How It All Started
Across the globe, the future of public pension systems is currently in doubt. And while there is no lack of suggestions for how to reform these systems, the key to assessing the various reform proposals is to understand why public pension systems were established and how they operate. What were the goals of these systems, and how successful have they been in meeting them?
The Origins of Social Security
Germany established the first national public pension system in 1889. By the time the United States established its program (commonly referred to as Social Security) in 1935, such systems were well established in most ma jor industrialized countries. The pace with which public pension systems spread throughout the world can be tied to the demographic transformations taking place during the late 19th and early 20th centuries. As life expectancies began to increase, so too did the population of the elderly. Meanwhile, migrations of people from farms to cities reduced the ties among extended families and, thus, the family support system that the elderly traditionally relied upon. Combined with the usual employment difficult ies faced by older workers, these transformations often plunged the elderly into poverty.
Concerned about their own financial security in old age, wage earners pressured their governments to create public pension systems. In the United States, the Great Depression was the catalyst: Older workers were often th e first to be laid off and the last to be hired at a new job. Even worse, the stock market collapse wiped out much of their retirement savings.
The Success of Public Pension Systems
| RISING FROM THE ASHES: U.S. Poverty Rates | |||||||||
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| 1959 | 1966 | 1970 | 1975 | 1980 | 1985 | 1990 | 1996 | ||
| In 1959, more than one-third of the elderly were living in poverty. Today, the elderly are wealthier than the general population. SOURCES | |||||||||
If such programs were established primarily to reduce poverty among the elderly, they have been a huge success. In the past 40 years, public pension systems in the seven major industrialized countries (Canada, France, Germany, Italy, Japan, t he United Kingdom and the United States) have been extended to cover nearly all workers, and retiree benefits have been expanded. Today, almost 100 percent of retirees in these seven countries receive public pensions. In most countries, poverty rates for retirees are now lower than they are among the rest of the population (see U.S. example at left). Pensions are now the most important source of income for the elderly, and their importance is growing.
The prevalence of public pensions also has been linked to a reduction in labor force participation rates of the elderly. One goal of the 1935 U.S. Social Security Act was to encourage elderly workers to retire, creating vacancies for younger workers and reducing unemployment. Programs in other countries have shared the same goal throughout the years. In Europe, however, this goal took on increasing importance in the 1980s, when persistently high unemployment rates led to the sharp expansion of early retirement incentives.
[ How It Works ] [ Keeping It Going ] [ What We Can Do ] [ Conclusion ]
[ The U.S. Advisory Council on Social Security: A Group Divided ] [ More Information ]