How It Works
The Operation of Public Pension Systems
The public pension systems in these seven countries operate essentially on a pay-as-you-go basis. This means that contributions by current workers are used to pay the benefits for current retirees. Each generation of wor kers supports the previous generation with the implicit understanding that the next generation of workers will support their retirement, forming a chain of intergenerational transfers.
The table below gives an overview of the current public pension system in each of the seven countries. Since their inception, most of these systems have been revised dramatically. Today, there are two types: a universal flat-rate system and an earnings-related system. Under the former system, workers who are eligible for full pensions receive the same monthly benefit as everyone else. Under the latter, workers' pensions vary depending on t he wages they receive during their working life. Most countries also provide supplemental pensions for the poorest retirees, which are financed from general government revenues.
To qualify for a public pension, a worker must have reached a certain age and have contributed to the system for a minimum number of years. The normal retirement age varies across countries, with 65 as the current maximu m. In Italy, Japan and the United Kingdom, women may retire at an earlier age than men, but these gender differences are being eliminated. All countries allow individuals to retire early, with varying restrictions. France, Germany and Italy allow individu als with long work experience to retire early with no penalty (although they are phasing out these provisions). Canada, France, Japan and the United States allow individuals to retire early, but with a reduction in benefits. Most countries allow retirees to increase their benefits by delaying retirement for a few years.
In all countries, benefit payments increase with the number of years worked, up to a maximum. In computing the eligibility requirement, many countries count a portion of the years spent out of the labor force while carin g for children. All countries except Germany and Italy increase the pension if a spouse is ineligible for his or her own pension and if there are dependent children.
| All of Europe's systems are in deficit: Worker contributions do not cover payments to retirees. |
Retiree benefits in these seven countries are adjusted as often as quarterly and as seldom as annually, in accordance with changes in consumer prices. The exception is Germany, where the adjustment is based on changes in average after-tax wages.
In some countries, the government finances part of the pension program through its general revenues. In all countries, at least part of the cost of the pensions is funded through payroll taxes on current workers and thei r employers. Wages below a minimum level are exempt from taxes in all countries, except France and the United States, reducing the actual tax paid. In the United Kingdom, the tax rate paid by the employee and employer is graduated: Wages below an establis hed level are taxed at one rate, while wages above are taxed at a higher rate. All, except Italy, place an upper limit on taxable earnings, and Italy will soon follow suit. In most countries, however, this limit is high: More than 90 percent of all worker s fall below it.
Four of the seven countries maintain trust funds for their pension systems. In Canada and Germany, these funds are used purely for handling cyclical fluctuations in contributions and payments. In Japan and the United Sta tes, such funds are intended as a form of insurance, to counteract the effects of looming demographic changes.
The last row in the table indicates the financial health of each country's program. All of Europe's systems are currently in deficit: Contributions from workers do not cover the payments to current retirees. Canada's and Japan's systems are roughly in balance, with contributions just covering payments to retirees. In the United States, contributions exceed payments and the trust fund is growing. According to the latest annual report of the U.S. Social Security Board of T rustees, contributions from workers will cover payments to retirees until 2012. After this date, monies from the trust fund will be used to finance the shortfall in contributions. By 2029, the fund will be depleted, and in the following year contributions will cover only 75 percent of payments. Without an increase in taxes or a reduction in benefits, government revenues will be necessary to pay the remaining 25 percent. This shortfall will continue to grow through the middle of the next century, as will t he deficits in the other six countries.
| IN THE SAME BOAT: A Global Comparison of Social Security Programs, 1996 | |||||||
| . | First Legislation | Benefit Type | Retirement Age | Work Years For Pension | Dependents' Supplement | ||
| . | . | . | Male (m) | Female (f) | Minimum | Full | . |
| CANADA | 1927 | UF | 65 | 65 | 10 (residency) | 40 (residency) | Yes |
| ER | 65 | 65 | 1 | 40 | No | ||
| FRANCE | 1910 | ER | 60 | 60 | 38.5 [40] | Yes | |
| 65 | 60 (mother) | 15 | 37.5 | ||||
| GERMANY | 1889 | ER | 60 | 60 | 15 with 12/last 18 mos. unemployed 35(m); 15 with 10 after age 40(f) | No | |
| 63 [65] | 60 [65] | ||||||
| 65 | 65 | 5 | 40 | ||||
| ITALY | 1919 | ER | Any Age [65] | Any Age [65] | 36 | No | |
| 62 [65] | 62 [65] | 15 [5] | 40 | ||||
| JAPAN | 1941 | UF | 65 | 65 | 25 | 40 | No |
| ER | 60 | 59 [60] | 25 | 40 | Yes | ||
| UNITED KINGDOM | 1908 | UF/ER | 65 | 60 [65] | 12(m) 11(f) | 49(m) 44(f) | Yes |
| UNITED STATES | 1935 | ER | 65 [67] | 65 [67] | 10 | 40 | Yes |
| [ ] Refers to changes that have been approved but are not yet in effect. ER = Earnings Related UF = Universal Flat Benefit SOURCES | |||||||
| IN THE SAME BOAT: A Global Comparison of Social Security Programs, 1996 | ||||||||
| . | Indexation of Pension | Payroll Tax Rate | Government Contribution | Taxable Wages | Trust Fund | Operating Status | ||
| . | . | Employee | Employer | . | Floor | Ceiling | . | . |
| CANADA | Prices | 0 | 0 | 100% | NA | NA | No | NA |
| 2.925% | 2.925% | 0 | Yes | Yes | Yes | SURPLUS | ||
| FRANCE | Prices | 7.96% | 7.96% | Cover Deficit | No | Yes | No | DEFICIT |
| GERMANY | Net Wages | 9.3% | 9.3% | 20% | Yes | Yes | Yes | DEFICIT |
| ITALY | Prices | 8.34% | 21.3% | Cover Deficit | Yes | No [Yes] | No | DEFICIT |
| JAPAN | Prices | 8.675% and 0.5% of bonuses | 33.33% plus administrative cost | Yes | Yes | Yes | BALANCE | |
| UNITED KINGDOM | Prices | 2-11.1% | 2-10.2% | Cover Deficit | Yes | Yes | No | DEFICIT |
| UNITED STATES | Prices | 6.2% | 6.2% | 0 | No | Yes | Yes | SURPLUS |
| [ ] Refers to changes that have been approved but are not yet in effect. SOURCES | ||||||||
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