Wednesday, March 25, 2009

RGE Monitor: US Pension reform: Lessons from other countries

RGE Monitor gives a good summary of new work by Martin Neil Baily and Jacob Funk Kirkegaard looking at pension reform abroad and what it might say for us in the U.S. The whole article is worth reading, but their main goals for reform are:

  • Reduce Social Security and pension tax incentives costs for high earners;
  • Continue to increase the Social Security retirement age in line with life expectancies; and
  • Establish a system of universal retirement savings accounts on top of Social Security managed by the SSA.

These are goals I could live with. Click here to read the whole article.


WilliamLarsen said...

“Life expectancy at birth in 1930 was indeed only 58 for men and 62 for women. But life expectancy at birth in the early decades of the 20th century was low due to high infant mortality, and someone who died as a child would never have worked and paid into Social Security. A more appropriate measure is probably life expectancy after attainment of adulthood.

Since average life expectancy at birth is now about 76, this is interpreted as implying that people collect benefits for 14 to 18 years longer than they used to. However, as Table 1 indicates, the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has only increased a modest 5 years (on average) since 1940. So, for example, men attaining 65 in 1990 can expect to live for 15.3 years compared to 12.7 years for men attaining 65 back in 1940. So the actual increase in time that males can anticipate receiving Social Security is closer to 3 years than to 14.”
Social Security Administration’s Web Site

Increasing life expectancy is an escape goat. Life expectancy is increasing, but the rate of increase has been slowing for four decades. A baby born in 2009 will live about 17 days longer than a baby born in 2008 at age 67. When we think about the cohort life span at age 67, we are looking at less than a ¼ of 1% increase. Another way to look at is, how much would you have to set aside over 47 years worth of saving to pay 17 more days of benefits?

Now compare this to inflation which was 5.8% in 2008. Inflation in 2008 was over 23 times greater than the effect of increased life expectancy.

Increasing the retirement age from 67 to 68 would reduce costs about 6.2%. It would require increasing the retirement age past 73 to solve the problem. This would eliminate 30% of those who lived to age 67, but died prior to reaching 73. This group would have at least received a few months of benefits, but now receive none. This makes Social Security a lottery, if you live long enough, you might collect.

Anonymous said...

If there is a problem with large
tax subsidies going to higher
income savers in tax-favored
pension plans, why is the solution
to reduce social security benefits
for higher income people? Why not
claw back some of the pension tax
subsidy and earmark that revenue
for the social security trust fund?
Higher income people are already
paying income tax on their social
security benefits.