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Individual Accounts for Social Security Reform

International Perspectives on the U.S. Debate

John Turner, AARP

Introductory chapter | Table of Contents

“Individual accounts are often debated in a vacuum—unrelated to any real world experience. John Turner, one of the nation’s foremost experts on Social Security, does a masterful job of making us look at the experience with accounts already offered in many countries—but in many different sizes, shapes, forms, and levels of risk. Whether you like accounts or not, you’d better read Dr. Turner’s book if you want to engage in the Social Security debate in any serious way.”

—Eugene Steuerle, senior fellow, Urban Institute

“The United States is engaged in the most significant debate over Social Security that it has had in 50 years. Fortunately, it doesn’t have to rely on abstract analysis or ideological arguments. Other countries have had experience with the types of reforms we are considering. This very readable book provides a valuable reference for people interested in learning about international experience relevant to the U.S. Social Security reform debate.”

—Ron Gebhardtsbauer, FSA, MAAA, senior pension fellow, American Academy of Actuaries

"Dr. Turner's new book becomes the definitive guidebook for policymakers seeking to reshape the [U.S. Social Security] system. Dr. Turner explores the universe of individual accounts with admirable evenhandedness and unfailing accuracy. [This] new book must be the starting point whenever Social Security is debated in earnest and should be required reading for those who seek to join that debate."

—Comparative Labor Law & Policy Journal
Proposals for privatizing a portion of the U.S. Social Security system involve replacing a defined benefit pension program (the current system) with a defined contribution (or individual account) program. Defined benefit programs provide a level of retirement benefits based on a formula that usually includes a worker’s earnings and years of service. In contrast, defined contribution programs rely on contributions from the employee and/or employer and investment growth over the worker’s years of service for pension income at retirement. While defined benefit social security programs continue to be predominant in high-income countries, many nations have adopted defined contribution programs in their social security retirement systems. As this book shows, U.S. policymakers should be wary.

John Turner uses the documented experiences of many countries—including the U.K., Sweden, Chile, Australia, Canada, and others—and the tools of economics to analyze the public policy issues surrounding the proposed implementation of individual accounts as part of the U.S. Social Security system. The result is a book that clarifies these issues while offering direction to Social Security policymakers. Also included is a comprehensive overview of the types of defined contribution plans in use today.

One issue often ignored in the policy debates surrounding individual accounts is the complexity such accounts add to a social security system. This is partly due to the variety of accounts that may be implemented. As Turner explains, they may be “add-ons,” individual accounts added to an existing social security program, or they may be “carve-outs,” individual accounts that replace benefits in an existing social security program. Furthermore, either of these types of accounts can be made voluntary or mandatory, resulting in four categories of pension plans. Investment decisions facing workers enrolled in individual accounts compound this complexity. Turner recognizes this and explores how this added complexity might affect worker behavior, including investment decisions, hours worked, and retirement age.

Another issue Turner explores is risk. Risk in individual accounts occurs in many forms, not just those related to the financial markets. From most perspectives, individual accounts are riskier than defined benefit plans in high-income countries that have well-managed social security systems, such as the United States. Turner assesses how risk posed by defined contribution systems is handled by institutional investors and governments and compares that to how individual investors manage risk. Most importantly, he says, Social Security should continue to provide stable, low-risk retirement income to low- and middle-income workers, and policymakers should be careful in assessing the amount of risk inherent in various retirement income options.
Related titles
  • Pay at Risk, John Turner, Editor
  • Employee Benefits and Labor Markets in Canada and the United States, William T. Alpert and Stephen A. Woodbury, Editors
  • Private Pension Policies in Industrialized Countries: A Comparative Analysis, John Turner
  • Pensions and Productivity, Stuart Dorsey, Christopher Cornwell, and David Macpherson
  • Pension Policy for a Mobile Labor Force, John Turner
    • Turner concludes by debunking what he terms the “Twelve Myths about Individual Accounts.” These myths address voluntary carve-out individual accounts, the type of reform promoted by President George W. Bush.
    195 pp. 2006.
    $40 cloth ISBN 0-88099-283-2 / ISBN-13 978-0-88099-283-1
    $18 paper ISBN 0-88099-282-4 / ISBN-13 978-0-88099-282-4

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