In this book, pension experts from ten countries imagine an ideal pension system for their country. The editors, Dana Muir of the University of Michigan and John Turner of the Pension Policy Center provide an introductory chapter and are the authors of the U.S. chapter.

In common with programs in other countries, the United States Social Security system faces an actuarial shortfall. This shortfall will need to be remedied by some combination of benefit cuts and tax increases. The actuarial parameters are well understood, and a benevolent dictator could fix the program in an afternoon. The fact that it remains un-fixed reflects deep disagreements as to how the program should be reformed. Should benefits be cut or taxes increased? If benefits are to be cut, should low-wage workers or those in or near to retirement be protected? Should tax increases be across the board, or should they fall disproportionately on the wealthy? Similar considerations apply to potential reforms to other tiers of the pension system. For example, stakeholders disagree over the extent to which the cost of restoring the solvency of funded state and local pension plans fall on retirees, possibly through a reduction in cost of living adjustments, on workers, through higher contributions, or on taxpayers. These are essentially political decisions, and it follows that if authors are asked to design an ideal pension system, their answers are going to be strongly influenced by their political viewpoint.

The authors clearly differ in their assessment of the role of the government, on the extent to which pensions should be funded, and on how longevity and investment risk should be distributed within society. However, I am not sure to what extent these differences reflect societal norms and beliefs and to what extent they reflect the predilections of the authors. For example, the author of the French chapter asserts on page 213 that ‘collective forms of work-time reduction – reductions in the work week, increases in the number of days of leave, and increases in the duration of retirement – can further social justice and help to prevent unemployment,’ citing one of his own papers in support. A recent cross-country study by Gruber and Wise effectively debunks the lump of labour fallacy.Footnote ¹ One wonders to what extent the author's comments reflect the thinking of economists and policy analysts in France. The chapter of the United Kingdom contributor, Bryn Davies, although persuasive and well written, may reflect the perspectives of the United Kingdom trades unions, who have historically favoured a generous pay-as-you-go program. His ideal pension system includes a substantial increase in the current meagre pay-as-you-go benefit. However, I suspect that some part of the differences in the authors’ ideal pension systems reflects differences in social norms. Some of the European authors make reference to ‘solidarity’ as a goal. Unsurprisingly, ‘solidarity’ does not receive a mention in the United States chapter. If an ideal pension system exists, it is unlikely to be the same in every country, even if all the countries were starting from the same position.

In reality, countries face different constraints, imposed by both historical events and their existing pension systems. The ideal pension system for a country that currently has a purely pay-as-you-go system will likely be very different from the ideal system for a country with a strong second tier.

To be successful, cross-country studies require strong editorial oversight. In the Gruber and Wise book referred to above, the editors asked the contributing authors to apply similar econometric techniques, thereby facilitating comparability. Most of the countries studied in this book face similar challenges in their pension systems. They face low birth rates and increasing longevity that put pressure on both pay-as-you-go and funded programs. Defined benefit pensions face actuarial deficits resulting from the financial crisis, and the prospect of a prolonged period of low real interest rates. In many countries, at least in the private sector, defined benefit pension plans have been displaced by defined contribution plans that transfer investment and longevity risk to the participant, and often also transfer investment decisions to the participant. Participants have generally proved ill-equipped to bear these risks and make these decisions. Although risk pooling can be used to eliminate idiosyncratic risk, aggregate longevity and investment risk cannot be similarly eliminated. The best we can hope to achieve is an optimal sharing of such risks across birth cohorts. Optimality also requires that participants be told in advance in what circumstances their benefits will be reduced. Cross country studies have a valuable role in showing how different countries have attempted to address similar challenges and risks. Can we, for example, learn from the way in which the Swedish notional defined contribution pension program incorporates automatic stabilizers, or the way in which defined benefit plans in the Netherlands handle investment risk?

A book that directly addressed the above questions would, to my mind, be more valuable than one that gave free rein to authors to design their optimal pension system. However, the book nonetheless contains useful insights. The authors explain their national systems very clearly, and the book is commendably free of jargon.