Arnold Kling  

Perspectives on Social Security

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Last year, Stanley Fischer discussed Australia's Social Security system. He found several aspects to be admirable.


Australia has already undertaken the key pension system reforms that most of the rest of the industrialized world is now struggling with. The World Bank’s policy advice closely matches the current Australian system of pension provision, which combines the Age Pension, a means-tested first pillar pension, with the second pillar – Superannuation Guarantee Contribution (SGC) mandatory savings in personal accounts. As you know, Australia is one of the few countries in the world with a government- mandated private saving scheme. Others include the United Kingdom, Switzerland, and several emerging market countries, among them Chile.
The Age Pension provides benefits that guarantee a minimum standard of living but, crucially, the Age Pension has never been linked to an individual’s earning history.

Pension systems, such as the U.S. Social Security system, which link benefits to the recipient's latter-year wages, effectively link pension payments to productivity. As a result, increases in productivity do not increase the solvency of the system. It would be better to index benefits to prices than to index benefits to wages.

The dire state of European pension systems was described in this article in the New York Times.


"In reality, a legal retirement age of 80 is what we should aim at," Erich Streissler, an Austrian economist, wrote in a newspaper article.

Mr. Streissler's basic argument is one that applies to most of the countries of the European Union: people are retiring well before the official retirement age of 60 to 65, depending on the country.

Across Europe, only 39 percent of men age 55 to 65 still work, according to the Organization for Economic Cooperation and Development.


In my latest essay, I write,

The reforms that mainstream economists believe would make the biggest difference, such as raising the future retirement age and changing from wage indexing to price indexing, need to receive political consideration. In contrast, the politically salient alternatives of repealing the Bush tax cuts or relying on a free lunch from the stock market are much less sound economically.

For Discussion. Will the age of eligibility to receive Social Security and Medicare have to be changed in the United States? If so, will the change be made in time for people to plan for it?


Comments and Sharing


CATEGORIES: Social Security



COMMENTS (14 to date)
Patrick R. Sullivan writes:

Certainly some combination of benefit decreases and tax increases will happen, just what can't be predicted with much confidence. Anyway,

http://www.hrdc-drhc.gc.ca/isp/ris/rismain_e.shtml

The above propaganda site is for the Canadian Pension System. Looks like there is a first tier welfare payment from general tax revenues
available to the truly poor.

The second tier relies on 6% of earned
income between $3,500 and $38,000 going into "Social Security" to earn a maximum of
$750 per month in retirement.

Which leaves the third tier to actual investment. And the government ENCOURAGES it.

dsquared writes:

I swear to you that the UK does not have a government-mandated private savings scheme, whatever Stanley Fischer thinks.

Eric Krieg writes:

Whoa! The maximum Canadian Socialist Insecurity benefit is $750 Canadian per month? That's like one trip to Tim Horton's. That isn't very many Molsens.

Eric Krieg writes:

I just read Arnold's commentary, and something just struck me.

The crisis in Socialist Insecurity is entirely the fault of Baby Boomers. More specifically, it is caused by there being SO MANY of them.

It is my perception that one reason it is so difficult to deal with the current generation of retirees (the Baby Boomers parents) is because of their service in World War II. It was through their blood, sweat, and tears that this country survived. Retirement benefits are the smallest way we could possibly pay them back.

I see these arguments being made now for prescription drugs, for example.

But are we going to feel this way when the Baby Boomers retire? A bunch of pot smoking, draft dodging Clintonistas? I don't think so. Bubba and his cohorts can pay their own way.

Benefits will be cut before taxes are increased.

Patrick R. Sullivan writes:

That would depend on your definition of, "government-mandated private savings scheme", wouldn't it?

http://www.bc.edu/centers/crr/papers/wp_2000-10.pdf

--------quote--------
The
partial privatization of the British national pension system began with legislation enacted
in 1959 and implemented in 1961 adding a second-tier earnings-related pension called the
“graduated pension.” This legislation also gave employers the right to opt-out (“contract-out”)
of the graduated pension if they provided an alternative private defined benefit
occupational pension plan for employees. ....

Legislation enacted in 1975 and implemented in 1978 replaced the graduated
pension with the State Earnings Related Pension System (SERPS) ....It too
allowed employers to contract-out and substitute their own private pension plans, but the
benefits had to be at least equal to the relatively generous benefits provided by SERPS
(Williamson & Pampel, 1993, pp. 54-55).

In retrospect, the 1959 and 1975 legislation can be viewed as early stages of the
privatization of the British pension system....

The Thatcher government came to power in 1979 and encouraged further
privatization by making the public scheme less generous and providing increased
incentives for workers to move out of SERPS. ....

A number of major pension policy changes were included in the 1986 Social
Security Act and implemented in 1988 (Liu, 1999; Pierson, 1994). One of the most
important offered employees the very favorable tax incentives to opt-out of SERPS (or
occupational pensions as well) and set up personal retirement savings accounts called
Appropriate Personal Pensions (APPs). Workers could select from a very large number of
private sector financial service providers (primarily insurance companies, but also other
financial institutions such as banks and mutual funds) and a portion of the worker’s
National Insurance contribution (payroll tax) that had gone to SERPS (or to an
occupational pension) could now be sent to a personal account with a provider of the
worker’s choice. These accounts are similar to IRA accounts in the United States.

Another important provision of the 1986 legislation called for cuts in future
SERPS benefits. Under the 1975 legislation SERPS was to replace 25% of the workers
pre-retirement income based on his or her 20 best years. Under the new legislation the
replacement rate would be gradually reduced from 25 to 20% between 1999 and 2009. In
addition this pension would now be based on the worker’s average lifetime earnings (a
provision that further lowers benefits for many workers, particularly those with irregular
work histories, a category that includes many women).
In the 1995 Pensions Act several other reforms were made. One called for
gradually increasing the pensionable age for women from 60 to 65 by 2010. Another
called for a shift to a less generous formula when computing the worker's original SERPS
benefit. Yet another change shifted responsibility of paying for occupational pension
price indexing from the government to employers. The net effect of these changes was to
further reduce projected future government spending on public pensions.
-------endquote-------

Eric Krieg writes:

>>Looking at the actual Social Security System (as opposed to my numerical example), and looking at a far less optimistic productivity scenario, John F, Cogan and Olivia S. Mitchell argue that changing from wage indexing to price indexing would resolve the outlook for Social Security.

dsquared writes:

This is proof positive that Patrick doesn't read these things before he pastes them.

I live in the UK, pay UK tax and National Insurance and obey all UK laws other than those which I consider impositions on my liberty. I would be acutely aware if the British government forced me to save money with a private provider and they don't.

Patrick R. Sullivan writes:

" I would be acutely aware if the British government forced me to save money with a private provider and they don't."

dsquared continues to pretend to be obtuse. At least I hope he's pretending, but sometimes I wonder. It is obvious that the government in the UK for decades now has been placing incentives in front of dsquared and his compatriots to move to a (at least partly) privatized pension system. For instance:

"...gave employers the right to opt-out (“contract-out”) of the graduated pension if they provided an alternative private...."

and:

" The Thatcher government ...encouraged further privatization by making the public scheme less generous...."

and:

"...very favorable tax incentives to opt-out of SERPS (or occupational pensions as well) and set up personal retirement savings accounts...."

and:

"...cuts in future SERPS benefits."

and:

"...gradually increasing the pensionable age for women from 60 to 65 .... a shift to a less generous formula when computing the worker's original SERPS benefit. ... shifted responsibility of paying for occupational pension price indexing from the government to employers. ...further reduce projected future government spending on public pensions."

So, if dsquared wants to make snide remarks about the meaning of "mandatory", in a mandatory system that encourages private accounts to the point that only someone with the IQ of a head of lettuce wouldn't get it, be my guest.

Eric Krieg writes:

What's the difference between what England has and what the US has with the Social Security and the 401(k)? The semantics are different in that the Brits have more closely linked their 401(k) and their Social Security system. But in the end, a retiree is in a similar situation in both countries: a portion of their income from investments, and a portion from a legalized ponzi scheme.

We want to go to a place where 100% of our retirements comes from investments, and where ALL ponzi schemes are illegal.

dsquared writes:

You might not have noticed it, but Patrick just admitted he dropped a clanger on "Mandatory".

>>in a mandatory [ie not mandatory -dd] system that encourages private accounts to the point that only someone with the IQ of a head of lettuce wouldn't get it, be my guest.

Keep digging, Patrick

dsquared writes:

Apparently anchor tag not permitted. Apologies in advance for the long url:

http://www.google.com/search?hl=en&ie=UTF-8&oe=UTF-8&q=uk+pension+misselling+scandal+serps

Keep digging ...

Patrick R. Sullivan writes:

A little digging at the url provided by dsquared produces:

" The United Kingdom has a two-tier pension program. The first tier, called the basic state retirement pension (BSP) provides a modest flat-rate benefit. When it was originally implemented in 1908, the first tier did not require workers to pay in and only disbursed benefits to needy retirees. In 1925, the program was redesigned: the means testing requirement was dropped and contributions were MANDATED." [my emphasis]

Patrick R. Sullivan writes:

Also from dsquared's source, this sounds familiar:

___________----quote___________-----
The second tier was reformulated in 1978.... Workers who earn more than the lower limit MUST CONTRIBUTE [my emphasis] 2 percent of earnings up to $95 per week, plus 10 percent of earnings over $95 and below $719 per week. .... SERPS benefits replace approximately 25 percent of a worker’s pre-retirement wage, based on his or her 20 highest-earning years. Since the inception of the program, employers have been allowed to contract out of SERPS and substitute their own pension plans, provided they offered BENEFITS AT LEAST AS GENEROUS [my emphasis] as the public program.[4]

Individual Accounts

While limited opting out was permitted under the original SERPS legislation, the British government under the ideologically-driven Thatcher administration SIGNIFICANTLY EXPANDED AND ENCOURAGED [my emphasis] this process.

In 1988, new legislation was implemented that allowed employees to opt out of SERPS (or occupational plans) and invest in individual retirement accounts called Appropriate Personal Pensions (APPs). The legislation also served to ENCOURAGE OPTING OUT [my emphasis] by cutting SERPS benefits. Under the legislation, the replacement rate of pre-retirement income will [DROP] from 25 percent in 1999 to 20 percent in 2009. In addition, benefits will be based on lifetime earnings, rather than a worker’s highest-earning 20 years (as was previously the case). To make OPTING OUT EVEN MORE ATTRACTIVE [my emphasis], workers were offered generous incentives to contract out of SERPS and into APPs.
___________--endquote___________---

And, I'm really curious, is dsquared one of the heads of lettuce? I.e. has he failed to respond to the incentives to opt for private accounts?

Matthew writes:

Er Patrick -- Dsquared is right. What you are referring to -- National Insurance -- is indeed mandated, but that is because it is a tax in all but name. It is certainly not a government-mandated private saving scheme. It has no link to pension provision. For example it went up by one percentage point this April. THis had no effect on anyone's pension.

Also I don't know why you are so unkeen on discussing the meaning of the word 'mandated'. It is crucial to this discussion.

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