Evaluating the impact of social security

Although pressing issues, from immigration to national security, can capture the attention of policymakers from year to year, the problems associated with the fiscal consequences of an aging population are always looming in the background. The eventual impact of Social Security and Medicare on the long-run budget in the United States is likely to be substantial. But, the problems facing other OECD countries are perhaps even more severe. Birth rates elsewhere are lower, meaning that fewer workers will be paying for the benefits of retirees. Moreover, the share of retirement benefits provided through the state is higher in many other OECD countries than in the United States. (1) In light of these pressures, many countries already have implemented substantial reforms. Italy and Sweden are phasing in notional defined contribution plans to replace their traditional social security programs. Canada has a 140 billion dollar trust fund invested in a diversified portfolio of financial assets. Germany has lowered the public pension entitlement and encouraged the establishment of occupational pensions and individual savings plans. In the fall of 2010, France advanced the retirement age from 60 to 62 in the face of mass protests, joining the United States and other countries in a movement toward later benefit entitlement ages. Further reforms, both large and small, are under discussion in many other nations. Over the past few years, I have participated in a number of research projects evaluating social security programs around the world. The broad goal of this work is a better understanding of the economic responses to the incentives embedded in public pension programs. Research on these issues can provide policymakers with some guidance as they face the demographic challenges of the future. Some of this work is undertaken through the NBER's International Social Security group, organized by Economics of Aging Program Director David A. Wise. It features the work of teams from twelve OECD countries, collaborating to produce comparable analyses that address important questions for the design and future of Social Security programs. To date, this project has produced four published volumes, with more on the way. Here I describe work from two phases of the International Social Security project, as well as two other research projects related to retirement behavior. Disability Insurance The International Social Security project has focused recently on disability programs. Wise and I have written a summary paper describing and exploring the detailed work being done by the country teams. (2) In most countries, public disability insurance programs provide important insurance against income loss from disability for those too young to retire. However, in many countries disability programs may become a pathway for early retirement. Across countries, the uptake of disability insurance among younger working people is quite similar; however, among those who are older, uptake displays enormous variation. For men at age 64, for example, uptake ranges from 8 percent in Italy to 37 percent in Sweden. The cross-country comparisons suggest a strong level of substitutability between the availability of early public retirement pensions and disability insurance uptake. We are also interested in how much of the growth of disability insurance programs can be attributed to changes in health and improvements in life expectancy. Japanese men aged 65 in 2005 could expect to live ten years longer than Japanese men who were 65 in 1960. There also have been large increases in self-assessed health over time. Still, the use of disability insurance has grown over these years. Making use of the cross-country data, we can compare changes in disability benefit use in countries with large and small improvements in health status. We find no evidence of a relationship between health changes and disability rates. Instead, the main driver of disability insurance uptake seems to be policy choices about how disability is defined, as well as variation in the generosity of benefits. …

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