Posts Tagged ‘Social Security Privatization’

My views on the value-added tax are very simple and straightforward.

If we completely eliminated all income-based taxes, I would be willing to accept a VAT (or even a national sales tax) as a revenue source for government.

But unless that happens, I’m unalterably opposed because it’s far too risky to give politicians two major sources of tax revenue. Just look at what happened in Europe (and Japan). Before the VAT, the burden of government spending wasn’t that much higher in Europe than it was in the United States. Once VATs were adopted, however, that enabled a vast expansion of the welfare state.

This is why I’m worried about the Rand Paul and Ted Cruz tax plans. On paper, both plans are very good, dramatically lowering income tax rates, significantly curtailing double taxation, and also abolishing the corporate income tax. But I don’t like that they both propose a VAT to help make up the difference. It’s not that I think they have bad intentions, but I worry about what happens in the future when a bad President takes office and has the ability to increase both the income tax and the value-added tax. When the dust settles, we’re France or Greece!

By contrast, if we do some type of tax reform that doesn’t include a VAT, the worst thing that could happen when that bad president takes office is that we degenerate back to the awful tax code we have today. Which would be unfortunate, but not nearly as bad as today’s income tax with a VAT on top.

Bad since I’ve already addressed this issue, let’s focus on a part of the Paul and Cruz tax plans that has received very little attention.

Both of them propose to get rid of the payroll tax, which is the part of your paycheck that goes to “FICA” and is used to help fund Social Security and Medicare.

Alan Viard of the American Enterprise Institute has a column in U.S. News & World Report that explores the implications of this repeal.

Would you like to see the FICA item on your pay stub go away and be able to keep the 7.65 percent that the payroll tax takes out of your paycheck? If so, Republican presidential candidates Rand Paul and Ted Cruz have a deal for you – each of them has proposed getting rid of the tax. The senators’ plans would also eliminate the other 7.65 percent that the government collects from your employer, which you ultimately pay in the form of lower wages.

That sounds good, right? After all, who wouldn’t like to keep 15.3 percent of their income that is now being siphoned off for entitlement programs.

But here’s the catch. As Alan explains, other revenue sources would be needed to finance those programs, particularly Social Security.

The payroll tax finances two large benefit programs – 6.2 percent goes to Social Security and 1.45 percent goes to Medicare Part A. If the payroll tax went away, we would have to find another way to pay for those benefits. Paul and Cruz would turn to a value added tax, known as a VAT. …using it to pay for Social Security would have repercussions for the program that the candidates haven’t thought through. …once the payroll tax was gone, Social Security would no longer be a self-financed program with its own funding source. Instead, it would draw on the same general revenues as other government programs.

Viard thinks there are two problems with using VAT revenue to finance Social Security.

First, it means that there’s no longer a limit on how much money can be spent on the program.

…having a separate funding source for Social Security has been good budgetary policy. It’s kept the program out of annual budget fights while controlling its long-run growth – Social Security spending is limited to what current and past payroll taxes can support.

Second, replacing the payroll tax with a VAT eliminated the existing rationale for how benefits are determined.

And that will open a potential can of worms.

…what would happen to the benefit formula if the payroll tax disappeared and Social Security was financed by general revenue from the VAT? Paul and Cruz haven’t said. …One option would be to switch to a completely different formula, maybe a flat monthly benefit for all retirees. …that would be a big step, cutting benefits for high-wage workers and posing tricky transition issues.

I imagine there are probably ways to address these issues, though they might wind up generating varying degrees of controversy.

But I’m more concerned with an issue that isn’t addressed in Viard’s article.

I worry that eliminating the payroll tax would make it far harder to modernize Social Security by creating a system of personal retirement accounts.

With the current system, it would be relatively easy to give workers an option to shift their payroll taxes into a retirement account.

If the payroll tax is replaced by a VAT, by contrast, that option no longer exists and I fear reform would be more difficult.

By the way, this is also the reason why I was less than enthused about a tax reform plan proposed by the Heritage Foundation that would have merged the payroll tax into the income tax.

Yes, I realize that genuine Social Security reform may be a long shot, but I don’t want to make that uphill climb even more difficult.

The bottom line is that I don’t want changes to payroll taxes as part of tax reform, particularly when it would only be happening to offset the adverse distributional impact of the VAT, which is a tax that shouldn’t be adopted in the first place!

Instead, let’s do the right kind of tax reform and leave the payroll tax unscathed so we’ll have the ability to do the right kind of Social Security reform.

P.S. Some of you may be wondering why Senators Paul and Cruz included payroll tax repeal in their plans when that leads to some tricky issues. The answer is simple. As I briefly noted above, it’s a distribution issue. The VAT unquestionably would impose a burden on low-income households. That would not be nice (and it also would be politically toxic), so they needed some offsetting tax cut. And since low-income households generally don’t pay any income tax because of deductions, exemptions, and credits, repealing the payroll tax was the only way to address this concern about fairness for the less fortunate.

P.P.S. Since we have a “pay-as-you-go” Social Security system, with benefits for current retirees being financed by current workers, some people inevitably ask how those benefits will be financed if younger workers get to shift their payroll taxes into personal retirement accounts. That’s what’s known as the “transition” issue, and it’s a multi-trillion-dollar challenge. But the good news (relatively speaking) is that coming up with trillions of dollars over several decades as part of a switch to personal accounts will be less of a challenge than coming up with $40 trillion (in today’s dollars) to bail out a Social Security system that is actuarially bankrupt.

P.P.P.S. It goes without saying (but I’ll say it anyhow) that class-warfare taxation is Obama’s (and Hillary’s) ostensible solution to Social Security’s shortfall.

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Because of the budgetary implications, I think it’s more important to deal with Medicaid and Medicare than it is to address Social Security.

If left on autopilot, Social Security will eventually consume an additional 2 percent of the private economy.

That’s not good news, but Medicaid (which now includes a big chunk of Obamacare) and Medicare are much bigger threats.

Hopefully, though, we don’t need to engage in fiscal triage and we can reform all the big entitlement programs.

So let’s look at why Social Security needs to be modernized.

First and foremost, the programs is about $40 trillion in the red. And that’s after adjusting for inflation!

Moreover, the longer we wait, the more difficult reform will be. I don’t always agree with the policy prescriptions of the Committee for a Responsible Budget, but they are very sober-minded in their analysis. And this chart from one of their recent publications shows that waiting until 2026 or 2034 will require more radical changes.

So it should be obvious we need reform, but now the question is what kind of reform.

Some people think the key goal is making the program solvent, but that’s the wrong focus. Sort of like making balance the goal of budgetary policy.

Instead, the goal should be creating a freer society and smaller footprint for government. And that’s why I think personal retirement accounts are the right goal.

And to understand the implications, consider these excerpts from a column in today’s Wall Street Journal. Professor Jeremy Siegel of the University of Pennsylvania explains how the Social Security system has made his retirement less comfortable.

Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits. Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640. This sounds like a good deal… But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund. …the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. …are affluent seniors making out like bandits? Not at all. The bandit is the federal government, which provides benefits that are millions of dollars short of what anyone whose earnings are at or above the tax cap easily could have accumulated on his own.

In effect, Professor Siegel has been forced to pay for a steak and he’s getting a hamburger. Which is a good description of how all entitlement programs operate.

And it’s not just high-income people who get a bad deal. Social Security is particularly bad for young people. And many minorities also are disadvantaged because of their shorter life lifespans.

Moreover, everyone will pay more for their steak and get even less hamburger if politicians deal with the program’s giant shortfall by imposing the wrong type of reform.

But it’s not just that Social Security is bad for individuals. It’s also a burden on the overall economy.

Andrew Biggs of the American Enterprise Institute looks at how private savings is impacted by government-run retirement schemes

fixing Social Security by raising taxes – or, going further, expanding Social Security as many progressives favor – won’t increase retirement income so much as shift it from households to government. …A new report from Canada’s Fraser Institute looks at how Canadian households’ personal saving habits responded to increases in the tax rates used to finance the Canada Pension Plan (CPP). …The Fraser study, authored by Charles Lammam, François Vaillancourt, Ian Herzog and Pouya Ebrahimi,  found that for each dollar of additional CPP contributions, Canadian households reduced their personal saving by around 90 cents. As a result, total saving – and thus total future retirement income – would increase by a lot less than you’d think. Households would receive more income from the CPP but less from their own saving.

These results are similar to what’s been found in other nations.

I found a similar result across OECD countries: when a country’s government provided an additional dollar of retirement benefits, retirees provided for themselves about 93 cents less in income from savings and work in retirement. …a 2003 analysis by Suzanne Rohwedder and Orazio Attanasio which found that, for the United Kingdom’s earnings-related pension system, individuals reduced personal saving by 65 to 75 cents for each dollar of benefits they expected to receive from the government.

Here’s a very powerful chart on the relationship between private savings and government retirements benefits from another one of Andrew’s articles.

Wow, that’s a powerful relationship. And Biggs isn’t the only expert to produce these results.

All of which underscores why I think we should have a system similar to what they have in Australia or Chile (or even the Faroe Islands).

Here’s my video making the case for personal retirement accounts.

P.S. Two economists at the Federal Reserve produced a study examining why Social Security was first created. It might seem obvious that it was a case of politicians trying to buy votes by creating dependency, but they actually go through the calculations in order to explain how it made sense (from the perspective of people alive at the time) to create a program that now undermines the well-being of the nation.

A well-established result in the literature is that Social Security tends to reduce steady state welfare in a standard life cycle model. However, less is known about the historical effects of the program on agents who were alive when the program was adopted. …we estimate that the original program benefited households alive at the time of the program’s adoption with a likelihood of over 80 percent, and increased these agents’ welfare by the equivalent of 5.9% of their expected future lifetime consumption. …Overall, the opposite welfare effects experienced by agents in the steady state versus agents who experienced the program’s adoption might offer one explanation for why a program that potentially reduces welfare in the steady state was originally adopted.

Gee, what a shocker. Ponzi schemes benefit people who get in at the beginning of the scam.

P.P.S. Speaking of Ponzi schemes, here’s the case for 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.

P.P.P.S. I’m not sure whether Hillary’s plan or Obama’s plan for Social Security would be worse.

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Chile is one of the world’s economic success stories.

Reforms in the 1980s and 1990s liberalized the nation’s economy and resulted in rapid increases in economic growth and big reductions in poverty.

Unfortunately, the current government is pushing policy in the wrong direction.

This drift toward statism has been unfortunate, featuring higher tax burdens, more spending, and increased intervention.

But I’ve always assumed that Chile’s private pension system would be safe from attack. After all, as noted in a new column for Investor’s Business Daily by Monica Showalter, it’s been a huge success.

Chile’s 35-year old private pension program…is working spectacularly well. …savings, ownership, control, responsibility and wealth building…are the pillars of the Chilean Model — and have as their ultimate reward a comfortable retirement, which Chileans now do.

But Monica warns that an ongoing education campaign is necessary to make sure that workers realize the benefits of the system.

And that’s been lacking.

…successive socialist governments in Chile have pretty well limited their recognition of the Chilean Model to criticism of it, many of them still unhappy that it’s not a state model that’s providing such high returns. …All the issues that had been called problems were largely the result of widespread public ignorance of economics…the people who should know better aren’t educating the public.

Given that Chile has enjoyed such strong growth in recent decades, you would think ordinary people would be happy, even if they’re not aware of the relationship between pro-market reforms and rising living standards.

And since Chile has grown far faster than other nations in Latin America, you would think that the political elite actually would understand that there is a strong relationship between economic freedom and national prosperity.

But that’s not the case, and the current left-leaning government is an obvious example. It even created a commission to review Chile’s pension system, and that decision was perceived as an effort – at least in part – to undermine support for the private system.

Fortunately, it’s very difficult to look closely at the Chilean system and conclude that personal retirement accounts have been unsuccessful.

Professor Olivia Mitchell of the Wharton School at the University of Pennsylvania served on the Commission and wrote a column based on that experience for Forbes.

She starts by acknowledging Chile’s personal retirement accounts are a gold standard for reform and then asks why there’s a desire to change something that works.

Chile’s retirement system has been hailed as “best in class” by pension experts near and far. The country’s fabled individual and privately-managed accounts include around 10 million affiliates, hold $160 billion in investments, and pay retirement benefits to over a million retirees. So why did President Michelle Bachelet establish a Pension Reform Commission that just delivered to her 58 specific reforms and three comprehensive proposals to overhaul remodel Chile’s retirement system?

A benign explanation for the Commission is that it’s a helpful way of helping people learn about the system.

Ms. Mitchell (no relation, by the way) points out that workers in Chile suffer from genuine and widespread ignorance.

…only a handful (19% of men, 11% of women) know how much they contribute to the accounts: 10% of pay. This underscores my own research showing that most Chileans had no idea how much they paid in commissions, how their money was invested, or how their benefits would be determined at retirement. Only one-fifth of the participants had the faintest idea about how much money they held in their accounts (even within plus or minus 20%!).

But if those people paid close attention, they’d learn that the private system – particularly when combined with the government’s safety net – does a very good job of protecting the less fortunate.

Chile’s retirement system actually does a rather remarkable job of protecting against old age financial destitution. …Adding the means-tested to the self-financed pension generates replacement rates of about 64%, levels even above what retirees in the US get from social security.

Nonetheless, some of the Commissioners want to weaken the current system and give government a bigger role.

Prof. Mitchell is not impressed by their thinking.

…reforms offered by others on the panel have a major flaw: these would – slowly or rapidly – eat into the money so painstakingly built up in the private accounts over time. My view, along with the majority of the Commissioners, was that wrecking Chile’s funded pension system is not the answer. Instead, this would destroy decades of national saving and economic growth, not to mention the well-being of future generations. This is an especially critical concern in view of Chile’s rapid aging: this nation is set to become the oldest country in South America within 15 years. …Chile needs a resilient retirement system that encourages continued work, incentivizes saving, and offers credible pension promises that can actually be paid when the time comes. It would be unfortunate to see Chile dismantle the system that has done so well for so many, over the past 35 years.

The good news, as you can see from the column, is that most Commissioners don’t want radical changes to Chile’s private pension system.

This is a positive outcome. Assuming, of course, that the current left-wing government follows their recommendations.

What we don’t know, though, is whether other governments learn any lessons from all this analysis.

America’s Social Security system has gigantic unfunded liabilities, for instance, and many other nations also have big fiscal shortfalls in their tax-and-transfer systems operated by their governments.

The right answer is a transition to personal retirement accounts. That’s what will happen if policy makers from elsewhere in the world learn from Chile’s success.

P.S. This comparison of Chile and Cuba tells you all you need to know about markets vs statism.

P.P.S. Here’s a comparison of real savings in Australia’s system of private accounts compared to the growing debts of America’s pay-as-you-go government-run system.

P.P.P.S. If you want to see a strong case for personal retirement accounts, click here for an explanation from the man most responsible for Chile’s remarkable reforms.

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America has a giant long-run problem largely caused by poorly designed entitlement programs such as Social Security, Medicare, and Medicaid.

So when I wrote last month about proposals by some Democrats to expand Social Security, I was less than enthusiastic.

…demographic changes and ill-designed programs will combine to dramatically expand the size of the public sector over the next few decades. So it’s really amazing that some politicians, led by the clownish Elizabeth Warren, want to dig the hole deeper. …I’m surprised demagogues such as Elizabeth Warren haven’t rallied behind a plan to simply add a bunch of zeroes to the IOUs already sitting in the so-called Social Security Trust Fund. …If Hillary winds up endorsing Warren’s reckless plan, it will give us another data point for our I-can’t-believe-she-said-that collection.

But it turns out I may have been too nice in my analysis.

As reported by USA Today, independent researchers have discovered that Social Security is even more bankrupt than suggested by official estimates.

New studies from Harvard and Dartmouth researchers find that the SSA’s actuarial forecasts have been consistently overstating the financial health of the program’s trust funds since 2000. “These biases are getting bigger and they are substantial,” said Gary King, co-author of the studies and director of Harvard’s Institute for Quantitative Social Science. “[Social Security] is going to be insolvent before everyone thinks.” …Once the trust funds are drained, annual revenues from payroll tax would be projected to cover only three-quarters of scheduled Social Security benefits through 2088.

By the way, I’m not overly enamored with this analysis since it is based on the assumption that the Social Security Trust Fund is real when it’s really nothing but a collection of IOUs.

But if you don’t believe me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.

These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

In other words, what really matters is that Social Security spending is climbing too fast and consuming an ever-larger share of economic output.

That means – in the absence of reform – that more and more money will be diverted from the economy’s productive sector, in the form of taxes or borrowing, to finance benefits.

And when I write “more and more money,” that’s not a throwaway statement.

Returning to the USA Today report, academic experts warn that the long-term shortfall in the program is understated because it is based on 75-year estimates even though the program doesn’t have an expiration date.

The bigger problem with the Social Security Administration is not disclosure, it’s accounting, said Laurence Kotlikoff, a Boston University professor of economics… Kotlikoff…wants the agency to calculate its liabilities using fiscal gap accounting, which considers the difference between the government’s projected financial obligations and the present value of all projected future tax and other revenue. …Under this accounting system, SSA’s projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088). …17 Nobel Prize-winning economists have endorsed Kotlikoff’s push for the SSA and other government agencies to use the fiscal gap accounting method more broadly. “We have a situation that is like Enron accounting,” Kotlikoff said. “And the public doesn’t want to hear about it.”

At the risk of being pedantic, I’m also not enamored with either approach mentioned in the above passage.

Sure, we should acknowledge all expenses and not arbitrarily assume the program disappears after 75 years, but the approach used to calculate “unfunded liabilities” is artificial since it is based on how much money would need to be invested today to finance future promised benefits (whether for 75 years or forever).

Needless to say, governments don’t budget by setting aside trillions of dollars to meet future expenses. Social Security, like other programs, is funded on a pay-as-you-go basis.

That’s why the most appropriate way to measure the shortfall is to take all projected future deficits, adjust them for inflation, and calculate the total. When you do that, the Social Security shortfall is a staggering $40 trillion.

And that’s based on just a 75-year estimate, so the real number is much higher.

Though keep in mind that this is just an estimate of the fiscal shortfall. What really matters is the total level of spending, not how much is financed with red ink.

Which is why the only real answer is genuine reform.

For further information, here’s the video I narrated for the Center for Freedom and Prosperity on the need to modernize the system with personal retirement accounts.

But if you prefer to trust politicians, you can always support the left’s favored solution.

P.S. You can enjoy some previous Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

P.P.S. The “Trust Fund” is real only in the sense that the government’s legal authority to pay benefits will be constrained when the IOUs are used up. That’s why the USA Today article says that the government at that point would be able to pay only about 3/4ths of promised benefits (though one imagines that future politicians will simply override that technical provision and require full payments).

P.P.P.S. Many nations have adopted genuine reform based on private retirement savings, including Australia, Sweden, the Faroe Islands, Chile, and The Netherlands.

P.P.P.P.S. Because of lower life expectancies, African-Americans are very disadvantaged by the Social Security system. A system of personal accounts presumably wouldn’t help them live longer, but at least they would have a nest egg to pass on to their kids.

P.P.P.P.P.S. And don’t fall for the false argument that financial markets are too unstable for personal retirement accounts

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Last month, I posted “the cartoon argument” for Social Security reform.

My main goal, as an American, is to achieve this important reform in the United States.

And I’ve tried to bolster the argument by citing lots of hard data, including the fact that “funded” accounts already exist in nations such as Australia, Chile, Sweden, and the Netherlands.

In this spirit, I wrote an article for the most recent issue of Cayman Financial Review, and I looked at the issue from a global perspective. I first explained that demographics are destiny.

It is widely believe that aging populations and falling birth rates represent one of biggest global challenges for long-term economic stability. How can a nation prosper, after all, if there are more and more old people over time and fewer and fewer workers? Don’t these demographic changes put every-growing fiscal burdens on a shrinking workforce to support the elderly, leading to crippling tax burdens and/or enormous levels of debt? In most cases, there are no good answers to those questions. So it is quite likely that many nations will face serious economic and fiscal challenge… Here are some charts showing the age profile of the world’s population in both 1990 and 2100. As you can see, demographic changes are turning population pyramids into population cylinders. …virtually every industrialized nation is undergoing demographic changes that will produce some very painful fiscal consequences.

But not all nations are in trouble.

there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies. And other nations, including Sweden, Australia, Switzerland, and the Netherlands, have much smaller long-run challenges than other industrialized countries with similar demographic profiles.

Why are these jurisdictions in stronger shape?

Simply stated, they have personal retirement accounts.

Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze. Whether they rely on occupational pensions, individual accounts, or even central provident funds, the common characteristic is that workers automatically set aside a portion of current income so it can be invested in some sort of retirement vehicle. Over several decades, this results in the accumulation of a substantial nest egg that then is used to provide retirement income.

And there are now about 30 nations that have implemented this critical reform…though that number unfortunately is dwarfed by the number of countries that haven’t modernized their tax-and-transfer schemes.

For advocates of funded pension systems, there is good news and bad news. The good news is that there has been a dramatic increase in jurisdictions that have adopted some form of private retirement system. …the bad news is that mandatory private retirement systems still only cover a small fraction of the world’s workers. The vast majority of workers with retirement plans are compelled to participate in pay-as-you-go government schemes.

Unsurprisingly, I explain why personal retirement accounts are much better for the overall economy.

Economists have been concerned about a triple-whammy caused by traditional tax-and-transfer retirement schemes. First, payroll taxes and other levies discourage labor supply during peak working years. Second, the promise of retirement benefits undermines a very significant incentive to save. Third, the provision of retirement benefits discourages labor supply once a worker reaches retirement age. …Systems based on private savings, by contrast, have very little economic downside. Workers are compelled to save and invest some portion of their income, but all of that money will be correctly seen as deferred compensation. …Perhaps equally important, second-pillar systems boost national savings, which means more funds available to finance productive private-sector investment.

Though I bluntly admit that there will be a significant transition cost.

The…common critique of mandatory retirement savings is that…if younger workers are allowed to shift their payroll taxes into personal accounts, policy makers would need to find lots of money over several decades (trillions of dollars in the American example) to fulfill promises made to existing retirees as well as workers that are too old to get much benefit from personal accounts. This critique is completely accurate. …But here’s the catch. While trillions of dollars are needed to finance the transition to a system of personal accounts, it’s also true that trillions of dollars are needed to bail out the current system. …The real question is figuring out the best way to climb out of that hole. From a long-term fiscal and economic perspective, personal accounts are the more attractive option.

To elaborate, it’s better to somehow find $5 trillion over several decades to finance the shift to personal retirement accounts than it is to somehow find $30 trillion over a longer period of time to bail out the current system.

For more information on personal accounts, you can click here for my video on the topic.

And to learn about Obama’s supposed solution, watch (with horror) this video.

P.S. You can enjoy some previous Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

P.P.S. While I’m a very strong advocate of personal retirement accounts (my Ph.D. dissertation was about Australia’s very good system), I’ll be the first to admit that it’s even more important to modernize Medicare and Medicaid.

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We have some good news to share.

A government has just announced that it is going to end the unfair practice of giving government bureaucrats pension benefits that are far greater than those available for workers in the economy’s productive sector.

Can you guess which jurisdiction took this important step, notwithstanding the greed, political sophistication, and power of government bureaucracies?

Is it the federal government in Washington, which provides bureaucrats with much higher levels of overall compensation than workers in the private sector?

Is it Ireland, which a few years ago actually cut bureaucrat salaries by more than 13 percent?

Is it California, which is infamous for over-compensated bureaucrats?

Is it Denmark, which has the world’s most expensive bureaucracy?

Is it Italy, which has some of the most coddled government bureaucrats in the world?

Is it New Jersey, where it’s possible for a bureaucrat to have six government jobs at the same time?

Is it the Cayman Islands, which actually contemplated the imposition of an income tax to finance its bloated bureaucracy?

Is it Portugal, which overpays bureaucrats more than any other nation?

Those jurisdictions are all be good guesses. Or, to be more accurate, that’s a good list of jurisdictions where reform is desperately needed.

But all those guesses are wrong. The nation that is ending special pension privileges for government bureaucrats is the People’s Republic of China.

Yes, you read correctly. A communist-run nation is implementing this pro-market reform. Here are some of the details from CNTV.

China will reform its public sector pension system to reduce disparity between the public and private sectors, Vice-Premier Ma Kai said Tuesday… Under China’s dual pension system, civil servants and employees in state agencies do not need to pay for their pensions — the government provides full support for them. But employees of private enterprises have to pay 8 percent of their salary to a pension account. After retirement, private urban employees usually get a pension equal to about half of their final salary, but civil servants get much more without making any financial contribution. …now the reform is coming. The aim is to build a system for Party, government and public institution staff that is similar to the one used by the private sector. This move will affect around 37 million people: 7 million civil servants and 30 million public institution staff.

Wow, bureaucrats will have to live under the same rules as folks in the private sector.

What a radical concept! Maybe we could even try it in the United States at some point.

By the way, one additional indirect feature of the story is worth a mention. China actually has the beginnings of a private Social Security system.

Because the system is still developing, I don’t put it on my list of nations with private Social Security (though it is on the Social Security Administration’s list), but the goal is to slowly but surely shift to a funded system.

Assuming that actually happens, China could mitigate the fiscal consequences of a very large demographic crisis caused by that nation’s barbaric one-child policy.

In any event, China’s at least moving in the right direction (see here, here, and here for more information), which is more than can be said for the United States.

P.S. While China has moved in the right direction in recent decades, it still gets a relatively low score from Economic Freedom of the World. Which helps to explain why I think it’s silly for people to fear the supposed Chinese Tiger.

P.P.S. If you want to see far more striking examples of Chinese people being successful, check out Hong Kong and Taiwan.

P.P.P.S. Though at least some Chinese government officials have a very perceptive understanding of the European welfare state.

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I confess that I get a bit of perverse pleasure when a left-leaning media outlet screws up and inadvertently shares information that helps the cause of limited government.

A New York Times columnist, for instance, pushed for a tax-hiking fiscal agreement back in 2011 based on a chart showing that the only successful budget deal was the one that cut taxes.

The following year, another New York Times columnist accidentally demonstrated that politicians are trying to curtail tax competition because they want to increase overall tax burdens.

Now it’s happened again.

In a major story on the pension system in the Netherlands, the New York Times inadvertently acknowledged that genuine private savings is the best route to obtain a secure retirement.

Let’s look at a few excerpts, starting with some very strong praise for the Netherlands in the article.

Imagine a place where pensions were not an ever-deepening quagmire, where the numbers told the whole story and where workers could count on a decent retirement. …That place might just be the Netherlands. And it could provide an example for America… “The rest of the world sort of laughs at the United States — how can a great country like the United States get so many things wrong?” said Keith Ambachtsheer, a Dutch pension specialist who works at the University of Toronto… The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. …The Dutch approach bears little resemblance to the American practice of shielding the current generation of workers, retirees and taxpayers while pushing costs and risks into the future, where they can metastasize unseen.

Interestingly, the article doesn’t explain what makes the Dutch system so superior to its American counterpart, but the phrase “each generation should pay its own costs” is a big hint.

That basically means that the system is not based on inter-generational redistribution, which is a core feature of pay-as-you-go schemes such as America’s bankrupt Social Security system.

That’s important, but what’s really key is that the Dutch system is based on private savings and private investment. It’s not a pure libertarian system, to be sure, since there are government mandates (such as high mandatory savings to finance generous old-age payments), but it is definitely a far more market-based system than what we have in America.

Here are some details.

About 90 percent of Dutch workers earn real pensions at their jobs. Their benefits are intended to amount to about 70 percent of their lifetime average pay… For this and other reasons, the Netherlands has for years been at or near the top of global pension rankings compiled by Mercer, the consulting firm, and the Australian Center for Financial Studies, among others. Accomplishing this feat — solid workplace pensions for most citizens — isn’t easy. For one thing, it’s expensive. Dutch workers typically sock away nearly 18 percent of their pay, most of it in diversified, professionally run pension funds. That compares with 16.4 percent for American workers, but most of that is for Social Security, which is intended to provide just 40 percent of a middle-class worker’s income in retirement.

And it’s worth noting that a system based on private savings also means that there is lots of money that can be invested.

And “lots of money” isn’t just a throwaway line. The Netherlands leads the OECD in private pension assets, measured as a share of economic output.

It’s worth pointing out, by the way, that the leading nations in this chart (Chile, Iceland, Australia, Switzerland, and Denmark) generally have systems based at least in part on private mandatory savings.

And given that big piles of money are very tempting targets for greedy governments, it’s also worth noting that the Dutch haven’t allowed the system to get politicized.

There’s not the slightest whisper of a rumor, for instance, that the government will grab the money.

Moreover, unlike the United States (particularly when discussing the pension systems operated by state and local governments), pension funds actually have to maintain adequate assets to pay promised benefits.

And no using funky math!

Imagine a place where regulators existed to make sure everyone followed the rules. …standing guard over it is a decidedly capitalist watchdog, the Dutch central bank. …the central bank in 2002 began to require pension funds to keep at least $1.05 on hand for every dollar they would have to pay in future benefits. If a fund fell below the line, it had just three years to recover. …The Dutch central bank also imposed a rigorous method for measuring the current value of all pensions due in the future. …Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. …He explained that in the Netherlands, regulators believe that basing the cost of benefits today on possible investment gains tomorrow is the same as robbing tomorrow’s workers to pay for today’s excesses.

No wonder the Netherlands ranks so much higher than the United States in the rule of law index.

Now that I’ve said what’s good about the system, I’ll be the first to admit that it could be improved.

First and foremost, the Dutch system is basically a near-universal defined-benefits regime, which means that workers get a guaranteed amount of money and it is up to the fund administrator to make sure there is enough money.

This type of system has been very unstable in the United States because of chronic underfunding. The Dutch so far seem to have avoided that problem, but I still prefer the defined-contribution systems, which means that workers get back exactly what they paid in, plus all the earnings.

And the good news, from this perspective, is that the Dutch are moving in this direction according to a British service that monitors global pension developments.

Occupational pension schemes in the Netherlands are still mostly defined benefit (DB) schemes. But as companies are seeking to control costs and risk, a massive shift from final salary career average plans is taking place. Also, the popularity of defined contribution (DC) and hybrid schemes is growing.

One thing I wouldn’t change about the Dutch system is the tax treatment. The Dutch have what is sometimes called an exempt-exempt-tax (EET) system, which is sort of like a traditional IRA (i.e., no double taxation).

The Dutch government explains that the income is taxed only one time.

No tax is levied on pension contributions. And the growth of pension rights via the pension fund’s investment performance remains untaxed. Pension benefit is only taxed when it is received.

And let’s hope it stays that way, though the welfare state in the Netherlands is so large that the nation does have some significant long-run fiscal challenges. And that could lead future politicians to sacrifice the stability of the private pension system in order to prop up big government.

That being said, I would gladly trade the U.S. Social Security system for the Dutch mandatory pension system. An imperfect system based on private savings is always a better bet than a perfectly terrible tax-and-transfer scheme.

For more information, here’s the video I narrated explaining why personal retirement accounts are far superior to government-run schemes such as Social Security.

By the way, since I began this column by making fun of the New York Times, I may as well close it by sharing examples of biased and/or sloppy reporting by that outlet.

And none of this counts Paul Krugman’s mistakes, which are in a special category (see here, here, here, here, here, here, here, and here for a few examples).

P.S. I shouldn’t be too critical of the New York Times. After all, they ran a great piece by Pierre Bessard dealing with tax competition, fiscal sovereignty, and financial privacy. Heck, they once even let me pontificate on those issues.

P.P.S. While the Dutch system is far better than the American system, I think Australia is the best role model. Chile also is a big success.

P.P.P.S. You can enjoy some Social Security cartoons here, here, and here. And here’s a Social Security joke, though it’s too close to being true to be funny.

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