Racing to Save World’s Retirees

Let’s say you’re under 40. That means you’re at the young end of the baby boom generation or maybe in the baby bust generation that followed.

Then the chances are you believe that the Social Security system is a bum deal. Here you are, paying 6.2% of your wages so that today’s retirees can drive their Winnebagos all over creation. By the time you retire, you figure you’ll be lucky to afford an oil change with what the program has left for you.

Well, if it’s any consolation, you have a lot of company all around the world. The United States is not the only country with a baby boom generation on the brink of retirement, poised to sock the workers who will be supporting them.

In fact, compared with most other “rich” countries, the U.S. Social Security system is the Rock of Gibraltar. Experts estimate that it should be able to pay its promised benefits in full until 2032, when it will exhaust the surplus it has been building since the program was started during the Great Depression. And even then it will still be taking in enough revenue from the payroll tax to cover 75% of promised benefits.

President Clinton says he will dedicate the last two years of his administration to shoring up the system for all time. That sounds good in principle; in practice, it probably means raising somebody’s taxes or reducing somebody’s benefits--in short, taking political risk.

So rather than offer his own plan for repairs, Clinton will convene a panel of experts and politicians at a Washington hotel Tuesday and in private sessions at the White House on Wednesday to begin laying out the options.

The president will have to rescue Social Security from the same historic forces that are inexorably driving up the resources devoted by the world’s rich societies to their elderly.

The worldwide baby boom in the aftermath of World War II was followed in the world’s industrial countries by a baby bust of equally extreme proportions. This is happening just as the miracles of modern medicine will make the baby boom generation the longest-lived in history.

What’s more, most industrial countries are extraordinarily indulgent toward their elderly, who wield even more political clout overseas than they do in the United States.

Working together, these forces are leaving relatively few workers to pick up the tab for progressively more comfortable lifestyles for vastly increased numbers of retirees.

That’s a formula for financial disaster. The United States is not exempt, although it has acquired some important protections, some intentionally, but most fortuitously.

Compared with the rest of the industrial world, the U.S. has a relatively hefty birthrate and very high immigration, which have combined to produce a steadily growing population.

In addition, the U.S., as the citadel of free markets, leans more heavily on private and company pensions than most other industrial countries. That enables Social Security benefits in the United States to be scarcely half the levels of some other rich countries--and the U.S. retirement age to be the highest in the industrial world--without a revolt by the 65-and-over generation.

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In most of the rest of the industrial world, by contrast, the crisis is just around the corner. How the other industrial countries cope--indeed, whether they cope--should provide lessons to the United States as it tries to keep its Rock of Gibraltar from crumbling. Could what’s happening overseas today be repeated in the United States in the next century?

Look, for example, at Germany, which in most ways is a paragon of financial rectitude. But its pension program, established in Prussia more than 100 years ago by Count Otto von Bismarck as part of his strategy to win the populace over to his military adventures, lives from hand to mouth.

Germany’s onerous 10% payroll tax on workers is nearly twice as big as America’s, but it’s still not large enough to cover the extremely generous benefits that Germany guarantees its retirees. The government is already digging into revenue from its income tax to make ends meet.

Even Japan, a nation of inveterate savers, isn’t saving enough. Unlike Germany, the Japanese government is at least building up a small surplus against the day when its baby boomers hit retirement age. But its surplus will be no match for a birthrate of 1.47 children per woman--far too low to prevent the population from declining--and a life expectancy (82.4 years for women, 76.6 for men) that is the world’s highest.

As a result, the number of workers supporting each retiree will decline sharply, and Japan figures to run through its pension fund surplus about a decade before the United States does. Consequently, Sanwa Bank estimates that today’s typical 60-year-olds can expect to collect twice as much from the public pension system as they will have contributed. But for a typical 25-year-old the equation is reversed--the taxes paid will be double the benefits collected.

That math makes young Japanese highly skeptical of their retirement system. Many of those who have the option are dropping out.

“I’m not paying because I think this is a waste of money,” says 26-year-old receptionist Asako Ichigun. “It is kind of stupid if we don’t get back what we paid.”

Loss of Faith in Governments

Italy is the most extreme case of all. To mask its huge unemployment rate, the nation with one of the world’s lowest birthrates (1.2 children per woman) long resorted to letting workers retire with full pension benefits in their early 50s.

Two predictable things happened: Italy now has more retired people (21 million) than workers (20 million). And the government has postponed the retirement age for today’s workers to 65--even though it was temporarily knocked out of power for its trouble because the public rose up in anger.

“There are people who work all their lives and then they’re told to wait. It’s insane,” says Giovanna Picceri, a young agribusiness entrepreneur in Tuscany. “We have no faith in the government. From one day to the next, boom, it can stop paying your pension.”

Picceri’s sentiments are shared throughout the industrial world.

“The inter-generation battle is a reality,” says David Walker, an advisor on retirement issues in Canada’s finance ministry. “There is no way to get around it: People younger than us will get less.”

That’s true even in the United States. Franklin D. Roosevelt signed Social Security into law in 1935 as the first wave of his New Deal. Cash benefits were available for the first time not only to the elderly, but also to the unemployed and to the children of poor families--three groups regarded as unable to support themselves.

Social Security is a pay-as-you-go program. Workers’ payroll tax payments were not set aside for their benefit when they retired; rather, they were used to pay for the benefits of those who were already retired.

Ida May Fuller, who drew the first Social Security check in January 1940, had paid a grand total of $24.75 in payroll taxes from 1937 through 1939. Her monthly benefit check started at $22.54 and--because she lived to be 100--she ultimately collected $22,888 from the system--$924 in benefits collected for each $1 in taxes paid.

Fuller was an exception. At Social Security’s founding in 1935, Americans’ life expectancy was only 62, and the 65-and-over population was tiny.

Since then, life expectancy has risen steadily, to 76 today, and being on Social Security for two or three decades is no longer a fluke. To keep up with the demand, Congress frequently ratcheted up the payroll tax rate and the wage base on which it is levied.

As a consequence, Social Security has become less of a windfall for each succeeding generation. Workers with average earnings who retired in 1975 needed just two years of benefits to recapture all the taxes they had paid into the retirement fund. Workers who retired last year needed nine years and eight months of benefits to break even; those who are 49 and still working will need 17 years of benefits.

From the beginning, Social Security in the United States coexisted with a private pension system that was pioneered by the railroads and a few other companies in the 1880s. Private pensions spread slowly until the 1940s, when the newly muscular labor unions won pension benefits under many collective bargaining agreements. Today about half of all full-time American workers are covered by pension plans.

Private pensions have shared with Social Security the burden of keeping the elderly from having to live their final years in poverty. In most other countries, the idea of private savings for retirement is a novel one.

France is so concerned about the basic unfairness of private savings plans for retirement--such plans often help those who are rich enough to save but not those whoaren’t--that they were illegal until last year. Then, France allowed 14 million private-sector workers to begin making voluntary contributions toward their own retirement, although it may take a long time for the private savings to have much of an impact on how retirees live.

“It’s the present that matters to me, and I make the most of it,” says Gabrielle Le Brize, 27, sitting in a Paris cafe, cigarette in one hand, a drink of lemonade and strawberry syrup in front of her. “Retirement? Well, we’ll see about that later.”

America’s heavy reliance on private pensions makes it easier to be relatively stingy with Social Security benefits. Most European countries try to provide average retirees with 60% or 70% of what they had earned as workers.

In France, retired postal workers get 87% and retirees from the government-owned electricity and gas companies receive 85%. In the United States, the average worker’s Social Security benefit is just 40% of pre-retirement earnings.

The United States also makes people work longer to qualify for full Social Security benefits. Its retirement age--65 for both men and women, scheduled to rise gradually to 66 for Americans born in 1943 and later and 67 for those born in 1960 and later--is the highest of all the major industrial countries.

Italy, with its super-early retirement, is an aberration. France, which allows retirement with full pension benefits at age 60, is not. There, the generation known as “le baby-boom” will begin retiring in 2006, five years before America’s.

Moreover, although the U.S. population is aging, it is not aging as fast as those of most other industrial countries. By 2030, America’s 65-and-older generation will constitute 20% of its total population, up from 13% now. In Japan, 26% of the population will be at least 65 years old then, and in Italy the figure will be 30%.

Favorable Population Trends

One reason the United States is turning gray relatively slowly is that its birthrate is high, at least by industrial nation standards. The U.S. rate is 2.1 births per woman, enough to keep the population growing at a modest rate.

Immigrants also help keep America young. About 900,000 immigrants entered the United States legally last year (in addition to the unknown thousands who came illegally), and the median age was 27 for men and 29 for women. They face several decades of working and paying Social Security taxes before collecting benefits.

Most other industrial countries are far less hospitable. Japan, the most closed of all, allowed fewer than 3,000 foreigners to move there last year.

Public pension programs exist only in relatively rich societies, those with enough resources that some can be transferred from workers to the elderly--and with a sufficiently developed governmental system that it can do the job.

Just 30% of the world population over age 60 is covered by a formal pension program, according to the World Bank. For the rest of the world, work is something people do until they can no longer carry the daily burden, and the only retirement benefit is direct personal support from families and neighbors.

Many in the industrial world are beginning to wonder if the same fate awaits them. Guenter Albrecht, spokesman for the Assn. of German Pension Insurers, notes that the number of retirees supported by every 100 workers--now 36--will double to 73 by the time all the baby boomers have reached retirement age in 2030. He fears the burden will prove unbearable.

“The question is not when the revenues will be insufficient,” Albrecht says darkly. “The question is when and where the limit of suffering will be reached.”

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Times researcher Tricia Ford in Washington contributed to these reports.

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Stepping Back From the Brink

Measures adopted recently by the Group of 7 industrial countries to shore up their public pension systems.

Britain

Maximum benefit from state pension plan reduced to 20% of wages from 25%/ Retirement age for women to be increased to 65 from 60. Expanded use of private pensions taking the heat off the public system.

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Canada

Payroll tax to rise from 5.85% today (shared equally by employee and employer) to 9.9% in 2003. Benefits to be gradually reduced, particularly for upper-income retirees.

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France

Retirement age to rise to 65 from 60 for most. Benefits to be calculated on best 25 years of earnings rather than best 15. Number of years most workers must pay into the system to increase from 37.5 to 40. Private pensions permitted for the first time.

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Germany

Federal value-added tax raised by 1 percentage point to help pay for pensions. Payroll tax rates for workers and employers to be increased. Pension benefits to replace 64% of previous earnings, down from 70%.

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Italy

Retirement age, now 57 for women and 62 for men, to rise to 65 for both. For civil servants, it will be 67.

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Japan

Retirement age, now 60, to rise to 65. Shared payroll tax to rise to 29.8% by 2026.

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United States

Retirement age, now 65, to rise gradually to 67. Early-retirement benefits to decline.