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Archive for the ‘Hong Kong’ Category

Because they directly measure economic liberty, my favorite global rankings are Economic Freedom of the World and the Index of Economic Freedom.

But I also like the World Economic Forum’s Global Competitiveness Report and the Institute of Management Development’s World Competitiveness Rankings, both of which basically measure the degree to which a nation is hospitable to business activity (which is correlated with economic liberty).

The United States dominated the IMD rankings until 2010, and America managed to reclaim the top spot for 2017. But according to new numbers from IMD’s World Competitiveness Center, Singapore and Hong Kong are now at the top.

I’m also not surprised to see Switzerland ranked highly.

And it’s worth noting that the Netherlands, Ireland, and Denmark are top-10 nations, similar to their scores in the Human Freedom Index.

Here’s some additional information from the press release.

Singapore has ranked as the world’s most competitive economy for the first time since 2010, according to the IMD World Competitiveness Rankings, as the United States slipped from the top spot… Singapore’s rise to the top was driven by its advanced technological infrastructure, the availability of skilled labor, favorable immigration laws, and efficient ways to set up new businesses. Hong Kong SAR held on to second place, helped by a benign tax and business policy environment and access to business finance. …The IMD World Competitiveness Rankings, established in 1989, incorporate 235 indicators from each of the 63 ranked economies. The ranking takes into account a wide range of “hard” statistics such as unemployment, GDP and government spending on health and education, as well as “soft” data from an Executive Opinion Survey covering topics such as social cohesion, globalization and corruption. This information feeds into four categories – economic performance, infrastructure, government efficiency and business efficiency – to give a final score for each country. There is no one-size-fits-all solution for competitiveness, but the best performing countries tend to score well across all four categories. Switzerland climbed to fourth place from fifth, helped by economic growth, the stability of the Swiss franc and high-quality infrastructure. …The United Arab Emirates – ranked 15th as recently as 2016 – entered the top five for the first time. …Venezuela remains anchored to the bottom of the ranking, hit by inflation, poor access to credit and a weak economy. The South American economy ranks the lowest for three out of four of the main criteria groups – economic performance, government efficiency and infrastructure.

Venezuela in last place? I’m shocked, shocked.

There are two specific items from the report I want to highlight.

First, notwithstanding the bleating from Trump and others about a supposed crisis of inadequate spending, notice that the United States is in first place for that category.

Also, notice that the jurisdictions with high scores for government efficiency are all places with (by modern standards) small government.

This is very similar to the “public sector efficiency” scores from the European Central Bank.

The moral of the story is that small government is the way to get competent government. It’s almost as if there’s a recipe that generates good outcomes.

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International development experts often write about a “middle-income trap.”

According to this theory, it’s not that challenging for nations to climb out of poverty, but it’s difficult for them to take the next step and become rich countries.

The theory makes sense to many people because it describes much of what we see in the real world.

We even see the trap at higher levels of income. European nations were catching up with the United States after World War II, but then the convergence process stalled.

But I don’t think there’s actually a “middle-income trap.” Instead, nations don’t enjoy full convergence because they are hamstrung by bad policy.

And Hong Kong and Singapore are the best evidence for my hypothesis. These two jurisdictions have routinely ranked #1 and #2 for economic freedom.

And their solid track record of free markets and small government has paid big dividends. Here a chart, for Our World in Data, which shows how they have fully converged with the United States after starting way behind.

The performance of Hong Kong and Singapore is particularly impressive because the United States historically has been a top-10 nation for economic liberty (notwithstanding all my grousing about bad policy in America, we’ve been fairly good compared to the rest of the world).

So it takes extraordinarily good performance to catch up.

But it can happen.

P.S. By the way, one thing I noticed in the above chart is that Singapore has surpassed Hong Kong in the past couple of decades. This could just be a statistical blip, though I wonder if this is a result of the transfer of Hong Kong from British control to Chinese control. Yes, China has wisely chosen not to interfere with Hong Kong’s domestic policy, but perhaps investors and entrepreneurs don’t fully trust that this economic autonomy will continue.

P.P.S. Don’t forget that comparatively rich nations can de-converge if they adopt bad policy.

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What’s the world’s freest nation?

I’ve suggested that Australia as an option if the United States ever suffers a Greek-style collapse, but my answer wasn’t based solely on that country’s level of freedom.

Another option is to look at Economic Freedom of the World, which is an excellent resource, but it only measures the degree to which a nation allows free markets.

If you want to know the world’s freest nation, the best option is to peruse the Human Freedom IndexFirst released in 2013, it combines economic freedom and personal freedom.

The 2018 version has just been published, and, as you can see, New Zealand is the world’s most-libertarian nation, followed by Switzerland and Hong Kong. The United States is tied with Sweden for #17.

If you scan the top-20 list, you’ll notice that North America, Western Europe, and the Antipodes (Australia and New Zealand) dominate.

And that also is apparent on this map (darker is better). So maybe “western civilization” isn’t so bad after all.

Here is an explanation of the report’s guiding methodology. Simply stated, it’s a ranking of “negative liberty,” which is basically freedom from government coercion.

The Human Freedom Index casts a wide net in an attempt to capture as broad a set of freedoms as could be clearly identified and measured. …Freedom in our usage is a social concept that recognizes the dignity of individuals and is defined by the absence of coercive constraint. …Freedom thus implies that individuals have the right to lead their lives as they wish as long as they respect the equal rights of others. Isaiah Berlin best elucidated this notion of freedom, commonly known as negative liberty. In the simplest terms, negative liberty means noninterference by others. …This index is thus an attempt to measure the extent to which the negative rights of individuals are respected in the countries observed. By negative rights, we mean freedom from interference—predominantly by government—in people’s right to choose to do, say, or think anything they want, provided that it does not infringe on the rights of others to do likewise.

Unsurprisingly, there is a correlation between personal freedom and economic freedom.

Though it’s not a perfect correlation. The Index highlights some of the exceptions.

Some countries ranked consistently high in the human freedom subindexes, including Switzerland and New Zealand, which ranked in the top 10 in both personal and economic freedom. By contrast, some countries that ranked high on personal freedom rank significantly lower in economic freedom. For example, Sweden ranked 3rd in personal freedom but 43rd in economic freedom; Slovenia ranked 23rd in personal freedom but 71st in economic freedom; and Argentina ranked in 42nd place in personal freedom but 160th in economic freedom. Similarly, some countries that ranked high on economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked in 2nd place in economic freedom while ranking 62nd in personal freedom; the United Arab Emirates ranked 37th in economic freedom but 149th in personal freedom; and Qatar ranked 38th in economic freedom but 134th in personal freedom.

This raises an interesting question. If you had to move, and assuming you couldn’t move to a nation that offered both types of freedom, would you prefer a place like Sweden or a place like Singapore?

As an economist, my bias would be to choose Singapore.

But if you look at the nations in the top-10 for personal freedom, they’re all great place to live (and they tend to be very market-oriented other than their big welfare states). So I certainly wouldn’t blame anyone for instead choosing Sweden.

P.S. There are some very attractive micro-states that were not including in the Human Freedom Index, presumably because of inadequate data. I suspect places such as Bermuda, Liechtenstein, Monaco, and the Cayman Islands would all get very high scores if they were included.

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Since I’ve been writing a column every day since 2010, you can imagine that there are some days where that’s a challenge.

But not today. The Fraser Institute has released a new edition of Economic Freedom of the World, which is like a bible for policy wonks. So just like last year, and the year before, and the year before, and so on (you may sense a pattern), I want to share the findings.

First, here’s what EFW measures.

The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. …The EFW measure might be thought of as a measure of the degree to which scarce resources are allocated by personal choices coordinated by markets rather than centralized planning directed by the political process. It might also be thought of as an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions.

Now let’s get to the good stuff.

Unsurprisingly, Hong Kong is at the top of the rankings, followed closely by Singapore. Those jurisdictions have been #1 and #2 in the rankings every year this century.

The rest of the top 5 is the same as last year, featuring New Zealand, Switzerland, and Ireland.

The good news for Americans is that we’re back in the top 10, ranking #6.

Here’s what the report says about the United States.

…the United States returned to the top 10 in 2016 after an absence of several years. During the 2009–2016 term of President Obama, the US score initially continued to decline as it had under President Bush. From 2013 to 2016, however, the US rating increased from 7.74 to 8.03. This is still well below the high-water mark of 8.62 in 2000 at the end of the Clinton presidency.

It’s important to understand that the improvement in the U.S. score has nothing to do with Trump. The EFW ranking is based on America’s economic policies as of 2016 (there’s always a lag in getting hard data).

President Trump’s policies may increase America’s score (think taxes and regulation) or they may decrease America’s score (think trade and spending). But we won’t know for sure until we see future editions.

Here’s what’s happened to economic liberty in America between 1970 and 2016.

As you can see from the historical data, the U.S. enjoyed progress through the Reagan and Clinton years, followed by decline during the Bush years and early Obama years. But we’ve trending in the right direction since 2013.

Let’s look at other nations that get decent scores.

Here are the other nations that are in the top quartile.

Canada and Australia were tied for #10, so the rest of the rankings start with the under-appreciated success story of Taiwan at #12.

All the Baltic nations do well, especially Estonia and Lithuania. Chile also remains highly ranked, as is the supposedly socialist nation of Denmark.

Luxembourg, which was ranked #1 as recently as 1985, is now #25.

I also noticed that Rwanda (#40) has eased past Botswana (#44) to become the highest-ranked nation in Sub-Saharan Africa.

By the way, I’m not going to bother showing the bottom nations, but nobody should be surprised to learn that Venezuela is in last place.

Though that may simply be because there’s isn’t adequate data to include North Korea and Cuba.

Let’s close by including a chart that hopefully will show why economic liberty is important.

Simply stated, people enjoy much higher living standards in nations with free markets and small government. Conversely, people living under statist regimes suffer from poverty and deprivation.

The bottom line is that Economic Freedom of the World shows the recipe for growth and prosperity.

Sadly, very few nations follow the instructions because economic liberty is not in the interests of politicians.

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When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.

There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.

But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.

In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.

The global evidence says yes, regardless of whether other countries do the same thing.

Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.

Have they suffered?

Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.

To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.

But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.

Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.

Have the Kiwis suffered from free trade?

Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.

Today, let’s look at a column on the same topic by Patrick Tyrrell.

New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.

Was that a successful policy?

Extremely beneficial.

New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.

Here’s the chart from Patrick’s column.

Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.

Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.

The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions), but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.

What was the impact of this shift to unilateral free trade?

…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.

Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.

Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.

Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).

The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.

Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.

But there’s no ambiguity about the ultimate goal of ending protectionism.

P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.

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The internal revenue code is a reprehensible mess that torments taxpayers and undermines American competitiveness.

The good news is that Americans don’t like the tax system.

The bad news is that they don’t dislike it nearly as much as they should. At least in my humble opinion.

There are two reasons for the inadequate level of disdain.

  • First, nearly half of all households are no longer are subject to the income tax. Indeed, the system is actually a revenue generator for some households since the EITC wage subsidy is a redistribution program laundered through the tax code.
  • Second, many people get a warm and fuzzy feeling when they file their taxes because of the expectation that they will get a sizable refund, even though that payment from the IRS is simply a reflection of having paid too much tax during the prior year.

For those of us who want to scrap the tax system, this is a challenge.

And I’m not shy about admitting the problem.

About three-quarters typically get money back, with refunds so far this year averaging almost $3,000. For many, it will be the single biggest payment they receive all year. …the fact that so many people are getting paid by the IRS, and not the other way around, takes some of the edge off a day when they’re trying to stoke public anger at the tax system. “The fact that people are looking forward to tax time rubs me the wrong way,” said Dan Mitchell, a tax expert at the libertarian Cato Institute. “I would like them to be upset.”

I also have a good idea of why the problem exists.

It’s withholding. And it started back during World War II. Here’s some background.

During the war, tax rates went up, and a broader number of people were expected to pay them. Professor Anuj Desai from the University of Wisconsin Law School said there was a saying that income tax went from “a class tax to a mass tax.” …“The thought was that if we withhold a little bit every bit every paycheck, people won’t have to worry about the problem of coming up with a huge chunk of money,” Desai said. But withholding is also a remarkably efficient way for the government to raise money, and policymakers knew that. …“You could never have the taxes that were levied during World War II without withholding. It was absolutely essential for that purpose,” economist Milton Friedman said in an interview… Friedman worked with the Treasury Department at the time withholding was introduced. Withholding stuck around after the war, much to Friedman’s chagrin. “Unfortunately, once you got it installed, it’s almost impossible to get rid of it,”  Friedman said. “It’s too useful to the people in power.”

Jeffrey Tucker of the Foundation for Economic Education elaborates.

The problem is…the withholding tax. Instead of being collected directly from the payer, the government  collects them “at the source,” which is to say that they are collected from the institution that pays wages and salaries — on behalf of the taxpayer. …one of the most amazingly brilliant innovations of the modern state. This tinkering with the system — the creation of the institution called withholding — has created an illusion that paying taxes is really about getting free money! When the check arrives from the government a month or so later, the taxpayer is actually tempted to think: wow, this is really great! A pillaging has been spun to look like a gift. …Withholding dramatically changed the psychology of paying taxes. It almost feels like you aren’t paying any at all. The worker gets used to how much after-tax income she makes and adapts to it quickly. Then when tax time arrives, there is no more to pay. Instead you file and find yourself on the receiving end of what seems like an unexpected gift of a check from government. Yet in reality your refund is nothing more than the belated return of a zero-interest loan you were forced to provide the government.

Exactly.

Every time I talk to somehow who is happy about a refund, I ask them whether they will give me an interest free loan instead. After all, I’d be happy to collect money from them all year long and then return it the following April.

But I’m digressing.

Jeffrey points out how the political dynamics of tax day would change in the absence of withholding.

If we really wanted to make a wonderful change in favor of transparency and decency, one that would mark a shift in people’s perceptions of the costs of government, the withholding tax could just be repealed completely. …every taxpayer would pay the full amount owed to the government every April 15 and otherwise receive full compensation the rest of the year. Such a seemingly small change would have a dramatic effect on public perceptions of taxation and government. Even from the age of 16, every citizen would have a more pungent reminder of the costs of government. We would no longer live the illusion that we can all get something for nothing and that government isn’t really expensive after all.

Ben Domenech of the Federalist agrees.

The overwhelming majority of Americans pay their taxes by having them extracted from their paychecks before they ever see the money. Operating under the fiction that the government is giving you money as opposed to returning what it has already taken is damaging to the psyche of the nation’s taxpayers. …Withholding was originally mandated as a wartime step, but its continuation since then disguises the property rights involved, essentially offers the government an interest free loan, and shields taxpayers from the ramifications of federal spending. The country would be better off if everyone experienced what entrepreneurs and business owners do: writing the most sizable checks every year to the government, and watching that hard-earned money walk out the door.

By the way, this isn’t merely impractical libertarian fantasy.

There’s a real-world example of a tax system where people actually write checks to the government and are much more aware of the cost of the public sector. It’s called Hong Kong, which is – not coincidentally – an economic success story in large part because of a good fiscal system.

And I would argue that good fiscal system exists because taxpayers are directly sensitive to the cost of government (it also helps that there’s a spending cap in Hong Kong).

Let’s close with some government propaganda. This Disney cartoon was produced before withholding. As you can see the government basically had to make the case that people should set aside money out of their paychecks so they would have enough money to make periodic tax payments.

This was a plausible case when seeking to finance a war against National Socialism and Japanese imperialism. It wouldn’t be nearly as persuasive today when the government seems to specialize in financing waste, fraud, and abuse.

P.S. At the bottom of this column, you can watch a much better cartoon from the 1940s.

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I’ve looked at some of the grim fiscal implications of demographic changes the United States and Europe.

Now let’s look at what’s happening in Asia.

The International Monetary Fund has a recent study that looks at shortfalls in government-run pension schemes and various policies that could address the long-run imbalances in the region. Here are the main points from the abstract.

Asian economies are aging fast, with significant implications for their pension system finances. While some countries already have high dependency ratios (Japan), others are expected to experience a sharp increase in the next couple of decades (China, Korea, Singapore). …This has…implications. …pension system deficits can increase very quickly, limiting room for policy action and hampering fiscal sustainability. …This paper explores how incorporating Automatic Adjustment Mechanisms (AAMs)—rules ensuring that certain characteristics of a pension system respond to demographic, macroeconomic and financial developments, in a predetermined fashion and without the need for additional intervention— can be part of pension reforms in Asia.

More succinctly, AAMs are built-in rules that automatically make changes to government pension systems based on various criteria.

Incidentally, we already have AAMs in the United States. Annual Social Security cost of living adjustments (COLAs) and increases in the wage base cap are examples of automatic changes that occur on a regular basis. And such policies exist in many other nations.

But those are AAMs that generally are designed to give more money to beneficiaries. The IMF study is talking about AAMs that are designed to deal with looming shortfalls caused by demographic changes. In other words, AAMs that result in seniors getting lower-than-promised benefits in the future. Here’s how the IMF study describes this development.

More recently, AAMs have come to the forefront to help address financial sustainability concerns of public pension systems. Social insurance pension systems are dominated by defined benefit schemes, pay-as-you-go financed, with liabilities explicitly underwritten by the government. …these systems, under their previous contribution and benefit rules, are unprepared for population aging and need to implement parametric reform or structural reforms in order to reduce the level or growth rate of their unfunded pension liabilities. …Automatic adjustments can theoretically make the reform process politically less painful and more likely to succeed.

Here’s a chart from the study that underscores the need for some sort of reform. It shows the age-dependency ratio on the left and the projected increase in the burden of pension spending on the right.

I’m surprised that the future burden of pension spending in Japan will only be slightly higher than it is today.

And I’m shocked by the awful long-run outlook in Mongolia (the bad numbers for China are New Zealand are also noteworthy, though not as surprising).

To address these grim numbers, the study considers various AAMs that might make government systems fiscally sustainable.

Especially automatic increases in the retirement age based on life expectancy.

One attractive option is to link statutory retirement ages—which seem relatively low in the region—to longevity or other sustainability indicators. This would at the very least help ameliorate the impact of life expectancy improvements in the finances of public pension systems. … While some countries have already raised the retirement age over time (Japan, Korea), pension systems in Asia do not yet feature automatic links between retirement age and life expectancy. …The case studies for Korea and China (section IV) suggest that automatic indexation of retirement age to life expectancy can indeed help reduce the pension system’s financial imbalances.

Here’s a table showing the AAMs that already exist.

Notice that the United States is on this list with an “ex-post trigger” based on “current deficits.”

This is because when the make-believe Trust Fund runs out of IOUs in the 2030s, there’s an automatic reduction in benefits. For what it’s worth, I fully expect future politicians to simply pass a law stating that promised benefits get paid regardless.

It’s also worth noting that Germany and Canada have “ex-ante triggers” for “contribution rates.” I’m assuming that means automatic tax hikes, which is a horrid idea. Heck, even the study acknowledges a problem with that approach.

…raising contribution rates can have important effects on the labor market and growth, it would be important to prioritize other adjustments.

From my perspective, the main – albeit unintended – lesson from the IMF study is that private retirement accounts are the best approach. These defined contribution (DC) systems avoid all the problems associated with pay-as-you-go, tax-and-transfer regimes, generally known as defined benefit (DB) systems.

The larger role played by defined contribution schemes in Asia reduce the scope for using AAMs for financial sustainability purposes. Many Asian economies (Hong Kong, Singapore, Australia, Malaysia and Indonesia) have defined contribution systems, …under which system sustainability is typically inherent.

Here are the types of pension systems in Asia, with Australia and New Zealand added to the mix..

For what it’s worth, I would put Australia in the “defined contribution” grouping. Yes, there is still a government age pension that serves as a safety net, but there also are safety nets in Singapore and Hong Kong as well.

But I’m nitpicking.

Here’s another table from the study showing that it’s much simpler to deal with “DC” systems compared with “DB” systems. About the only reforms that are ever needed revolve around the question of how much private savings should be required.

By the way, even though the information in the IMF study shows the superiority of DC plans, that’s only an implicit message.

To the extent the bureaucracy has an explicit message, it’s mostly about indexing the retirement age to changes in life expectancy.

That’s probably better than doing nothing, but there’s an unaddressed problem with that approach. It forces people to spend more years working and paying into systems, and then leaves them fewer years to collect benefits in retirement.

That idea periodically gets floated in the United States. Here’s some of what I wrote in 2011.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits.

I made a related observation about this approach back in 2012.

…it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

The bottom line is that the implicit message should be explicit. Other nations should copy jurisdictions such as Chile, Australia, and Hong Kong by shifting to personal retirement accounts

P.S. Speaking of which, here’s the case for U.S. reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

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