For Solutions, There’s No Lack of Ideas--but Which Ones Will Work?
Smaller benefits. Higher taxes. Later retirement. More reliance on private pensions.
Desperate problems demand desperate solutions, and the major industrial powers, their public pension programs hurtling toward a fiscal cliff, are trying desperately not to go over the edge.
Compared with the rest of the industrial world, the United States has time on its side. Social Security is accumulating a surplus big enough to keep the system solvent until 2032. Most experts argue that small changes of direction could yield major savings and stave off bankruptcy all but indefinitely.
This week, a White House conference of politicians and pension experts will begin looking at the options. And President Clinton has promised to meet with Republican congressional leaders next year to seek a bipartisan plan.
Meanwhile, most of the other industrial countries have already sped by the kinds of warning flags that are just beginning to appear in the U.S. For them, the time for gradual mid-course corrections has passed. Their remaining choices--to turn sharply or hurtle into the abyss--define a predicament that the U.S. need not face.
If these countries cannot address their problems in ways that are acceptable to both their tax-paying workers and their benefits-collecting retirees, they face an unsavory combination of political and economic upheaval. That will have reverberations in the United States, which can ill afford uncertainty in its allies and major trading partners.
Canada has decided to take its medicine. Seeking to spread the pain, it has decided that workers’ payroll taxes will nearly double by 2003, and that the value of pensions and disability payments will be trimmed by 10% over a 20-year span.
In Europe’s welfare states, such measures are far more difficult. Europeans have long regarded generous pensions as a birthright, and they are not about to give them up. Political leaders interfere at their own peril. In Italy, for example, last year’s prime minister was temporarily kicked out of his job when his government pushed back the retirement age as part of its plan to rescue the Italian pension system.
France has done little more than tinker at the margins of its system: requiring, for example, that workers pay in for 40 years instead of 37.5 before collecting benefits. And the government has not dared tinker with special retirement rules for favored professions; sopranos and tenors at the Paris Opera may still retire at 40, and engineers on the state-owned railroad get full pension benefits at 50.
Japan, lacking Europe’s welfare-state mentality, has taken more drastic steps. Its payroll tax, already already much bigger than the U.S. rate of 12.4%, will jump from 17.35% of wages to 29.8% by 2026. In both countries, the tax is split evenly between employee and employer. And to curtail benefits, it is pushing back the retirement age from 60 to 65.
Even these measures, though estimated to keep the pension system solvent until about 2020, have not allayed the Japanese people’s fears about retirement. In a recent survey by the Ministry of Posts and Telecommunications, 73% of respondents said they felt uneasy about their retirement prospects, a huge increase from 3% in 1993.
Compared with the other rich countries, the United States has some significant advantages.
Its population is still growing, and it, unlike most other countries, has a vigorous private pension system covering about half its work force.
“We have a nice balance, with a younger population relative to the rest of the industrial world, and we educate a lot of people, with 70% of the high school students getting some college experience,” said Ethan Kapstein, professor of international peace at the Humphrey Institute of Public Policy at the University of Minnesota. A greater level of education gives workers the skills to become more productive, generating more goods and services and paying more taxes. “I think we look pretty good,” Kapstein says.
But probably not so good that the U.S. can operate on cruise control. Although some politicians would like to believe that the robust American economy will generate so much wealth that the crisis will be postponed indefinitely, most economists believe the day will come--unless there are mid-course corrections--when the Social Security system will be unable to make promised benefit payments.
Generating wealth--that’s the key.
“The problem of supporting the elderly [is a reality] whether you have a Social Security program or not,” says Eli Schwartz, professor emeritus of economics and finance at Lehigh University in Bethlehem, Pa. “In real terms, it is the production of the country’s economy that supports the elderly.”
If only the U.S. could somehow increase the number of workers. But the proportion of Americans in the work force already is at record levels, and unemployment is at the lowest level in many years. Nor is the U.S. expected to return to a robust birthrate, which would breed large numbers of new workers. Birthrates throughout the industrial world are at low levels and show no signs of turning back up.
“As the standard of living and the status of women rise, birthrates go down--that is the only form of birth control that works,” says Randall Wray, senior scholar at the Jerome Levy Economics Institute in New York.
To offset this, countries could take in more immigrants--although few do.
“Immigration is far less popular in Europe than it was in the earlier postwar period, in part because of high rates of unemployment,” according to a study by Barry Bosworth and Gary Burtless of the Brookings Institution. “Massive immigration has never been considered a serious policy option in Japan.”
And in the U.S., “although immigration continues at a high rate, it has become more controversial and substantially less popular during the last decade. Major increases in U.S. immigration seem unlikely in the immediate future.”
Social Security demographers expect U.S. immigration to continue at about 900,000 a year. Most of the growth in the labor force will come from immigrants and their children.
Alternatively, countries can make people work longer before they qualify for retirement benefits. Many countries are doing this, including the U.S., whose retirement age of 65 for both men and women is already as high as any other country’s. A law enacted in 1983 will push the age of qualification for full pension benefits to 66 for those born in 1943 and later and 67 for those born in or after 1960.
Another approach is to help existing workers work more productively: to enable them to make more cars or write more insurance policies or check out more people at the grocery store.
Productivity gains mean that each worker produces more goods and services. This makes for a richer society and a bigger pie to divide when the baby boomers reach retirement age.
However, U.S. productivity growth has been sluggish for a generation. As Federal Reserve Chairman Alan Greenspan has noted, even the computer revolution hasn’t significantly boosted given productivity.
Moreover, the goal of greater output clashes with that of later retirement. At least in the U.S., productivity typically plateaus at about age 43 and begins declining at age 58, according to a survey of employers by Watson Wyatt Worldwide, a benefits consulting firm.
An outside-the-box strategy for shoring up Social uSecurity has been advanced as the U.S. stock market soared in the ‘90s. The system now invests its surplus in Treasury securities, the safest of all investments, but with a comparatively low yield because of the low risk. Instead, could it somehow invest in the stock market and get much higher returns?
A growing number of elected officials and nongovernmental experts think it could. They envision a Social Security system transformed in whole or part from a pay-as-you-go program into one in which some or all of a worker’s tax payments would be set aside for that worker’s retirement. The nest egg could be invested either by the government or by individual workers themselves. Investments would have the potential to bring much greater returns--but at greater risk--than the U.S. Treasury securities that today’s Social Security surplus must be invested in.
The stock market’s wild swings of recent months have removed some of the luster from this argument, however.
Supporters of individual accounts say the world has changed since the Great Depression. Governments have learned how to avoid such economic disasters, and working Americans should be allowed to cash in on that fact by investing some of their own Social Security tax dollars.
Critics respond that Social Security is much more than just a retirement program. It also provides a safety net for workers who become disabled before they reach 65 and for the families of workers who die before 65. Among workers 20 and older, 38% of men and 27% of women will become disabled or die before age 65. For a young worker, Social Security offers the equivalent of a $300,000 disability insurance policy for the worker and a of $300,000 life insurance policy to support the spouse and children. The Heritage Foundation, a conservative Washington research organization, analyzed a household with two 30-year-old workers, each earning slightly less than $26,000 in 1996 and keeping up with inflation until they retired at age 67.
Under current law, Heritage says, the couple would collect a combined $450,000 in Social Security benefits, with the wife expected to live to about age 86, and the husband to about age 80.
What if they were allowed to invest their Social Security tax payments for themselves and chose to put half into Treasury securities and half into stocks? Based on historical returns, Heritage says, that investment strategy has yielded real earnings of 5%--that means the buying power is 5 percentage points higher than the rate of inflation over the last 70 years.
At average annual real returns above inflation of 5% over 37 years, the couple would have a combined $975,000 stashed by age 67, more than double what they’d draw over their lifetime from Social Security.
As privatization’s critics like to point out, however, even the strongest markets have losers as well as winners.
“Socialism promised that everyone would get rich, but capitalism didn’t,” says Richard Leone, president of the Century Foundation, a research organization. “Some people get rich and lots don’t. That’s not ideology, that’s arithmetic.”
And more serious is the problem of getting from here to there. Social Security is a pay-as-you-go system. The taxes paid by 141 million workers are promptly transferred to the 43 million people who collect benefits. If today’s workers could set aside their tax payments for their own retirement, where would the money come from to pay the benefits of today’s retirees?
President Clinton says he is of two minds on the subject. He respects the wishes of those who want to make personal gains on their investments, he says, but worries about “what happens to people who happen to retire after the market has gone down for five years.”
Greenspan, by contrast, says privatization misses the point of what ails Social Security. The problem, he says, is that society soon will lack the resources to support the nation’s elderly in the style to which they have become accustomed. Proposals that do not enable the country to save more, he argues, do nothing to change that.
“If benefits and contributions do not change, national savings are only being transferred from the federal government account to that of households and are not increased in the process,” he says. “All you’re doing is shuffling paper, not producing real goods.”
