Indeed, in the early decades of such programs, it appeared that the market had been outfoxed. Consider Nobel Prize-winning economist Paul Samuelson's smug optimism back in 1967: "The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in....How is this possible? It stems from the fact that the national product is growing at compound interest....Always there are more youths than old folks in a growing population....A growing nation is the greatest Ponzi game ever contrived."
Sooner or later, though, such hubris must receive its grim comeuppance. Shifting demographics impose the ultimate constraint. As populations age, the number of retirees begins to grow faster than the number of new workers, until at last the burden is unsustainable.
Meanwhile, the perverse incentive structure of collectivized social insurance works to accelerate the system's ultimate breakdown. In particular, workers have strong incentives to minimize or evade their contributions to the system, while retirees have an obvious stake in campaigning for higher benefits. Such dynamics steadily worsen the relationship between revenues and obligations and thereby hasten the eventual day of reckoning.
Today, with a global pension crisis that affects rich, developing, and postcommunist nations alike, the reckoning is at hand. Around the world, the ratio of active workers to retirees is shrinking. Promised benefits have spiraled out of control, while demographic changes and widespread evasion reduce the relative size of the contribution base. Consequently, the hopes for retirement security of hundreds of millions of workers are now in serious jeopardy.
The inevitable Ponzi endgame is now obvious in the rich countries of the industrialized world. In the United States, for example, average life expectancy at birth was only 61.7 years in 1935 when Social Security was established -- lower than the original minimum retirement age. Today, U.S. life expectancy stands at 76.5 years, and is expected to climb to around 80 over the next 20 years. For most other industrialized countries, current and projected life expectancies are even higher. Meanwhile, fertility has dropped sharply. With the single exception of Ireland, birth rates in all the advanced countries are now below the replacement rate of 2.1 children per woman. In Japan, the fertility rate is only 1.68; in Austria, 1.45; in Italy, a mere 1.33. Continued declines in fertility are expected.
The upshot of these demographic trends is a steady erosion in the funding base for social insurance benefits. In 1950, there were 16 workers in the United States for every retiree; today the ratio is only 3 to 1, and in 20 years it will have fallen to 2 to 1. Elsewhere the outlook is even bleaker: By 2020, worker-to-retiree ratios are expected to fall to 1.8 in France and Germany, and 1.4 in Italy and Japan.
Social insurance in the advanced countries is caught in a squeeze between rising life expectancy on one flank and falling fertility on the other. In that tightening vise, what once seemed so clever is now a catastrophe in the making. "When population growth slows down, so that we no longer have the comfortable Ponzi rate of growth or we even begin to register a decline in total numbers," a chastened Paul Samuelson wrote in 1985, "then the thorns along the primrose path reveal themselves with a vengeance."
The Crushing Burden of "Security"
Already today, public pension spending in the rich member countries of the OECD averages 24 percent of the total government budget, or 8 percent of GDP. To fund these enormous outlays, the tax burden imposed on current employees has reached punishing levels: In Italy, Germany, and Sweden, for example, the combination of employer and employee contributions and personal income taxes now averages around 50 percent of gross labor costs. And while workers put more and more into the system, they can expect to receive less and less. In Sweden, the average rate of return for the generation retiring 25 years after the establishment of the public pension system approached 10 percent per year; for the generation retiring 20 years later, the rate of return had dropped to 3 percent. In the United States, real rates of return for two-earner couples now range from -0.45 percent to 2.13 percent, depending on income.
Even with rising tax rates and declining returns, pay-as-you-go systems throughout the advanced nations are heading toward financial collapse. In the United States, Social Security revenues currently exceed expenses, but the system is expected to begin running deficits in 2016. The annual shortfall is projected to be $1.3 trillion by 2030, a figure that represents more than two-thirds of the entire federal budget for 2001. Over the next 75 years, Social Security's total unfunded liabilities have an estimated present value of $9 trillion -- as compared to the current national debt of $5.7 trillion. In Germany and Japan, the current unfunded liabilities of the public pension system are well over 100 percent of GDP; in France and Italy, they exceed 200 percent.
Since developing countries still have relatively young populations, one might expect that the problems with their pension systems remain in the distant future. One would be wrong. First of all, developing countries are making the transition from high birth and death rates to low fertility and mortality much faster than did the advanced nations. It took France 140 years to double the share of the population over 60 years of age (from 9 to 18 percent), while Belgium needed nearly 120 years; China, on the other hand, will repeat the feat in 34 years, and Venezuela will do it in 22. Between 1990 and 2030, the percentage of the world's population over 60 years of age is expected to increase from 9 percent to 16 percent, and most of that growth will occur in poorer countries.
In addition, administering public pension systems in poor countries is severely complicated by the large informal sectors endemic to those societies. A vicious circle is often triggered. Because many people work in the informal sector, payroll taxes (collected only in the formal sector) have to be higher than would otherwise be necessary. High payroll taxes, though, create incentives for even more people to retreat into the informal sector, thus necessitating even higher rates, which push more people into tax evasion, and so forth. Rising payroll tax rates in Uruguay, for example, caused the proportion of workers contributing to the system to fall from 81 percent in 1975 to 67 percent in 1989. In Brazil, evasion cut contribution revenues by more than a third during the 1980s.
The transitional economies of the former Soviet empire have inherited no end of problems from the Communist era, including tottering public pension systems. During Soviet rule, dependence on state pensions was nearly total, since occupational pensions and private saving were virtually nonexistent. With communism's collapse, the folly of that dependence has become abundantly clear. To begin with, the countries in question have populations that are nearly as old as those in the advanced nations: As of 1990, over 15 percent of people in former Communist bloc countries were over 60, as compared to 18 percent in the OECD. Like developing nations, though, they also have large informal sectors that erode the contribution base.
By the mid-1990s the pension systems of the transitional economies were saddled with cripplingly high dependency ratios. In Poland, pensioners totaled 61 percent of active workers by 1996; in Ukraine, the figure was 68 percent; in Bulgaria, 79 percent. To cope with this crushing burden, contribution rates were forced to remain at the punitive levels that had been set during Communist rule: 26 percent in the Czech Republic, 30.5 percent in Hungary, and 42 percent in Bulgaria. With the demise of the command economy, though, such high rates only accelerated workers' flight into the informal sector, aggravating dependency ratios even further.
Government-provided social insurance is defended on the ground that it shields retirees from the market risks that attend private pension plans. Indeed it does, but only at the cost of subjecting current and future retirees to a far greater risk -- the risk of living until the Ponzi scheme of pay-as-you-go pensions begins to break down. Over the past couple of decades retirees around the world have discovered, much to their chagrin, that substituting political risk for market risk has been a poor bargain indeed, as governments have been forced to renege on promises and slash benefits in order to stave off financial collapse.
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|5.23.10 @ 6:21AM|#
the problem with privatizing pensions is that it forces workers to pay into a system that exists to make the fund managers wealthy and that puts their pensions at risk. Witness the current financial collapse. If pension systems are ponzi schemes, privatization is musical chairs meets a game of dice if you're lucky to reach retirement during a boom economy and can transfer your wealth out of the dice game... you win. Otherwise, suck it up 80 year old and start pushing those carts at Walmart. Uh... no thanks.
|5.23.10 @ 8:54AM|#
http://www.youtube.com/watch?v.....ure=digest
nfl jerseys|11.13.10 @ 3:04AM|#
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