Wednesday, February 17, 2010

How Not to Do Pension Reform

Various news outlets report that Greece is hiking the retirement age of its pension system as part of its efforts to restore confidence in its fiscal management and avert a financial crisis. This change, designed to raise the average retirement age by two years to 63 (this is Europe, after all) will take place over the next five years.

I'm all for the retirement age increase and I'm all for not having financial crises. But a two-year increase over a five year period will surely cause some Greeks problems. Yet the government has little choice since it let reforms wait too long. In the last round of U.S. Social Security reforms in 1983, the retirement age was increased by the same two years, but the increase from 65 didn't start until 2000 and doesn't reach 67 until the early 2020s. That's a luxury you have when short-term cash flows aren't a problem (they were a problem for Social Security in the early 1980s, but were addressed through other means).

The broader point is that the longer you put off reforms to programs like Social Security, Medicare and Medicaid the more drastic and painful those reforms have to be. People who get exercised about the painful steps involved with reform – and by their efforts make reform more difficult to enact – may be acting counterproductively.


Bruce Webb said...

Yes indeed.

But some of us look at the 25 year sub-periods and wonder what a 0.19% payroll gap over the first such 25 years makes it an absolute crisis?

Andrew G. Biggs said...

If we were actually prefunding on an overall budget/economic basis, then it wouldn't matter. But an actuarial deficit of 0.19% over the next 25 years hides the fact of zero deficit or potentially small surpluses today against a deficit of almost 4% of payroll 25 years from now. But these offset each other only in Social Security's accounting; in real life, people 25 years from now will need to pony up an additional 4 percent of payroll, which is significant.