The leading proposal of President George W. Bush's Social Security reform shares some striking similarities with the 1980s pension reform in the UK.

The Presidential Commission on Social Security, appointed during Mr Bush's first term, put forward a plan that would pay lower benefits than those promised under current law because the way they are calculated would be changed using the consumer price index rather than wage growth to work out what past contributions were worth.

That would reduce future benefits because, over time, wages rise faster than prices. To make up some of the shortfall, individuals would be allowed to divert a third of their payroll taxes into a private account.

In 1980 the British government cut the link between wages and the basic public pension, and in 1986 it cut the accrual rate of the supplementary state earnings-related pension. This had almost exactly the same effect as the current US proposals. Individuals were also given the choice of “contracting out” of this state pension and paying into private accounts.

But having been held up in the past as a model of successful pension reform, the UK has recently been reconsidering its achievements. A government commission headed by Adair Turner reported last month that the country had been living in “a fool's paradise” by thinking it had solved its pension problems.

Social Security in the US faces a long-term funding shortfall because the population is ageing. Including the proceeds from the Social Security trust fund, the unfunded liability is equal to 1.9 per cent of the payroll tax base over the next 75 years.

In terms of the annual cost, to pay projected benefits, the payroll tax would have to rise from 12.4 per cent of covered earnings today to 17 per cent by 2030 and 19 per cent by 2075.

Cutting the link between benefits and wage growth would largely close the financing gap. However, the separate proposal to introduce private accounts reopens it. The transition costs are large, since traditional benefits would have to be paid while individuals diverted payroll taxes into the personal accounts.

If both the assets in the Social Security trust fund and the cost of the transition to private accounts are included, the actuarial liability would still be 0.7 per cent of the payroll tax base if there were two-thirds participation.

Critics of personal accounts have pointed to the UK's experience, including the complexity caused by making personal accounts voluntary, a pension mis-selling scandal, and the shortfalls in required saving.

Six years ago, British politicians on both the right and left agreed that reforms started by Margaret Thatcher's Conservative government in 1980 and continued by Tony Blair's Labour party government in the late 1990s had resolved any government funding problem. At the same time, the levels of private pension saving in Britain were thought to be some of the highest in the world and ample to offset a relatively ungenerous public pension system.

That complacency has all but vanished, and all areas of the pension system are under pressure.

Private saving has not been adequate and was long overestimated by government statisticians. Company defined benefit schemes are collapsing or shutting their doors to new members. The levels of contributions to defined contributions schemes is much lower and not adequate to give a secure retirement income.

The recent UK government commission found that if nothing was done, pensioners in future would suffer a 30 per cent drop in the level of their pensions.

Longer lifespans and the growth of means-tested pensions which have become more important as a safety net to avoid poverty have meant that the government's estimates of its pensionliability have also risen.

Where individuals have switched out of state pensions, private pension providers are now recommending them to move back to the state scheme because projected private returns have fallen so much.

“The Adair Turner report has sounded alarm bells. What looks like a very good idea from a financial perspective in cutting costs has put pensioner poverty, which had been all but eradicated, back on the agenda,” said Monika Queisser, a pensions expert at the Organisation for Economic Co-operation and Development.

Speaking in London on Wednesday, John Snow, the US Treasury secretary, said he had not spoken to UK officials about the similarities of the US reforms to those in the UK, but he added that “the UK experience would be instructive” when proposals for Social Security reform became more concrete.

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.