Australia has already undertaken the key pension system reforms that most of the rest of the industrialized world is now struggling with. The World Bank’s policy advice closely matches the current Australian system of pension provision, which combines the Age Pension, a means-tested first pillar pension, with the second pillar – Superannuation Guarantee Contribution (SGC) mandatory savings in personal accounts. As you know, Australia is one of the few countries in the world with a government- mandated private saving scheme. Others include the United Kingdom, Switzerland, and several emerging market countries, among them Chile.
The Age Pension provides benefits that guarantee a minimum standard of living but, crucially, the Age Pension has never been linked to an individual’s earning history.
Pension systems, such as the U.S. Social Security system, which link benefits to the recipient's latter-year wages, effectively link pension payments to productivity. As a result, increases in productivity do not increase the solvency of the system. It would be better to index benefits to prices than to index benefits to wages.
The reforms that mainstream economists believe would make the biggest difference, such as raising the future retirement age and changing from wage indexing to price indexing, need to receive political consideration. In contrast, the politically salient alternatives of repealing the Bush tax cuts or relying on a free lunch from the stock market are much less sound economically.
For Discussion. Will the age of eligibility to receive Social Security and Medicare have to be changed in the United States? If so, will the change be made in time for people to plan for it?