New Ideas about Old Age Security

• Published in: Canadian journal of sociology 2002, Vol.27 (1), p.115-118
• Main Authors: Rein, Martin, Turner, John
• Format: Review
• Language: English
• Subjects: Aged; Book Reviews/Comptes rendus; Conferences; Management; Pension funds; Pensions; Retirement; Social security; Sociology
• ISSN: 0318-6431; 1710-1123
• DOI: 10.2307/3341420

The first chapter, by Peter Orszag and Joseph Stiglitz, and the second chapter which comments on it, are the most important in the book, broadly examining the fundamental issues and perspectives that underlie the pension reform debate. The first chapter delineates a series of myths the authors claim have been used by some policy analysts at the World Bank and elsewhere to support a particular approach to multipillar pension reform. The authors contend that policymakers have often narrowly interpreted the multipillar approach as requiring that the mandatory funded pillar be a privately managed defined contribution plan. A defined contribution plan is one where each individual has an account to which contributions are made and investment earnings are credited. The ultimate benefit the worker receives depends on the investment earnings on the account, and the worker bears the risk of financial market fluctuations, and of fluctuations in the level of benefits available through annuity markets. This proposal presented a daunting challenge to traditional approaches which were based on a different logic of intergenerational transfers in which the current generation of employers and workers paid for the benefits received by the current generation of retirees. Orszag and Stiglitz, both American economists, argue that the objectives of pension reform could also be achieved with a funded pillar that is publicly managed and that the plan could be a defined benefit plan, a view also held by the International Labour Organization (Gillion et al., 2000). A defined benefit plan is one where the worker's benefit is calculated using a benefit formula that typically takes into account the number of years the worker has worked and some measure of the worker's earnings. In defined benefit plans, the plan sponsor, rather than the worker, bears the financial market risk. This counter proposal narrowed the divide between the traditionalist and the modernists. In fact, the issue is better understood in terms of the relative lack of practical experience with mandatory defined contribution plans and the lack of analysis of their functioning, not in theory, but in the real world. Analysts had compared an idealized form of a defined contribution plan to an implemented and imperfect form of a defined benefit plan.