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1 - Constructing the Ideal Pension system: The Visions of Ten Country Experts
- W.E. Upjohn Institute
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1 1 Constructing the Ideal Pension System The Visions of Ten Country Experts Dana M. Muir Stephen M. Ross School of Business, University of Michigan John A. Turner Pension Policy Center At a time when many countries have aging populations and economies continue to struggle in the aftermath of the global financial crisis, the improvement of pension systems is especially important. Pensions often are critical in preventing retirees from living in poverty. Pensions enable older workers to retire. In order for retirees and workers to rely on pensions, the funding and administration of those pensions must be affordable and sustainable for workers, business, and society. The theme of the 2010 conference of the European Network for Research on Supplementary Pensions (ENRSP or the Network) was an exploration of how and why the image of the ideal pension system differs across countries. The organizers recognized that views on the ideal pension system for a country may evolve in reaction to changes in the economic and demographic environment. The conference recognized the importance of the various long-run goals that different actors have for the pension system. The conference focused on country-by-country studies. It was expected that the conference authors would have very different approaches to thinking about the characteristics of the ideal pension system, and the authors did not disappoint. This introductory chapter begins with a brief overview of the country studies. By necessity this overview omits much of the nuance of the chapters—the goal is to provide a short explanation of each country’s 2 Muir and Turner pension system and summarize the reforms proposed by the author of the country study. The summaries are intended to establish some background for the second section of this chapter in which we address some broad themes drawn from the country studies. We consider the authors’ views on the importance of culture in explaining differences in approaches to pension issues. We also reflect on four primary goals for any pension system: 1) coverage of the population so that pensions are broadly available, 2) risk sharing so that the many risks inherent in any pension system are appropriately shared, 3) adequate benefits to meet the country’s goal of sufficient retirement standards, and 4) approaches to respond to increases in longevity. Given our backgrounds, we view the complex pension systems described in this chapter through a U.S. lens. To decrease the confusion that results from using different terms for essentially similar pension concepts, we adopt U.S. terminology in this chapter and throughout the rest of the book, even when different terminology would typically be used elsewhere in the world. So, for example, pension schemes (British terminology) are referred to here as pension plans or pension systems. And the government-administered portion of a country’s pension system is typically referred to as social security. NORTH AMERICA United States, John A. Turner and Dana M. Muir The U.S. pension system is the only North American system covered in this book because, given the focus of the Network, the emphasis is on European pension systems. The U.S. and Japanese systems are included in the volume as points of comparison and discussion. [3.16.217.113] Project MUSE (2024-04-17 19:05 GMT) Constructing the Ideal Pension System 3 The U.S. pension system requires nearly all workers to participate in the social security system, which provides a defined benefit pension to workers who meet minimum criteria. In addition, the U.S. provides tax incentives for employer-sponsored pension plans, which may be defined benefit or defined contribution plans, and for individual retirement savings in accounts such as Individual Retirement Accounts (IRAs). The social security plan is the only mandatory plan. Sponsorship of defined benefit or defined contribution plans by employers is voluntary, as are individual savings accounts. Employer-sponsored plans have been heavily regulated since 1974. In spite of various incentives intended to increase coverage of employer-sponsored plans, however, coverage rates have never exceeded much more than 50 percent. Numerous interest groups recognize that planned and potential reductions in the social security system, limited coverage of employersponsored plans, poor uptake of individual plans, and the transition from defined benefit to defined contribution plans means that the U.S. pension system needs reform. Turner and Muir briefly discuss some of those proposals, which advocate very different approaches. Turner and Muir conclude that the importance of individual freedom in U.S. culture means that the voluntary nature of the...