If social security was introduced today

Retire at 80 and receive $670 a month in benefits – this is what introducing Social Security today would mean in the US

Jay Ralph

Two hundred years ago, one of history’s most brilliant, but notoriously grumpy, old men was born. A statesman acclaimed almost as much for his short-temper as he was wily maneuvering on the stage of international politics, Otto von Bismarck was no bleeding heart liberal, but he pushed through legislation whose implications are still being grappled with today.

In 1891, the Iron Chancellor, created a pension insurance law that gave elderly Germans a measure of financial security. It was the world’s first universal public pension and influenced similar developments worldwide, including in the United States.

Theodore Roosevelt was one early advocate of “German-style” social security and it formed part of his presidential campaign. However, it took more than 20 years until another Roosevelt, Franklin Delano, signed the Social Security Act. Introduced in during the Great Depression, when poverty amongst senior citizens exceeded 50%, it provided workers aged 65 or older with an income in old-age.

Today, governments around the world are struggling to deal with the “Bismarck pension trap” – the question of how to support growing numbers of long-living retirees without bankrupting the economy. In the US, this is an urgent matter as Social Society Trust Funds will be exhausted by. From then on payroll taxes will finance about three-quarters of scheduled benefits. Several measures – from increasing the retirement age to reducing people’s initial benefits – have been proposed to solve the problem.

BISMARCK’S INEXPENSIVE PENSION SYSTEM

With the 200th anniversary of his birthday on April 1, it is worth reflecting on why Bismarck first introduced a universal pension. A brilliant, conservative statesman who unified Germany and for 20 years played off the great powers of Europe against one another, Bismarck thought his social policies so inconsequential that he failed to mention them in his autobiography.

So why did he introduce such social welfare policies as the old-age pension? To pre-empt the growing socialist movement. But the system he launched was far different from the generous one workers in many countries enjoy today.

In 1889, you had to be aged 70 to claim a pension, about 10 years above the average life expectancy of a 20-year-old manIn 1889, you had to be aged 70 to claim a pension, about 10 years above the average life expectancy of a 20-year-old man. The few workers who survived till then could expect to live – and receive pension benefits – for about 7.5 years on average. Further, to qualify for a pension, individuals had to contribute for a minimum of 30 years.

Importantly, the Bismarck pension was seen as a supplement and not the mainstay of a living standard in old-age, so the amount paid was low. And due to the small number of pensioners (less than 2% of the population received benefits before the First World War) and the small amounts paid out, the system was inexpensive.

Similarly the system implemented by Roosevelt almost 40 years after the Bismarck system was inexpensive at the start. At the end of the, costs were less than 1.5% of GDP. the combined expenditures for old-age and disability represented about 5% of GDP.

BALANCING SUSTAINABILITY AND ADEQUACY

If there were no pension today and we implemented the Bismarck model from scratch, the pensionable age in many developed counties, including the US, would be 80 years for people born in the. It is only when they reach that age that individuals have a remaining life expectancy equivalent to 70-year-olds in 1889. However, due to the constant increase in longevity, retirement should be set at age 85 for the generation born after to keep life expectancy at retirement constant.

Besides restricting qualification almost exclusively to years spent working, the qualification period itself would be 36 years (if the retirement age is 80). This way, the minimum employment period as a proportion of working life would be equivalent to the one in 1889. And the rights to survivor benefits would be withdrawn from the current system.

Taken together, such a system would drastically reduce the number of individuals entitled to old-age pension today. Simply by stripping back survivor benefits, the number of pensions paid in Germany would fall by almost one-quarter. However, women would be particularly disadvantaged, as many would fail to qualify because their child-raising years would not be counted towards a pension. Today the average length of contribution by women currently receiving a standard old-age pension is less than 20 years, and this includes time spent in maternity leave and unemployment.

Finally, implementing a Bismarck template would mean substantially lower benefits. If it was to reflect the same proportion of the average wages in 1891, then this would be a monthly payment of €500 in Germany. This is well below the value of the minimum pension currently paid to a single person – often considered the minimum to avoid poverty. In comparison, this would mean slashing the monthly benefits paid in the US to around $670 – about half of what is received on average.

Raising the retirement age, tightening eligibility and lowering benefits would dramatically improve the long-term financial sustainability of modern Social Security systems. Such an improvement, however, would be achieved at the expense of the adequacy of the pension, that is, if what is received is enough to live on. Women would be particularly disadvantaged as many would fail to qualify because of their years spent in child rearing.

Striking a balancing between pension sustainability and adequacy will be the tough task in years ahead. For aiming at sustainability without regard to adequacy means we could escape the Bismarck pension trap. But it could also result in the type of explosive social conditions that caused both Bismarck and Roosevelt to introduce pensions in the first place – widespread and desperate old age poverty.

If social security was introduced today

Retire at 80 and receive $670 a month in benefits – this is what introducing Social Security today would mean in the US

Jay Ralph

If social security was introduced today

Retire at 80 and receive $670 a month in benefits – this is what introducing Social Security today would mean in the US

Jay Ralph

Germany: on the edge of gerontocracy

A tale of two demographics

Shrinking populations can be more productive

Who was Bismarck?