During the last century, the establishment of Social Security and the tax-favored employer pension plans that followed transformed and improved the lives of American workers. Combined with economic growth, these institutions meant that both the rich and the poor lived longer and every worker became entitled to pensions at the end of their working lives. At the same time, public spending for children, mainly through education spending, also skyrocketed, as the percentage of Americans with a high school degree or more increased from under 50 percent of the population in 1950 to over 86 percent in 2011.
Yet there is a growing attack on pensions and retirement security. Employers continue to financialize pensions by substituting traditional pensions with 401(k)-type retirement accounts. Politicians and pundits argue that people should work longer and benefits should be cut by raising the normal retirement ages.
Cutting pension benefits is not a good policy. It is fueled by a belief that society cannot afford to pay for retirement because spending for the elderly takes too many resources away from younger people. That belief is wrong — the old do not eat the young.
Pensions Do Not Transfer Funds from Young to Old:
There is little hard empirical evidence for the claim that pensions systems are designed to transfer funds from relatively powerless younger workers to older, more politically astute, elderly. Evidence from 63 nations shows that spending for both young and old populations increase together. This is because when a particular political alliance is in place public spending on social insurance and education increases: my statistical analysis shows that a 10 percent increase in spending on education is correlated with a 7.3 percent increase in spending on pensions.
Pension spending is best explained from what political economists John Williamson and Frank Pampel call a “social democratic perspective” that views generous pensions and Social Security policy as “the outcome of a struggle between organizations and political parties representing the interests of capital and those representing the interests of labor.” The data do not support the inference that children will get more resources if nations cut pension spending and the so-called powerful elderly stop writing the pension rules.
When pension systems are relatively new, workers who are middle-aged groups benefit the most because their lifetime financial contributions to the new program are small relative to the value of the benefits they collect. The logical consequence of this math is that as the programs age younger workers are contributing longer to the system and the benefit-to-contribution ratio is smaller relative to the lucky first group. But that math does not mean the system is unfair to younger generations.
Urban Institute economist Lawrence Thompson, responding to the need for a comprehensive measure of the transfers between generations, projected that in 2030 wages (after social insurance contributions) will be 35 percent higher than in 2003, while the average retirement benefit in 2030 will be only 18 percent higher than the same benefit in 2003. This means that, in the U.S., workers will have a greater increase in living standards than retirees in the future. He also finds that families, after education and Social Security taxes are accounted for, transfer over $27,000 on average to younger generations. In other studies comparing education to pension spending American economists Bommier, Lee, Miller, and Zuber compare U.S. education spending with Social Security and Medicare spending for various age groups. They find that young people have higher returns on their taxes than the older cohorts.
The economist Axel Boersch-Supan examined 16 countries and concluded the generosity of the countries towards the elderly (measured by social expenditures for programs targeting the elderly) does not reduce the share of total social expenditures for programs targeting youth.
Ryan Taylor and I found evidence (using 1986 data from 65 nations and 1995-2000 data from 58 nations) that government pension spending as a percent of GDP per old person does not reduce or affect government spending on education as a percent of GDP per child. When rich nations alone are examined, there is a correlation but it is positive. Wealthy nations that spend a high percentage of GDP on education also spend a large share on pensions. The simple correlation is 30.8 percent. A ten percent increase in spending for the young results in an over seven percent increase in spending for the elderly (as a share of GDP).
What does this mean? The grim specter that strong-armed generational politics forces young workers to pay high taxes to support the leisure of healthy older people is not supported by the evidence.
U.S. Retirement Plan: Work Till You Drop
Proposals to cut pensions are also predicated on the belief that Americans should work more. But older Americans have been working more than older workers in other nations for decades. The cover story of The Economist magazine in mid-April 2011 screamed “70 or Bust!: Why the Retirement Age Must Go Up.”
Raising retirement ages seem to make sense: nations with the oldest populations have some of the smallest elderly labor force participation rates. For instance, among German men, 4 percent of those over the age of 65 work, compared to 16 percent of older American men who work. The United States is the only nation in the Organization for Economic Co-operation and Development (OECD) that bans forced retirement, pays full Social Security benefits to people who have not retired, and has raised the normal retirement age to 67, a much higher age than its European counterparts.
The linkages between longevity and economic hierarchy has been long researched and the conclusion drawn is that workers with high socioeconomic stature lose the least when working longer is a norm because they already work more at older ages. One specific group of workers — educated professionals — is hurt least by raising the retirement age. Professionals began working full time in their mid-twenties and, by age 65, have worked fewer years than non-college-educated workers. They are also more likely to enjoy and control their work pace and tasks.
Although professional workers generally control the pace and content of their work and have more command over when they stop working, most workers leave their job before they plan to because of layoffs and health problems. There is no evidence that employers have made jobs more attractive, better paid, and easier to do for older people.
Moreover, older workers who enjoy a high socio-economic status are more likely to like their jobs and would not suffer significant loss in income if they choose not to work. The gaps in life expectancy between men and women have narrowed but the differences by socioeconomic status have grown larger. Individuals with higher lifetime earnings or more education experience lower mortality rates than those with lower lifetime earnings or less education. In the U.S., white-collar male workers’ longevity has grown faster than that of any other group.
Cutting pensions will not make Americans work longer. It will just make them poorer when they get old.
Who Benefits from Austerity for the Elderly?
The ideas that people want to keep on working, that work is good for people, and that pensions are not fair to the young are forceful, widespread, and influential. Who benefits from these beliefs?
Employers clearly benefit from the end of retirement, and that’s why employers are the biggest champions of the new “working retirement” norm. A recent survey by the Conference Board, an industry research group, reassured its client employers that future labor shortages will partially take care of themselves: 75 percent of older workers surveyed said they would continue working when they got older because they lacked sufficient financial resources to retire.
More American elderly are looking for work since the financial crises of 2009. Economist Rich Johnson at the Urban Institute shows that the 2008 recession was much worse for older American men than any other recession; workers over 50 had to wait longer relative to younger people to get rehired. An increase in the supply of labor invariably redistributes income away from wages and toward profits because the pressure faced for wage increases is defused. In general, an expanding labor supply helps employers tame pressures to pay more, to improve working conditions, or to conserve labor by investing to boost labor productivity.
The Evidence Supports Solidarity among Generations
Perhaps it is true, as many would have us believe, that older people everywhere want to have less retirement and I support sensible changes to pension rules that increase pension benefits as people work more or balance taxes and benefits. But reducing pensions because of trade-offs that don’t exist would be very harmful to both working-class and middle-class workers who earned legitimate retirements while increasing spending on their children.
In sum, pension spending and education go together. Political support for social spending promotes spending for all generations. This evidence is support for a particular kind of solidarity: workers support preserving pensions because they will get old and support transfers to workers, young and old. In this way, we can think of class solidarity as younger workers forming alliances with their older selves.
Teresa Ghilarducci is a labor economist and nationally-recognized expert in retirement security. An economics professor at The New School, she serves as the Bernard L. and Irene Schwartz Chair in economic policy analysis and director of the Schwartz Center for Economic Policy Analysis. This article was first published by the New America Foundation on 17 June 2011 under a Creative Commons license. For Ghilarducci’s regression results on international experience with intergenerational transfers, see Teresa Ghilarducci, “The Future of Retirement in Aging Societies,” International Review of Applied Economics 24.3 (2010): 319-331.