Modernizing social security: Changing responsibilities and individual choice

Social security needs to be reformed to make it sustainable. We argue that it is necessary to consider not only system characteristics (such as the level and duration of benefits, insured population), but also the division of responsibilities. Social security is not solely a state matter; firms, trade unions, industrial sectors and the individual play a role as well. As social risks are to some extent endogenous, insurance ought to be taken care of at the level at which the risk can be most directly influenced in order to improve efficiency. This may partly take place within the public system, for example through risk rating. Alternatives would include shifting from collective to more individual arrangements, prominent examples being multipillar systems and savings accounts. Multipillar systems mainly imply a new division of responsibilities, taking the endogeneity of social risks and the implications of modern life cycles into account. At the same time they offer more individual choice. Savings accounts reduce moral hazard without affecting individual choice. Either way, in reforming social security a balance needs to be found between competing goals or principles: between equity and efficiency, between solidarity and freedom of choice, between the risks of moral hazard and adverse selection. This choice is difficult because social security is not only about “security”. It is an important part of the way we organize our society and embodies many of society's values.