Sensible Perspectives

Just How Good is Social Security, Anyway?

Posted by on August 26, 2016

_RMR0440_September_2015 Axel Börsch-Supan, a German expert on public pensions, spoke at the 18th Annual Meeting of the Retirement Research Consortium in Washington, DC earlier this month.  He offered an implicit framework for how public pension systems should work. He suggested that these systems should:

He drew comparisons between the European systems and the situations in the various European countries, and the system and situation we have here. In brief, the US enjoys fortunate demographics relative to its European counterparts, but our system could likely improve substantially if we adopted some of the more innovative European approaches.

Our public pension system, Social Security, is a “Pay as You Go” (PAYGO) system. That is, workers’ tax payments fund distributions to retirees.[1] In a PAYGO system, the burden on workers depends on:

Burden Flowchart

  1. How many retirees each worker must support (the dependency ratio), which in turn depends on
    1. The fertility rate, or how many children each woman has; and
    2. Life expectancy
  2. The generosity of retiree benefits

Intuitively, the more retirees there are for each active worker, the more each worker must pay in taxes to provide benefits for all of the retirees he or she effectively supports.

Fortunate demographics for the US

Major demographic factors in assessing a public pension system:

US offers less generous benefits

When we are retired, we want more generous benefits. Economists measure benefit generosity on two dimensions:

Characteristics of a successful and sustainable system

Börsch-Supan concluded his remarks by reviewing the attributes of a public pension system that will work in the long run. Some of these attributes are not purely economic – public pensions are, well, public, and public means political. Based on both his economic analysis and his political experience, Börsch-Supan believes that the best public pension systems will exhibit

Believe it or not, Germany actually embedded a sustainability equation in its most recent public pension law, according to Börsch-Supan. If done well, Social Security reform might actually never need to be done again!

[1] Strictly speaking, when workers’ tax payments exceed benefit payments to retirees, as they do now, the Social Security system lends the surplus to the broader government, which issues special bonds to the Social Security system in return. As a practical matter, however, when benefit payments come to exceed workers’ tax payments, as they are currently forecast to do by 2033, the broader government will have to cut other programs or raise other taxes in order to pay off the bonds. The Congress may be unwilling to support either of these actions.

  • Saralynn Allaire

    Good information. Thanks for passing on to us. I wish such non-partisan information would be widely distributed.
    But, in the US I think the first thing to do is to increase the amount to income subject to SSA taxation. The income amount was reduced under Pres. Reagan, but it needs to be increased even further, given the current state of income inequity.
    We should aim to get the older age poverty rate down to 10%.
    And we should institute an equitable system to help SSA maintain solvency over time, similar to what the Germans have done.

    • Rick Miller

      The shortage of non-partisan information is indeed a major issue, I agree!

      It would be very useful to have a public discussion on objectives such as targeting an old age poverty rate and automatically maintaining solvency.

      Unfortunately, political discussion tends to operate at very general levels, e.g., “saving” Social Security.

      Nevertheless, it is a political issue, as well as a technical one.

      We can only hope that more and better information will lead to a better informed discussion.