CSIS: Lessons from Abroad for the U.S. Entitlement Debate

New report from the Center for Strategic and International Studies

Summary

As the baby boom generation enters retirement over the next few decades, the United States population will rapidly age, swelling the ranks of the elderly. This aging will strain government budgets, inflating the costs of our major entitlement programs: Social Security, Medicare, and Medicaid. Furthermore, population aging is by no means a solely American problem. Across the world, countries are undergoing similar demographic transformations, spurred by declining fertility rates and rising life expectancy.

A new report, prepared by the Center for Strategic and International Studies with support from the Peter G. Peterson Foundation, examines pension reform efforts in developed countries across the globe. In many cases, these nations have already made successful strides in addressing their coming demographic challenges, potentially providing a blueprint for action. As this report demonstrates, there are significant lessons to be learned for the United States from international state pension reform efforts.

The report’s major findings include:

• Most developed countries have already taken significant steps to prepare for the aging challenge."Several [other countries] have enacted sweeping overhauls of their public pension systems designed to stabilize their cost as a share of GDP... Meanwhile, on the health-benefit side, most developed countries have been more successful than the United States at imposing budget constraints that control — or at least moderate — the rate of spending growth."

• The US enjoys certain demographic and economic advantages. "Although the United States is aging, it is now the youngest of the major developed countries and, thanks to its relatively high fertility rate and substantial net immigration, it is projected to remain the youngest for the foreseeable future. The American elderly also have many alternative sources of income, such as employer retirement plans and personal pensions, which help to take pressure off of public budgets."

• These advantages, however, are not reasons for inaction."[Despite] its many advantages, the United States faces an aging challenge that may be every bit as daunting as those confronting countries with far larger age waves and much more expansive welfare states. The number of Americans aged 60 and over will grow faster than in any of the other nine countries except Australia and Canada."

• CSIS report calls for a fundamental shift from automatic cost growth to automatic cost constraint. Social Security benefits are indexed to wage growth, meaning that benefits increase automatically when wages grow. The report highlights many options for building automatic cost constraint into the system, such as means-testing beneficiaries, price-indexation of benefits, or indexing benefits to changes in life-expectancy. One option that has seen some success is the introduction of automatic demographic stabilizers into pension systems, adjusting benefits annually by changes in demographic variables, such as the ratio of retired beneficiaries to workers contributing into the system.

• Reforms should be balanced and protect the most vulnerable."The importance of balancing fiscal sustainability and income adequacy cannot be overestimated. Policymakers who believe that the two dimensions of aging preparedness can be divorced should heed the example of the UK, whose bold move to price-index public pensions was ultimately reversed amid growing concerns that the reform would impoverish the elderly. The lesson is that, in the long run, it may be no more feasible to have an entitlement system that is fiscally sustainable but socially inadequate than it is to have a system that is socially adequate but fiscally unsustainable."

• Entitlement reform in other countries was enacted with broad political support."Yet the very fact that political leaders in other countries were able to build broad coalitions in favor of entitlement reform suggests that they have grasped a deeper truth that most U.S. political leaders have not. This truth is that the unchecked growth in old-age benefit spending threatens the agendas of both right and left. In the end, it will not only prove inimical to small government, but to progressive government as well."

The report concludes: the sooner the United States acts, the better. "As daunting as the aging challenge may be, it is possible to forge consensus around effective and equitable reforms. There is still time for U.S. policymakers to take up the challenge. But the longer they wait, the more painful the choices will become."

The Center for Strategic and International Studies’ full report, "Lessons from Abroad for the U.S. Entitlement Debate," can be read below and downloaded here. For more information about CSIS' work, click here.