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Unemployment Benefits and Social Security: Paying Seniors Not to Work

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Over the last few decades old-age pensions have begun to look more and more like just another unemployment benefits program -- and one without a set expiration date to worry about.

Benefits for those "disabled from work by age and invalidity" were first introduced in Germany in 1889. Then, being over 65 often meant a person could no longer work. These days it often just means one is being paid not to work.

Conventional unemployment insurance is expensive. In the U.S., repeated extensions and an unusually high unemployment rate set the price tag at $92 billion in fiscal 2012 alone. Still, that was only about 0.5 percent of GDP. Even in generous Europe these benefits amounted to just 1.6 percent of GDP in 2011.

There are also several good reasons for these programs, ranging from the old-fashioned -- income support and efficient automatic stabilizer -- to the modern -- better outcomes for job hunters. But make benefits too generous or extend them for too long and perverse effects set in. Europe is a case in point with unemployment rates ostensibly returning to the chronically high levels of the 1980s and 1990s.

What to say then about retirement benefits schemes?

First, they usually require a lot more money. Excluding disability, the U.S. Social Security Administration paid about $670 billion in Old Age and Survivors benefits to nearly 47 million people in 2013. About 20 million of them are retirees or survivors younger than 70. By contrast there were fewer than 4 million unemployment insurance beneficiaries in 2013.

The economic case for retirement pensions has also become much weaker. When work placed high physical demands on the body, old age was often synonymous with an inability to sustain oneself. Clearly, this is no longer true. Medicine and technology have both slowed physical decline and transformed the workplace.

Some will argue that public annuity programs offer an attractive form of insurance protecting individuals from outliving their savings. But this fails to explain why benefits are paid to relatively young individuals who are perfectly able to work and support themselves. Longevity risk is also fairly easy to manage so there is no obvious reason why these annuities cannot be purchased in private markets.

Finally, it is true that public pensions have become an important (and well hidden) form of income redistribution. But much of this can, and should, be accomplished instead through taxes and other existing programs -- unless the goal is to preserve the lack of transparency.

There are then good reasons to rethink and generally scale down existing public pension programs. Two important qualifiers must be added however.

First, none of these arguments applies to disability insurance for which there are more clear merits. Accidents, wars and epidemics can happen at any time and it seems plausible that the state is better able to pool these risks across different individuals and generations than the private market. The current system is prone to abuse and requires monitoring. But the core idea remains sound.

Second, a promise is a promise. This conversation must be about younger generations. Regardless of financial cost, we must honor our debts to everyone who contributed to the current system. A society that reneges on its obligations to some of its members has taken the first step towards authoritarianism.

These caveats aside, public pension programs must change. As it stands they lead to an enormous waste, not so much of money, but of human capital.

An obvious place to begin is by changing existing formulas so that benefits are not reduced when individuals choose to work until full retirement age. Alternatively, we could offer much more attractive benefits at retirement for those choosing to work longer. Both options are easy to introduce and mild experimentation can be used to optimize their design. But this can be only a start. More extensive restructuring must to be considered for future generations and others have studied the issue more than me.

Of course everyone, young and old, is free to choose not to work. Some may well prefer to concentrate their work over a few short years, and live off their private savings thereafter. Many sports and pop stars do just that. But, except for periods of child rearing or debilitating illnesses, there is no reason why society should incentivize this behavior.

In the 21st century, age is no longer a reason not to work. If Ronald Reagan and Hillary Clinton can cope with the demands of the Oval Office at 69, there is no compelling reason why millions of other talented seniors cannot be productively engaged in the workforce too. We must find ways to encourage them to do so. The future of our fast-aging societies will probably depend on that.

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