The Risk of Social Security Benefit-Rule Changes
The Risk of Social Security Benefit-Rule Changes
Some International Evidence
Issues of risk are receiving a lot of attention in the debate over the relative merits of investment-based and pay-as-you-go social security systems. An important source of risk associated with these systems is political risk — the risk that benefit rules will be changed through the political process before or during one's retirement, thereby changing the value of retirement benefits. This chapter assesses political risk by undertaking a systematic empirical study of benefit reforms in the G7 countries from the mid-1980s through the mid-1990s. It shows that projections of rising costs under current law frequently provoke reforms that substantially reduce the benefits promised to middle-aged and younger workers. However, the benefits of citizens who are already retired or are near retirement are typically protected. This contrasts with the previous finding that efficient risk sharing requires adjustments of current benefits in response to demographic information. The chapter conjectures that there is a large political cost to changing retirement benefits that had already been promised and are currently payable.
Keywords: political risk, G7 countries, social security, retirement benefits, reforms, risk sharing
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