The real problem is that many people are not saving a lot of
their income for retirement. Sure, they make social security "contributions" to
government pension plans all their lives, but as a general rule, that money is
not saved and invested. Rather, it is used to pay current retirees, with the
understanding (or not) that the next generation will finance the retirements of
current workers, and so on. Seniors do not have to be dependent on anyone, but
unfunded, pay-as-you-go government pension plans have helped make them so.
Like any Ponzi scheme, the world's social security scams
seemed to work well enough as long as there were always more
suckers to swindle. In the United States in 1940, there were
42 workers per retiree,
according to economist Walter Williams. As population
growth continues to slow, however, the jig is finally up.
Today, there are only three workers per retiree in the
United States, even with its relatively high birth rate by
industrialized country standards.
There are only two way to keep the charade going: a) raise
payroll taxes, or b) reduce benefits, either directly or by
raising the retirement age, as France has just done. Workers
understandably resist these modifications that change the
terms of the deal for the worse. After all, in the market,
such a unilateral action would be a clear breach of contract.
Their mistake is in imagining that governments are bound by
the rules of conduct and the reputational incentives that
constrain actors in the private sphere.
Here in Quebec, payroll taxes were raised from 3.6% of
pensionable earnings in 1986 to 9.9% by 2003. In our hybrid
system, the surplus between current contributions and
current payouts is placed in a fund and actually invested.
But as Éric Duhaime points out in
an Economic Note released by the Montreal Economic
Institute earlier this year, that fund is set to run out by
2037 if taxes are not raised further, or benefits reduced,
It didn't have to be this way—and it's not too late to chart
a fairer, more sustainable course for the future. As Duhaime
explains, the Chilean government actually transitioned from
a doomed Ponzi scheme to a system of individual retirement
savings accounts beginning way back in 1981. Retirees at the
time kept their benefits, and then-current workers had the
choice of opting into the new system with compensation for
their past payroll taxes. Today, almost all workers have
switched over to the new system, which averaged an annual
rate of return of 10.3% over its first 26 years. Quebecers
born in 1990 can expect a 5.1% rate of return on their
A greying world need not be a poorer world, and senior
citizens need not be dependent on "society" to take care of
them. We can all take responsibility for ourselves and plan
appropriately for retirement during our working years. As a
bonus, with more income actually being invested instead of
simply shifted around and consumed, economic growth will be
encouraged. All we need to do to make it happen is get our
governments to get out of the way.