Retirement Income Systems in OECD Member States

This study examines the retirement income systems of the developed and newly industrializing countries that belong to the Organization for Economic Cooperation and Development (OECD).Tax-and-transfer, pay-as-you-go, government plans are the most prevalent means of providing retirement income to the elderly in OECD member states.Other types of plans include open “funded” plans based on private savings, and nudge plans, in which governments require employers automatically enroll employees in private, occupational, defined-contribution plans and/or provide government matching contributions for employee/individual contributions to such plans.From an economic perspective, these options are not created equal. Government retirement systems usually involve tax-and-spending burdens that can undermine economic vitality. And with demographic changes, those burdens in many cases will become more onerous, often accompanied by risky levels of government debt.Restraining benefit payments can avert, or minimize, future tax increases and additional borrowing. This is why many governments have raised normal retirement ages and reduced promised benefits. Such reforms limit the fiscal burden of government retirement plans.Funded systems have several economic advantages, most notably because there do not create fiscal burdens. People save, and their savings are invested to create an asset portfolio that will, in time, generate income for their own retirement. Consequently, funded systems generate savings that finance additional business investment and boost long-term real GDP growth.Conversely, tax-financed, pay-as-you-go government retirement plans diminish private savings and business investment and depress long-term real GDP growth because these plans are financed by taxes and borrowing.