Politics & Policy

Social Security Benefits in Context

The question is: To which countries do we look for context?

Who you compare yourself with says a lot about who you want to be. A common talking point from the Left regarding the generosity of Social Security benefits isn’t entirely honest, but more important, it’s indicative of the broader views of American liberals.

It’s a mantra from the Left that Social Security benefits are low compared with the pensions provided in other countries, and therefore we should fix Social Security by raising taxes instead of reducing benefits. For instance, the Century Foundation argues that Social Security’s benefit levels are far from overly generous and, internationally, rank near the bottom in the share of a retired worker’s past earnings that they replace.

The Century Foundation accurately points out that most OECD countries offer significantly higher pension-replacement rates — that is, pension benefits relative to pre-retirement earnings — than does the U.S. Essentially the same point has been made by, among others, the Center on Budget and Policy Priorities, the National Academy of Social Insurance, and the AFL-CIO.

Now, one reason to be skeptical of this argument is that Medicare benefits are generous relative to other countries’ old-age health-care benefits, and yet the Left wants to fix Medicare the same way it wants to fix the allegedly stingy Social Security program: by raising taxes rather than reducing benefits.

But there’s another reason this argument doesn’t do much for me: I honestly don’t care very much what Greece, Iceland, and Luxembourg (the medal round of the OECD pension-generosity Olympics) do. Leaving aside that two of these countries are insolvent and the third is a Lilliputian tax haven, these countries and most of the rest in the OECD simply think very differently about the role of government than we do. When the French decry “Anglo-Saxon attitudes,” that’s us they’re talking about.

But not just us. There is a group of nations that, while each is unique, share those Anglo-Saxon values: the United Kingdom, of course, and its former possessions of Australia, New Zealand, Canada, Ireland, and the United States. Despite our differences, most Americans will find far more in common with the Anglo nations than with Luxembourg.

Wouldn’t it be interesting to know how Social Security compares with pensions in Anglo countries? Pension-replacement rates for an average wage earner in the Anglo countries range from a low of 31.9 percent to a high of 47.3 percent. The U.K. has the least generous pension for the average earner, followed by New Zealand and Ireland. The U.S., paying 39.4 percent to an average earner, is in the middle of the pack. Interestingly, Australia both pays the most generous benefits and is the only country in the group to have what the American Left would call a “privatized” program. Imagine that!

The U.S. is also in the middle of the pack when it comes to financing its pensions. Australia, New Zealand, and Ireland finance their programs through general tax revenues, which are more progressive than Social Security’s payroll tax. But Canada and the United Kingdom, which do use payroll taxes, apply taxes up to a lower wage ceiling. Social Security’s payroll tax applies to the first $106,800 of earnings, equal to around 2.9 times (or 290 percent of) the average wage. In Canada, payroll taxes are levied up to 96 percent of the average wage, and in the United Kingdom up to only 115 percent, according to the OECD.

We’re not an outlier with regards to the overall size of government. U.S. total federal-, state-, and local-government spending was 36.8 percent of GDP in pre-financial-crisis 2007. That ranks us above Australia and below Canada.

But it’s precisely that political heritage that the Left disagrees with, which is why they doubtless would reject comparisons to Anglo countries in favor of the broader OECD. That in itself is telling. It shows the Left’s view of the role of government to be inconsistent with the political traditions of the U.S. and other Anglo nations, traditions of a limited role for government and an expansive role for individuals and private markets.

In a sense, there’s nothing wrong with that: Europe’s overweening welfare state comes not from dictatorial imposition but from the voters themselves. And there is a subset of Americans — 20 to 30 percent, if my AEI colleague Arthur Brooks is correct — that wants the same thing, a subset that simply views the role of government differently than do most Americans. This philosophical debate is the common thread that runs through the Tea Party, the fight over Obamacare, and Rep. Paul Ryan’s budget. The outcome of the argument, and even the means by which the argument will be decided, is far from clear.

Our fundamental disagreement isn’t over Social Security’s generosity or the myriad other technocratic questions of federal policy. Those can be compromised on. But when one side benchmarks itself against countries whose governments pay the average individual in retirement as much as or more than his employer paid him when he was working, there is a philosophical disagreement that is far more fundamental and far more difficult to reconcile. Who you compare yourself with is an indicator of who you want to be. As for me, I’m with the 70 percent of Americans who really don’t care what Luxembourg does.

— Andrew G. Biggs is a resident scholar at the American Enterprise Institute.


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