International Evidence on the Socioeconomic Determinants of Structural Pension Reform and Implications for Social Security in the United States

The looming Social Security financing imbalance is one of the most pressing economic issues in the United States today. The resolution will have a substantial impact on the economic and social well being of current and future generations. To date, academic research has focused mainly on whether the United States should undertake structural reform, rather than whether it is likely. I present a detailed treatment of the latter question. I begin by describing two theoretical pension models. I then design a framework for analyzing historical instances of reform. I also offer a theoretical model of the reform decision and design a regression model to predict the likelihood of reform based on socioeconomic parameters. Finally, I examine the implications of my results for the United States and attempt to predict the likelihood of future reform. I find four critical themes underlying the determinants of reform: the importance of the near-term demographic distribution, the need for easy access to transition financing, the consideration given to beneficial outcomes outside the pension sphere, and the failure of relative returns to impact the reform decision. I determine that the variables driving cross-country comparisons of reform likelihood are the age dependency ratio (the ratio of workers to dependents), the overall level of taxes and the rate of national saving. Propensity to reform within a country over time is influenced by the presence of well-developed financial markets and a fiscal surplus. I conclude that the probability of reform in the United States has risen substantially in recent years and will continue to do so in the near future.