The Nightmare in Your Future
By David Henderson
The title of this post is the subtitle of a talk I gave in about 2004 at Santa Clara University. The whole title was “Social Security: The Nightmare in Your Future.” I had two goals: (1) to get students paying attention to how much they were likely to pay in Social Security taxes for not very good benefits–I also threw in Medicare, which was worse; and (2) to get them to think seriously about ending Social Security and Medicare, both of which I called “intergenerational abuse.”
My daughter was a student at SCU at the time, but, not being in economics, she was not required to attend. She came up with a guy friend beforehand and explained that they would probably stay for half an hour at most because Tuesday night was party night. I told her I understood. An hour and a half later, after the talk had ended, they both came up and my daughter said, with a lot of energy, “I didn’t know these things.” It opened her eyes. Count me a proud papa.
Now, Mauricio Soto, a senior economist with the IMF, has produced a short readable analysis that backs up my point, not just for the United States, but for many rich countries. (HT2 to Timothy Taylor.) The piece is appropriately titled “Pension Shock.”
Population aging puts pressure on pension systems by increasing the ratio of elderly beneficiaries to younger workers, who typically contribute [sic] to funding these benefits. The pressure on retirement systems is exacerbated by increasing longevity–life expectancy at age 65 is projected to increase by about one year a decade.
To deal with the costs of aging, many countries have initiated significant pension reforms, aiming largely at containing the growth in the number of pensioners–typically by increasing retirement ages or tightening eligibility rules–and reducing the size of pensions, usually by adjusting benefit formulas. Since the 1980s, public pension expenditure per elderly person as a percent of income per capita–the so-called economic replacement rate–has been about 35 percent. But that replacement rate is projected to decline to less than 20 percent by 2060 (see Chart 1, right panel).
Solutions? One is a change in government policy:
For those born between 1990 and 2009, who will start to retire in 2055, increasing retirement ages by five years–from today’s average of 63 to 68 in 2060–would close half of the gap relative to today’s retirees.
The other is private:
Simulations suggest that if those born between 1990 and 2009 put aside about 6 percent of their earnings each year, they would close half of the gap in economic replacement rate relative to today’s retirees.
My advice to young people: start now.
Soto makes one claim that needs to be challenged. He writes:
Pensions and other types of public transfers have long been an important source of income for the elderly, accounting for more than 60 percent of their income in countries that are members of the Organisation for Economic Co-operation and Development (OECD). Pensions also reduce poverty. Without them, poverty rates among those over 65 also would be much higher in advanced economies.
See the problem in the last sentence? What is he assuming about people’s actions absent Social Security and other such intergenerational tax-and-spend schemes? If he had said “higher,” I might not object. But “much higher?” Soto doesn’t know that and there is good reason to doubt his claim. Ask yourself this: how many people do you run into who tell you they will be fine in retirement because they have Social Security? How many people would say the same if there were no Social Security? What percent of people would act differently if there were no Social Security? For Soto’s claim to be correct, it would have to be a low percent.