Private Pensions in International Perspective

Abstract

In the mid-1990s, in response to the spreading problem of financing public pay as you go (PAYGO) pension systems across industrialized countries experiencing population aging and economic globalization, the World Bank called for a three pillar model of pension policy to avert the old age crisis (World Bank 1994). The first pillar was to consist of minimal public sector defined benefit pensions bas ed mainly on PAYGO financing; the objectives were redistribution and poverty reduction. The second was to consist of earningsrelated or occupational pensions that could have public (government subsidized) or private financing arrangements; the objective was to promote or enforce saving. The third was to consist of private individual savings, with the objective to encourage individual, voluntary saving. Diverse mixes of these three policy alternatives already existed across advanced societies but the decade following the report has been characterized by more and more policy shifts across countries with different welfare state legacies towards more private and voluntary schemes. Meanwhile, the United States pension system was already based on a three pillar structure in 1994 and has tilted towards the third pillar vigorously. This chapter will consider private pensions in an international perspective. First, the range of welfare state legacies across countries will be briefly summarized. Second, the history of private pensions in the United States will be reviewed, with an emphasis on the recent two-decade shift from defined benefit to defined contribution occupational pension plans and recent debates about privatizing a portion of its PAYGO plan. Finally, selected international comparisons of recent policy changes will be reviewed among countries facing severe population aging trends that are forcing them to privatize their systems and move retirement ages later. Paradoxically, perhaps, the three pillar system has both separated the public from the private occupational and individual sectors and made them more interdependent. In some countries the boundaries between the pillars are blurred.