New Models for Old-Age Security: Experiments, Evidence, and Unanswered Questions

The escalating costs of traditional social security systems are forcing countries to reevaluate the formal programs that provide income maintenance support to the aging. This article suggests a reform strategy built around three systems, or “pillars,” to provide old-age security—a public pillar with mandatory participation, a private, mandatory savings plan, and a voluntary savings system. Three variations of this model are being implemented in different countries: the Latin American model, in which individual workers choose an investment manager for their retirement funds; the OECD model, in which employers, union trustees, or both choose the investment manager for an entire company or occupation; and the Swedish notional account model, a reformed pay-as-you-go first pillar that may be supplemented by a second, funded pillar. Preliminary empirical evidence on the efficiency and growth effects of pension reform, mostly from Chile, indicates that the impact on national saving and financial market development and, through these, economic growth, has been positive and possibly large. Problems concerning high administrative costs and regulations that distort investment decisions remain to be resolved, however.