December 19, 2015


Democracy's Difficult Choice: Pensions or Future Growth (Jean-Michel Paul, 12/17/15, Bloomberg View)

For anyone interested in the future of democracy, a recently released Organization for Economic Cooperation and Development report on pensions makes uncomfortable, but essential reading. If trends continue, democracies may have to make hard choices between elderly provisions and investment in future generations. To do that, democracy itself may need to change. 

Take, as a starting point, the fact that public expenditure on old-age benefits in the OECD is now on average above 8 percent of gross domestic product and steadily increasing. Japanese pension payments have doubled since 1990 to more than 10 percent GDP. Without that increase Japan would have a budget at or close to equilibrium today. Italy spends more than 15 percent of its GDP in pensions.

The proportion of GDP going to the elderly population naturally reflects the demographic trends of lower birth-rates as well as increased life expectancy. The portion of the population above 65 is now close to 20 percent in OECD countries and is expected to reach nearly 30 percent by 2050.

share of elderly oecd chart
The demographic change has far-reaching implications for policy. The reallocation of resources in favor of the elderly has been such that poverty is now highest among the young. The 65-to-75 age group is now the least likely population segment to experience poverty while those in the 18-to-25 age group are the most likely to be poor.

Many OECD countries have taken measures "to make their systems more affordable in the long term," such as increasing the retirement age in line with increased life expectancy or decreasing future pension indexation. to reverse the entitlement system.  By starting personal investment accounts at birth, transitioning the rest of us into them, making them heritable and means-testing all programs, you fuel economic growth (via investment and vesting everyone in deregulation), reduce overall costs and virtually end wealth transfers to seniors.


The Uncounted Trillions in the Inequality Debate (MARTIN FELDSTEIN, Dec. 13, 2015, WSJ)

Wealth is the ability to spend more than one's income. After a retirement or job loss, a household with financial wealth can maintain its standard of living. Wealth also allows people to make bequests and gifts to help children or grandchildren at early stages in their lives.

Most Americans count on Social Security to finance their consumption in retirement. The Social Security trustees estimate that Social Security "wealth"--the present actuarial value of the future benefits that current workers and retirees are projected to receive--is $59 trillion. Excluding the top 10% of households reduces the amount to about $50 trillion.

However, to qualify for those benefits, current workers must pay future payroll taxes with a present actuarial value of about $25 trillion. So you have to subtract these taxes from the $50 trillion, leaving a net Social Security "wealth" of $25 trillion for the bottom 90% of households. Adding this to the $20 trillion of their conventionally measured net worth, and these households have total wealth of $45 trillion.

Yet this figure leaves out the very large transfers that retirees receive from Medicare and Medicaid. [...]

So what is the grand total? Add the $50 trillion for Medicare and Medicaid wealth to the $25 trillion for net Social Security wealth and the $20 trillion in conventionally measured net worth, and the lower 90% of households have more than $95 trillion that should be reckoned as wealth. This is substantially more than the $60 trillion in conventional net worth of the top 10%. And this $95 trillion doesn't count the value of unemployment benefits, veterans benefits, and other government programs that substitute for conventional financial wealth.

Critics of inequality fail to recognize this wealth and that it represents a poor return. Individuals pay high payroll taxes--directly and through foregone wages--to finance the current system of pay-as-you-go retiree benefits. By my calculations, the implicit real rate of return on those payroll taxes will be less than 3%. That is substantially less than the 5.5% real return earned historically by contributions over a working life to an individual IRA or 401(k) plan invested in a balanced combination of stocks and high-quality bonds.

A wise approach would be to slim down today's Social Security pay-as-you-go system and supplement it with universal investment-based personal retirement accounts. This would reduce the tax burden on workers and raise the national savings rate, thus increasing the rate of economic growth and the future levels of real wages. Those individual accounts would also provide funds that could be bequeathed to the next generation or transferred for special purposes like education.

Posted by at December 19, 2015 8:55 AM