According to the latest annual Social Security Trustees’ report, Social Security cuts are inevitable unless Congress acts swiftly. Without urgent action, Social Security benefits will be slashed by 23% starting in 2033, and this has created fears among Americans. However, while U.S. lawmakers debate how to save the Social Security trust fund, other countries have already solved similar problems.
Ageing Populations Are Pushing Social Security Toward Insolvency
In the U.S. and other developed nations, it has been found that longer lifespans and lower birth rates are shrinking the number of workers. This has led to an actuarial deficit, where there are more retirees drawing benefits for longer periods and fewer workers paying into the system. Due to the lack of proactive reforms to solve this problem, Social Security beneficiaries are at risk of facing severe cuts in their monthly checks.
Successful Reforms Implemented by Other Countries
According to a recent analysis from the Cato Institute, written by Romina Boccia and Ivane Nachkebia, and highlighted in the National Review, several developed countries have implemented Social Security reforms that have saved retirement benefits, and the U.S. could learn a few lessons.
Countries like Germany, Canada, Sweden, and New Zealand have taken unique steps that have reformed their Social Security systems and made them financially sustainable. Here are the reforms explained:
1. Germany: Automatic Balancing Keeps Benefits Aligned With Demographics
Germany introduced a “sustainability factor” that automatically adjusts benefit growth based on the ratio of retirees to workers. This factor ensures that the system automatically adapts to population changes by self-correcting demographic shifts without requiring political intervention.
2. Canada Blends Universal Benefits With Targeted Support
Canada utilizes a tiered model, where the Old Age Security (OAS) has a flat monthly benefit for nearly all seniors, and a Guaranteed Income Supplement (GIS) that is meant to support low-income seniors. Additionally, the Canada Pension Plan is earnings-based, just like the U.S. Social Security.
Although Canada spends only 2.59% of its GDP on its retirement system, while the U.S. spends 5.1%, it has a much lower senior poverty rate. Canada’s reforms indicate a more efficient and smarter way of ensuring financial sustainability of its Social Security.
3. Sweden’s Partial Privatization and Flexible Retirement Age
Sweden overhauled its pension system in the 1990s after facing financial collapse. Its system is one of the most innovative models of Social Security reform, which entails partial privatization of pensions and a flexible retirement age tied to life expectancy.
Its system has benefits that are means-tested, meaning that if liabilities exceed, automatic stabilizers kick in to slow benefit increases. These reforms have enabled Sweden to avoid Social Security cuts while also mitigating poverty among retirees.
4. New Zealand’s General Taxation and Voluntary Savings
New Zealand abandoned payroll-based pensions and introduced tax-funded pensions. It also introduced a voluntary KiwiSaver program that encourages voluntary savings. There are no mandatory payroll taxes, and citizens can opt out of the savings plan if they wish.
Conclusion
The reforms used by the countries above to save their Social Security indicate that none of them relied on heavy tax increases. By contrast, the U.S. now has to raise the payroll tax by 35% to rescue its Social Security trust fund from insolvency by 2033. This is a risky move that could hurt workers and the economy.
The U.S. lawmakers should learn from these countries to avoid hurting its citizens and preserve Social Security for future generations without breaking the bank.