'Britain’s Answer for Future Retirement Income: Possible Lessons for the United States,' and 'An American Perspective on the Chinese Pension System'

August 2006, Vol. 27, No. 7
Paperback, 12 pp.
PDF, 417 kb
Employee Benefit Research Institute, 2006

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Executive Summary

Britain’s Answer for Future Retirement Income: Possible Lessons for the United States

Similarities and differences in U.K–U.S. retirement problems—Both the United Kingdom and the United States face similar budget pressures over their national retirement programs, shortfalls in individual savings, and a rapid decline of traditional private defined benefit pension plans. Although Congress is not about to overhaul U.S. retirement policy, Britain has very significant changes on the table, with the prospect of action later this year: The government is moving to raise the eligibility age for state pensions, create a new mandatory system of private savings accounts, and require both employer and worker contributions to the accounts.

U.K. presentation in Washington—John Hutton, British secretary of state for work and pensions, outlined the British proposal for pension reform at a June 14 meeting in Washington organized by Retirement Security Project. This article summarizes his presentation and initial reaction by U.S. experts.

• Affordability, employer mandates big issues—In both the U.K. and the U.S., major stumbling blocks to reform have been whether the government can afford the changes and how employers might be hurt by a national mandate to contribute to their workers’ retirement accounts.

An American Perspective on the Chinese Pension System

China’s underfunded retirement system a potential weakness—For all its rapid economic and military growth, China may have a crucial weakness in its grossly underfunded retirement system for the largest national population on earth. Currently, the implicit pension debt in China is around $1.5 trillion, a liability that primarily rests on the country’s 31 provinces.

China’s worker/retiree ratio worse than here—In the U.S., the ratio of workers to retirees is declining from 6 to 1 in 1960 to 2 to 1 in 2040. China, which generally limits each family to one child, the decline is much faster: from 6 to 1 in 2000 to 2 to 1 in 2040. Only 50 percent of urban workers and 11 percent of rural workers are actually paying into the current Chinese social security system.

A brake on growth?—Unless China implements reform, it runs a serious risk that inadequate funding of retirement benefits will constrain its high rate of economic growth, as the government will begin to devote a much larger percentage of its GDP to paying retirement benefits, and workers will have to save a large part of their income to finance their retirement.