Social Security has done much to reduce poverty rates in the elderly. The program, originally known as Old Age, Survivors and Disability Insurance (OASDI), was signed into law in the United States by FDR in 1935. At that time, poverty among elderly in the U.S. exceeded 50%. The Center on Budget and Policy Priorities now claims that only 8.7% of the elderly live below the poverty line in the United States.
Like every government intervention, the Social Security Program had unintended consequences. According to economist Martin Feldstein (JPE 1974), Social Security crowds out personal saving by 30%-50%. This means the amount of money individuals would have saved for retirement in the absence of Social Security is significantly higher than the amount they currently save. Also, retirement programs can also induce individuals to leave the labor force (retire) before they would have otherwise.
Regarding the second issue, Jonathan Gruber and David Wise have published a book titled “Social Security Programs and Retirement around the World. The book examines how the structure of Social Security and retirement decisions are related. For instance, in the United States there are two popular ages to retire: age 65 (when individuals receive full retirement benefits) and age 62 (when individuals can receive early retirement benefits). On the other hand, in Germany citizens receive early retirement at age 63, normal retirement benefits at age 65 and we see corresponding spikes in the proportion of people leaving the labor force at those ages as well as age 60. Age 60? Germans who qualify for disability insurance at age 60 or about receive generous retirement-like benefits; hence the reason for the jump in the amount of people who retire at that age.
During the rest of this week, I will be examining different countries and their Social Security plans. Most of the material will come from the Gruber and Wise book, but I will also use other material.