Pension systems – public and private – have been among the fastest-growing economic institutions during the last thirty years in many of the industrialized countries. For the United States, the relatively young social security system has expanded to include approximately 90 percent of the labor force, and benefits have been dramatically improved. Private pension plans have been rapidly incorporated into the compensation package of most large companies and cover approximately half of the total U.S. work force. This chapter examines the economic impact of pension systems. The individual and aggregate responses to the social security program are the primary focus of the first section, and the ensuing parts will analyze the effects of private pensions.

The expansion of social security has significant implications for the behavior of individuals and the performance of the economy. In Chapter 6, the effect of pension benefits on the labor supply of the elderly was discussed. This chapter focuses on the labor-supply response of the remainder of the work force. In addition, the growth and development of social security and private pensions are highlighted. Issues concerning incidence of payroll taxes, rates of return to contributions, and the impact of pensions on savings are also examined.

Social security

Growth and development

Old age and survivors benefit programs had been established in 108 countries by the beginning of 1975. Some of the more mature plans are those of Germany (first legislation in 1889), the United Kingdom (1908), France (1910), Sweden (1913), and Italy (1919). The United States did not enact a national retirement program until 1935.