Structural Reform of Social Security

overnments around the world have enacted or are currently considering fundamental structural reforms of their Social Security pension programs. The key feature in these reforms is a shift from a pure pay-asyou-go tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts. Countries as different as Australia, Chile, China, Britain and Sweden have already adopted mixed systems of this type (Feldstein, 1998; Feldstein and Siebert, 2002). In the United States, President Clinton almost proposed such a plan (Elmendorf, Liebman and Wilcox, 2001), and President Bush has made it a major priority for his second term. This paper will first explain how Social Security works now, how a mixed system could work in practice, and how the transition to such a change could be achieved. I discuss the economic gains that would result from shifting to a mixed system. I then turn to the three problems that critics raise about any investment-based plan: administrative costs, risk and income distribution. Finally, I comment on some of the ad hoc proposals for dealing with the financial problem of Social Security without shifting to an investment-based system.