International Evidence of Social Security’s Crowding-Out Effect

A common criticism of Social Security is that it crowds out private retirement saving by providing government transfer payments to retirees. If people know the government will provide retirement benefits, they have less incentive to save for their own retirements. They save less than they otherwise would in the absence of Social Security, even if they have the means to save on their own.

An interesting Twitter thread from Chris Pope of the Manhattan Institute provides cross-country evidence that indicates this is the case.

He looks at OECD data (so we’re just comparing developed countries) on government retirement benefits and total retirement incomes relative to each country’s average income. He finds that the average total retirement incomes across countries are pretty flat. Only the amount of spending on government retirement benefits changes by country.

That would indicate that, on average, people are capable of making up for perceived shortfalls in government-provided retirement benefits by saving their own money.

Of course, Social Security isn’t only a government-funded pension program. It’s also supposed to be an antipoverty program. But Pope finds that the amount of government retirement benefits across countries doesn’t make much difference in the income of poorer seniors, relative to each country’s average income. Instead, the well-off seniors are the ones who are made better off by higher levels of government support.

These are pretty tight correlations for cross-country data such as these, and they lend evidence to the crowding-out effect of Social Security.

Just because politicians in both parties have stopped talking about entitlement reform doesn’t mean the fundamental problems with the programs have gone away. In fact, the funding shortfalls for Social Security have gotten worse. As Phil Klein wrote in September when the Social Security trust fund report came out, in 2005 when George W. Bush was talking about reforming Social Security, the trust fund was projected to expire in 2042. This year’s projection shows it will run out in 2033. “What was then 37 years away is now just twelve years away,” he wrote.

In the face of those facts, it’s important to remember the crowding-out effect’s distortions on how much people currently save for retirement. Removing current disincentives to private retirement saving would likely make a significant difference in the amount of saving people do. But people need time to make adjustments in their personal savings behavior. If we’re forced to make big changes to Social Security at the last possible moment because we failed to address the program’s well-known actuarial problems, it could upend a lot of people’s retirement plans.