudio.
This article originally appeared in the May/June 2000 edition of Cato Policy Report.