Perspectives on Social Security
By Arnold Kling
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?