Political and economic forces sustaining social security.

• Author: Mulligan, Casey B.

Government officials, regardless of their political persuasion, are increasingly serious about Social Security reform. Politicians have long recognized that the success and longevity of their policies depend on the economic and political environments in which they operate. For example, Franklin Delano Roosevelt explained, "We put those [Social Security] payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions. With these taxes in there, no damn politician can ever scrap my Social Security program." (cited in Schlesinger, 1958). In other words, Roosevelt understood that he could not design a program for the elderly without regard for its political future; rather, he needed a design that made it difficult for future politicians to change the Social Security (hereafter, SS) program. Unfortunately, modern proposals and evaluations of changes to the SS system pay little attention to the political and economic forces that have been sustaining the program, and whether the proposals for change could endure those forces. Xavier Sala-i-Martin and I have been working to improve public pension economics along these lines.

Worldwide Challenges

Our initial step was to create international databases of the history of SS program design, including tax rates, financing methods, revenues, benefit eligibility rules, and benefit formulas. (1) Several interesting patterns emerge. First, the international history of SS includes many examples of well-intentioned reforms that were put in place but ultimately unable to resist the political forces pushing back towards the old system. Many of these are examples of countries that planned for a fully funded system (namely, a system that pays each cohort benefits equal to its lifetime contributions plus accumulated interest): Chile's original SS program, Germany's original program, one of the original French programs, the first U.S. SS law (passed in 1935, scheduled to come into effect in 1937 and to be partially funded, but rescinded in 1939), and Sweden's first system. A number of individual accounts systems (namely, systems that pay an individual benefits in proportion to his lifetime contributions) also have failed to be politically sustainable, including those in Seychelles, Egypt, St. Vincent, the system for the American clergy, and some African and Caribbean Provident Funds.

Second, public pension budgets have become very large in upper and middle income countries, with the share of labor income collected as SS taxes sometimes exceeding the fraction of the population who are eligible for SS benefits. Normalized by GDP, the U.S. SS budget is small by international standards. Third, the fringe benefit model is ubiquitous: almost all countries (including the United States, with one very recent exception) raise practically all of their SS revenue from payroll taxes on employer and employee, and pay a defined benefit that increases with lifetime earnings and declines with earnings during the beneficiary's retirement years. Even though economists disapprove of SS benefit formulas that give the elderly so little incentive to work, this...