Achieving Structural Reform by Supporting the Most Vulnerable

I was bummed to see that Matt had beaten me to blogging about Silja Haeusermann’s blog post on reforming public pensions. It starts off with a more than mildly condescending attempt at biting humor at the expense of the Swiss right that falls flat. But apart from that, the post is substantive and well worth reading. But before getting to Haeusermann’s post, let me address a few of the concerns that Dean Baker raises

The progressives who are most visible on this issue have been concerned about a Social Security benefit that is already small by international standards being made still smaller.

It’s worth noting that U.S. households are relatively affluent by international standards, with the top 90 percent of households comfortably ahead of the top 90 percent of households in the rest of the OECD. This suggests that a less generous system of old-age transfers is reasonable for the top 90 percent of households, and that we might want to create a more generous minimum benefit for the bottom 10 percent of households, an idea that Haeusermann raises as we’ll see. 

Well, we know that the vast majority of near retirees will have almost nothing other than Social Security to support themselves in retirement. The reason is that the people who always talk about budget deficits were too ignorant of the economy to recognize the dangers of an $8 trillion housing bubble. Since these people were controlling economic policy, middle class workers saw much of the wealth they had accumulated as home equity or in their 401(k) disappear. In other words, the deficit hawks who want “changes to take effect more gradually” want to kick again the people whose wealth was destroyed due to the incredible economic mismanagement of these deficit hawks. 

Bracketing the question of whether this is a fair characterization — the fixed costs of over-65s tend to be lower, and family networks and other transfers designed to add the truly destitute are presumably part of the solution — this seems like a decent case for limiting Social Security benefit reductions to under-55s or to the relatively affluent. And my sense is that Orszag intends to protect low-earners. I don’t get the impression that Baker is being very fair to Orszag. 

Moving along, Hauesermann makes a really, really interesting point regarding efforts to scale back entitlement spending:

In the 1990s, Paul Pierson made a huge impact in the field when he explained how difficult it would be for governments to consolidate or retrench existing social policy programs, because these policies (pensions being the best example) create their own support coalition that reaches far beyond the left-wing electorate. On this basis, he predicted policy stability. More recent research, spearheaded by Swiss political scientist Giuliano Bonoli , proved him wrong by demonstrating that reforms could be achieved, under the condition that governments combine cutbacks with elements that benefit the most precarious social groups, mostly low-skilled, young and female voters. In a book that will be out with CUP this month, I have shown that this kind of “package deals” has become a necessary condition for successful pension reforms over the last 20 years, not only in Switzerland, but also in Germany, France and other European countries. [Emphasis added.]

I am very eager to read Hauesermann’s forthcoming book. I’ve long through of Pierson’s work as the last word on this subject, though I’ve been disappointed by some of his more recent efforts.

A few quick thoughts:

(1) Reforming Social Security to improve the treatment of female workers might actually lower costs and improve incentives by reducing the spousal benefit and increasing benefits for lifetime low-earners. As the Urban Institute tells us, “Social Security discourages work by people who earn less than their spouses, because additional work often does not increase benefits by much.”

(2) The 90-10 gap is important to keep in mind. For the top 90 percent of households, a sensible goal is to provide additional savings vehicles, encourage attachment to labor force in old age, etc. For the bottom 10 percent, there is a plausible argument that a more generous minimum benefit would have salutary consequences.

(3) I wonder if Hauesermann’s insight, and Bonoli’s insight, can be applied to other domains.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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