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Social Security solutions abroad

By Barbara Whelehan · Bankrate.com
Friday, February 18, 2011
Posted: 4 pm ET

The discussion on how to fix Social Security elicits visceral reactions from people on all sides of the issue. Libertarians would like to forgo taxation altogether and instead assume responsibility for their own retirement planning by investing the money for themselves. Socialists consider a greater good, preferring the system get fixed so that no one has to live in poverty. In between are people who cling tenaciously to the rules of the current system as if they had been entitled to them since birth. Never mind that the rules have changed twice in recent history -- 1977 and 1983 -- and several other times since the 1935 Social Security Act was enacted.

Our elected leaders don't appear to be in a big hurry to address the long-term solvency of Social Security, even though the president's own debt commission came up with 30-odd solutions. But leaders from other countries have already taken steps to shore up their systems.

Global consultant Towers Watson just released a report summarizing the measures taken by Central and Eastern European countries to solve their social security problems. Granted, their systems are different from ours. Many have a two- or three-pillar system consisting of a baseline pension program plus mandatory or voluntary individual account systems. The U.S. Social Security Administration released an explainer of foreign systems back in 2005, around the time George W. Bush introduced the idea of implementing personal accounts in the Social Security system.

Sometimes looking at the retirement scenarios of foreigners makes change at home seem more digestible. Below is a quick synopsis of steps taken by a few governments in Central and Eastern Europe.

Armenia

The current system provides a modest pension to older citizens regardless of whether they ever worked, as well as an earnings-based pension based on a "notional defined contribution system." Notional means hypothetical -- the "accounts exist only on paper."

The government recently switched to individual retirement accounts. This year the transition period begins, during which participation is voluntary, "but by 2014, workers under age 40 will be required to join the new system," according to the report. "Participants will contribute 5 percent of earnings on a pretax basis, which will be matched by the government up to ArD25,000 per month (about U.S. $70)."

Workers over age 40 will stay on the old system, but have the opportunity to contribute 5 percent of pretax earnings to an account, though with no government match.

Bulgaria

Beginning this year, the contribution rate (shared by employers and workers) to the social security system in Bulgaria increased to 17.8 percent from 16 percent. That compares to the U.S. tax rate of 12.4 percent, not including 2.9 percent for Medicare (15.3 percent total).

"Some assets held in second-pillar individual accounts will be turned over to the State Social Security Institute," according to the report.

Hungary

Recently the government announced a suspension of contributions to so-called second-pillar individual accounts, diverting the contributions to the state social security system. Then it announced the suspension likely will be permanent. Workers were given the option of transferring their accounts to the state system, but then were told they'd have no rights to a pension from the state system if they kept their funds. (Employers pay a hefty 24 percent social tax into the state system.)

Poland

Polish workers contribute 19.5 percent of pay into the mandatory system. Currently, 12.2 percent of wages go to ZUS, Poland's Social Security Institute, and 7.3 percent go to an individual account managed by the private sector. Going forward, 5 percent of that 7.3 percent will revert to ZUS, though by 2017, that 5 percent will be lowered to 3.8 percent.

ZUS is ostensibly setting up individual accounts in which the 5 percent tax will go, but these will be notional (read: hypothetical) accounts. Changes to the system go into effect in April.

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Check out Bankrate's Retirement Realities series. We'll be adding stories to it throughout the year.

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1 Comment
robert pratt
February 28, 2011 at 6:35 pm

First let's put the blame where it belongs, our goverment, the dem"s for useing it for give away programs n notnot paying it back, an the repub's for watching the door. That said I payed money in n if I got it back I could live quite will on it'''but there are still those's who want to put every one on it pay in are not....I want my money back ......................