Social Security isn’t looking so bad anymore, says the OECD

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The notion that the U.S. is stingy about government benefits in comparison with the rest of the wealthy world is widely held, and is mostly backed up by the data. But in the case of retirement benefits, it’s getting less true by the day. Yet few here in the States have caught on.

Consider what Chicago lawyer/rabblerouser Tom Geoghegan wrote in an entertaining In These Times essay back in December:

In May 2005, the Paris-based Organization for Economic Cooperation and Development (OECD) put out a sort of Michelin Guide to the pensions of the world’s 30 wealthiest nations: the United States, Ireland and their ilk. While the United States is rich, comparatively it’s a beggar at the bottom, with a Burger King-type pension, paying on average 39 percent of after-tax income at retirement. Others pay about 70 percent on average. Germany, Sweden: pick a country. Some pay even more.

Geoghegan had the numbers a little bit muddled: According to that 2005 OECD report, government-mandated pensions in the U.S. (Social Security, more or less) paid 39% of after-tax incomes for people whose pre-retirement earnings were twice the national average. For the OECD as a whole, that replacement rate averaged 59.4%. Still, the basic point was right: The stats showed the average U.S. worker getting a skimpier government-mandated retirement income (51% of pre-retirement income) than the average OECD worker (68.7%).

A couple of caveats: One is that U.S. has voluntary pension plans that, for those covered by them, upped the replacement rate for those with average earnings to 91.9% in 2005, according to the OECD. But most American workers aren’t lucky enough to be covered by such pension plans, so it seems fair to ignore them. The more important caveat is that most of the continental European countries whose generous pension promises drove up the OECD averages probably won’t actually be able to afford those pensions as their populations grow older. As I put it in my column this week:

Most of these governments haven’t put aside money for pensions. As the ranks of retirees grow and workforces do not, countries will have to either renege on commitments or tax the hides off future workers.

In fact, it’s readily apparent in the brand-new edition of the OECD’s Michelin Guide, Pensions at a Glance 2007, that the ratcheting back of pension promises has already begun. It’s Europe’s government-run version of what Dan Gross has called the “Cram Down” forced on workers by corporations in the U.S. Yeah, the OECD average pension promise (now 70.1% of average pre-retirement earnings) is still driven up by the profligate likes of Greece (110.1% of pre-retirement earnings). But the governments of continental Europe’s biggest economies have already begun facing up to demographic reality, and as a result their pensions don’t look nearly as good in relation to Social Security as they did just two years ago.

Here’s the OECD rundown (from 2005 and this month) on pensions in what were once known as the G7 countries, plus the Netherlands because it’s the subject of my column and because its well-funded pensions have actually gotten more generous. Don’t get too excited about the uptick in the U.S. replacement rate: It appears to be the statistical artifact of changes in how the OECD calculates average incomes. But the declines in other countries’ replacement rates are real.

Net replacement for average earner, mandatory pension programs, men, 2005:
Italy: 88.8%
Netherlands: 84.1%
Germany: 71.8%
France: 68.8%
Japan: 59.1%
Canada: 57.1%
United States: 51.0%
United Kingdom: 47.6%

Net replacement rate for average earner, mandatory pension programs, men, 2007:
Netherlands: 96.8%
Italy: 77.9%
France: 63.1%
Germany: 58.0%
Canada: 57.4%
United States: 52.4%
United Kingdom: 41.1%
Japan: 39.2%

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