Social security woes are felt worldwide
If you think America's Social Security finances are strained, you should see Germany's. Or China's. Around the world, a major demographic tide of declining birthrates is pushing nations further and further away from the promises that they've made to seniors. As nations age, they have fewer and fewer workers to support more and more retirees.
Already, most industrial nations can't keep the promises they've made to older people under their pay-as-you-go social-security systems, say two economists, Jonathan Gruber and David Wise, in a new paper for the National Bureau of Economic Research (NBER), in Cambridge, Mass.
And it's not just rich countries. Poor nations are "grappling with the long-term affordability" of their pension systems, concludes a World Bank report this week. Policymakers are being forced to undertake "urgent pension reforms."
For example, China faces a demographic crunch. By midcentury, its population will be older, on average, than America's, thanks to its one-child policy. Traditionally, China has relied on sons to look after their aging parents. But many tens of millions of peasant youths are leaving their farms for jobs in the cities - sometimes weakening the ties to their parents.
Starting about 10 years ago, China responded by broadening a social- security system and enlarging a private pension system of "enterprise annuities," notes Richard Hinz, coauthor of the World Bank report. But new pension systems are expensive, especially for countries like China that are still emerging out of poverty.
India, also with more than 1 billion people, has been trying to enlarge its pension system beyond that for civil servants and employees of sizable corporations to those occupied in the "informal" and small-business economy.
"It's a real challenge," says Mr. Hinz, a former top pension researcher in the US Department of Labor.
More women in the global workplace, rising divorce rates, changing employment patterns, rising budget deficits, and growing numbers of elderly are making reforms unavoidable, says the report from the bank, which has advised more than 80 countries on their pension systems and has even provided some financial support for the cost of reforms in more than 60 nations.
In most rich nations, the financing problem has been compounded by the fact that, at least until recently, workers have been retiring at earlier and earlier ages and are living longer, thereby getting pension benefits for more years.
Many of these industrial nations, in effect, pay workers to retire early. "They are penalizing work at older ages," says Mr. Gruber, of the Massachusetts Institute of Technology. By doing so, social-security systems magnify the increased burden caused by aging populations.
In the Netherlands, for instance, workers can, in effect, lose as much as 40 percent of their benefits by working longer rather than retiring early.
By taking away that incentive, nations can get major cost savings, say Gruber and Wise, who together with a large group of economists in 12 rich countries have been studying the relationship between social-security provisions and retirement.
In Germany, for example, the government introduced a partial reduction in benefits, on a fairer basis, for those retiring before the early retirement age. (A special so-called disability program allows retirement as early as 57, though some early retirees are not really physically disabled.) The effect was that the percentage of men retiring early, which had been growing, was reversed in 1997. Something similar has happened in Sweden and Denmark.
In the US, there's currently no pension advantage to retiring early. Until recently, a growing share of men had been retiring at age 62, even though pension benefits are 80 percent of those for a retiree at 65. In the last few years, though, they have started to work longer again, perhaps because of uncertainty in, or reduction of, corporate pensions.
One possibility: raising the retirement age. If the age for eligibility for a pension was raised by three years (in the US, from 62 to 65 for a reduced pension and from 65 to 68 for normal pension), that would reduce government costs by an average 27 percent in the 12 countries in the NBER study. That saving includes both lower benefit payments and additional revenues from payroll and other taxes.
If actuarial reform - that is, setting pension levels on a fairer basis depending on the age of retirement - was combined with setting the early retirement age at 60 and normal retirement age at 65, cost savings could be high, as much as 1 percent of gross domestic product, in most of these well-to-do nations. Germany, France, Italy, and Spain would save more than 40 percent of their social-security costs. But such a plan would be politically risky in these nations, with their aging populations.
In the US, though, this change would raise costs because of the earlier possible retirement age and a bigger pension benefit at 65. Social security pensions in Europe are generally more generous than those in the US.
Even in developing countries, keeping breadwinners at work is important. Poor nations are experiencing aging populations before they get rich - the opposite of the scene in industrial nations. In poor nations, usually only a small proportion of people have any pension.