Because of increasing life expectancy and declining fertility, all of the major industrialized nations will experience substantial population aging over the next thirty years. By 2035, the elderly will make up 20 percent or more of the population in each of the seven big Organization for Economic Cooperation and Development (OECD) nations. Within that group, the United States will have the smallest proportion of elderly individuals. The overall dependency ratios in those countries show similar patterns.

These changes will have serious consequences for public pension systems around the world. The International Monetary Fund projects that, without changes, over the next fifty years, the social security systems in each of the seven major industrialized nations will experience a funding shortfall. The U.S. projected deficit is small compared to that of most of the other nations. Only the British social security system appears to face a shortfall comparable to the one projected for the United States. To restore fiscal balance, the United Kingdom and the United States would need to increase their annual revenues by less than 1 percent of GDP. All of the other nations would require an increase amounting to 2 to 3 percent of GDP. (The Century Foundation, The Basics: Social Security Reform, 2005; see also, Chand and Jaeger, IMF, Aging Populations and Public Pension Schemes, 1996)

While many have called for responding to this challenge by reducing guaranteed benefits in favor of funded plans (i.e., the Social Security vs. private account debate in the U.S.), the mixed record of privatization schemes around the world suggests that other solutions to global pension problems should be investigated. These solutions include increasing private savings, encouraging older people to stay in the work force longer, and promoting faster economic growth. (Richard Leone, Foreign Affairs, Stick with Public Pensions, 7/15/1997)

In 1981, under the dictatorship of Augusto Pinochet, Chile disbanded its longtime state pension system in favor of a private account system. While the move did away with a corrupt, inefficient, and deeply indebted state system, the privatized replacement has encountered its own setbacks in the past two and a half decades.

Under the privatized system, Chileans designate a private pension fund to receive a mandatory payroll deduction of 10 percent of salary (up to $22,000), plus an additional 2.5 percent to 3.7 percent for death and disability insurance and administrative fees. Workers can access their private accounts after contributing for a minimum of twenty years, at which point they either use the funds to purchase an annuity or choose to make withdrawals according to a predetermined schedule.

For more than a decade, the returns on private accounts seemed spectacular. The privatization of state enterprises and, from 1985 to 1991, high interest rates, contributed to an average annual real return over fifteen years of 16.6 percent, peaking at 35 percent from 1989 to 1991. But once Chile’s economy cooled, so did returns on personal pension accounts. Comparing returns on pension funds to bank deposits during the 1990s, the World Bank found in a 2004 report that “the difference [in returns] shrunk significantly (6.6 percent real yield on deposits, 9.8 percent real return on pension funds), and may not have compensated for their much greater volatility (1.1 against 8.5 percent)."

Commissions and other administrative costs have also swallowed up large shares of those accounts. The brokerage firm CB Capitales calculated that when commission charges are taken into consideration in Chile, the total average return on worker contributions between 1982 and 1999 was 5.1 percent—not 11 percent as calculated by the superintendent of pension funds. That report found that the average worker would have done better simply by placing pension fund contributions in a passbook savings account.

Finally, the investment accounts of retirees are also much smaller than initially anticipated—so low that 41 percent of those eligible to collect pensions continue to work.

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For more than forty years, the British, like Americans, financed their retirements based on the familiar model of a three-legged stool consisting of public funds, employer pensions, and personal savings. Following the rise of Margaret Thatcher's conservative government in the early 1980s, however, Britain embarked on a far reaching and often troubled experiment with privatizing their pension system. The argument for British privatization was built on many of the same premises as American privatization: empowering individuals to invest for their retirement without government interference while freeing the government from considerable expense.

In 1981, the government began indexing the flat rate benefits which all pensioners receive according to prices instead of wages. This change in benefit formulas, which would likely be part of an American privatization plan as well, drastically reduced the value of minimum benefits. In the last year before the formula change, the basic state penion replaced around 27 percent of income for the average male earner. In 2004, the benefit only replaced 19 percent of earnings, and by 2050 will only replace 7.8 percent of earnings.

In 1986, the government started allowing workers to opt out of the second, earnings related benefit (SERPS) in favor of private market investment accounts. At the same time the government scaled back the benefits from the SERPS program. But the private investment accounts which many workers used to replace their government benefits have been plagued by scandal, and the management costs associated with the accounts can eat up 30 percent of account value at retirement.

After more than a decade of privatization, the government decided to reverse course under the new Labour government of Tony Blair, in an attempt to address the pensioner poverty which persisted under privatization. The guaranteed minimum benefit (now the Pension Guarantee Credit) as well as the government earnings-related pension (formerly SERPS, now "S2P") were increased. A new Savings Credit was also instituted to ensure that the minimum income guarantee wouldn't act as a disincentive to private saving. In addition, many of the workers who contracted out during privatization's heyday are being encouraged to return to the state system.

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