Part 2 – US Social Security System from an International Perspective

• How similar or different is the Social Security system to that of other developed countries?

• How costly?• How generous?• How great are the financing challenges of

aging?

International Labor OrganizationDefinition of Social Security

• Social Security the protection that a society provides its members, through a series of public measures, against --

• Loss of work-related income (or insufficient income), caused by – sickness, – disability, – maternity, – employment injury, – unemployment, – old age, or – death of a family breadwinner;

• Lack of access to health care, because it is unavailable or unaffordable; and• Insufficient support for childrearing.

II. What stands out about US social security?

1. Missing elements:– Health insurance– Sickness benefits– Family benefits

2. Relatively low benefit levels

• ILO minimum standard: 40% of prior wages after 30 years of contributions

• Average benefit (as a percentage of average) wage:– US - 37%– Belgium - 45%– France - 63%– Sweden - 49%– Austria - 55%– UK - 35%

3. Relatively high retirement age

• 67 - Spain• 66 - US, Ireland• 65 - Austria, Belgium, Finland, Germany, Greece,

Italy, Netherlands, Portugal• 61 - Malta• 62 - Slovakia, France• 63 - Cyprus, Estonia, Slovenia• Legislated increases: US, Germ, Greece (67), Italy

& Ireland(69), Estonia, Slovenia (65).

4. Relatively low cost

• Social Security (pension) expenditures as a % of GDP– US - 5%– European Union average - 11.8%

5. Relatively small cost increase on the horizon

• Expenditures as a % of GDP– US - 5%, rising to 6% in 2060– European Union - 11.8%, rising to 14.2% in 2060

6. Low costs of administration

• Administrative costs as a % of total benefit expenditures, 8 countries

– US - 1.3– Austria - 3.2

– Belgium - 1.7– Canada - 1.3– Germany - 2.0– Italy - 4– Japan - 2.7

– Netherlands - 2.3

BUT ....

• It all depends on ...– Fertility – Employment – Immigration – Productivity – Inequality

Declining fertility rates

• Replacement rate = 2.1 children per woman

• 2007 - US 2.1, EU l.54, France 1.9

• 2009 - US 2.0, France 1.9, EU 1.59

• 2011 - US 1.89, France 2.0

Rising unemploymentUnited States (Jan. figure)

• 2002 - 6.0%• 2003 - 5.3%• 2004 - 5.4%• 2005 - 4.9%• 2006 - 4.9%• 2007 - 5.0%• 2008 - 7.3%• 2009 - 9.9%• 2010 - 9.4%• 2011 - 8.5%• 2012 – 8.3%

• 2012 – 7.9%

US versus Europe

• EU 27, 10.7%• EU 17, 11.7%• US, 8.3%

• But ....– Germany 5.4%– Netherlands 5.5%– Austria 4.2%

Immigration

• Countries with higher population growth are often the most successfully economically

• Illegal migration, a plus for social security– Steve Goss, SSA Chief Actuary: by 2007, the Social

Security Trust Fund has received a net benefit of somewhere between $120 billion and $240 billion from unauthorized immigrants.

Productivity

• Changes in living standards due to Aging and productivity, 2012-2035 (Dean Baker, New America Foundation)

• Aging - 8.5%• Productivity - 1% annual growth + 26%• Productivity - 1.5% annual growth + 41%

Inequality

• Raising the social security wage cap to its previous level, covering 90% of wages, would eliminate about one third of long-term social security shortfall.

To sum up,

• Compared to other developed countries, the financing challenge of theUS Social Security system looks manageable.– Low cost– Efficient administration– Small demographic challenge

• BUT …. It all depends on the future economy