Is there a quick fix for social security?

Professor Jurg K. Siegenthaler. American University

Swiss social security turned out to be the star at a conference that I attended in Boston in June. And, in part, US social security did not look too bad either, after all.

This roundtable meeting brought together Swiss and American experts from both sides of the Atlantic. They were asked to compare notes on how to reform social security at a time when society is ageing rapidly.

The meeting was organized by the House for Advanced Research and Education (Share) in Cambridge, Massachusetts, a Swiss consulate that promotes the exchange of knowledge and general cooperation in science.

Upon retirement, Swiss elderly can look forward to social security payments that cover about 50 per cent of their pre-retirement income, plus an occupational pension that covers another 20 per cent. Under US social security, benefits are similar, but only half of workers have occupational pensions since the latter are not compulsory here, a considerable difference.

In the long run, there may be some financing problems for both systems. The conference thus also discussed old-age pension financing in this century, now that larger numbers of retirees must depend on fewer workers paying in their taxes.

In the US, the current administration attempted in the past six years to convert part of social security provision into a system of personal retirement accounts so that private savings, invested in the stock market, would come to the rescue.

That agenda was totally unsuccessful because Americans, like the Swiss, value their social security and don’t trust Wall Street to produce a greater return than public social insurance.

Finance gap

In Switzerland too, a financing gap has to be covered, and there is an even stronger influence from the voter base because popular initiatives and referendums – which have to approve any reform – allow only gradual, small-step changes. The next reform step on the table is an increase in the retirement age for women from 64 to age 65 in line with that for men, and a more generous provision on early retirement (at age 62).

While it might seem frustrating that only small improvements in financing are possible where voters have a near-veto power, the Swiss system looks very good vis-à-vis the American, where the debate about the future of social security is deadlocked.

Or is it? At a roundtable like the one I attended, it becomes clear that at least the research base on which to develop alternative reform ideas is very good.

Old age security is a field on which an impressive array of specialists have worked together: economists, demographers, actuaries, public policy analysts, gerontologists, and more. Over the years, some imaginative suggestions for balancing the accounts have been made, especially in the United States. Thus action could be taken.

Why, for example, not increase the limit beyond which higher-income employees no longer pay social security taxes? (In Switzerland there is no limit, and yet the wealthy do not receive more than the maximum benefit in return, a re-distributive feature.)

Why not cut the benefits slightly for those who have a much longer life expectancy? Why not phase in contribution increases or benefit cuts over a very long period of time so that people can prepare themselves accordingly (this was done in the US in 1983 by increasing the retirement age from 65 to 67, to be implemented over 40 years)?

Alternative resources

Beyond this, there are alternative financial resources. Swiss social security recently got a temporary shot in the arm in the form of excess gold reserves from the National Bank, the equivalent of the Federal Reserve. Also, the Swiss have a value-added tax that can be increased somewhat because it is, fortunately, relatively low compared with the rest of Europe.

Similar possibilities exist in the US. For example, not abolishing the estate tax in 2009 as currently proposed, and channeling the returns into social security would fill the financing gap by 33 per cent.

Because the research base is strong, the possibilities for reform are actually quite good, given effective leadership. Ingeniously, the National Academy of Actuaries has come up with an internet-based “Social Security Game” that allows the player to square his or her preferences with the available financing options.

Another resource for citizens just published by the Center for Retirement Research at Boston College, is the Social Security Fix-It Book, a similar “review of the program, its financing problem, and the leading proposals for eliminating the shortfall.”

This is good research in action, and there is hope that a balanced proposal, spearheaded by good political leadership, will succeed, both here and in Switzerland. Americans are sometimes less conservative than they are credited to be. When they recognize a public program that works well for them, they are willing to pay – and pay a little more for it, too.

Jurg Siegenthaler

The views expressed in this column are not necessarily those of swissinfo.

Biography

Every month retired professor, Jurg Siegenthaler, compares and contrasts aspects of life in Switzerland with that of his adopted homeland, the United States.

He emigrated to the United States from Switzerland in 1967, and is now a retired university professor living close to Washington, DC. He is a graduate of Bern University (Dr.rer.pol., 1966).

His fields of teaching and research encompassed economic history, social theory and social policy analysis. Throughout his career, he has maintained close comparative research interests in the US and Switzerland.

He is associated with the Institute for Socio-Financial Studies, a research non-profit that has done a lot of work improving financial literacy at the community level.

Since his retirement, Jurg Siegenthaler has broadened his involvement in community organizations and in the arts. He is married and lives with his wife Linda in Silver Spring, Maryland.