Entitlement Lessons From Abroad A new report, by the Center for Strategic and International Studies, notes that many countries have recently enacted reforms that have trimmed benefit formulas, raised retirement ages, and put in place new funded pension systems that supplement or partially substitute for pay-as-you-go government systems.
Several countries – including Germany, Italy, Japan, and Sweden – have gone further and introduced “automatic stabilizers” into their public pension systems that, directly or indirectly, index benefits to the growth in the payroll tax base. These stabilizers may differ in design, but they have two crucial characteristics in common. First, they are all expressly designed to offset the full impact of demographically driven cost growth. And second, they are all self-adjusting. In effect, they put entitlements on a new kind of autopilot – one that is preprogrammed for cost constraint rather than for cost growth.
It’s ironic that other developed countries, most of which have faster-aging populations and more expansive welfare states than the United States, are leading the way on entitlement reform. Part of the explanation may be that, until recently, America’s age wave still loomed over the horizon, while in Europe and Japan aging populations have been burdening public budgets, forcing up payroll tax rates, and slowing economic growth for decades.
Part of the answer may also lie in America’s peculiar entitlement ethos. In Europe, government benefit programs may be fiercely defended, with the opponents of reform manning the barricades and calling general strikes. But in the end, everyone understands that they are part of a social contract that is subject to renegotiation and revision. In the United States, much of the public views Social Security and Medicare as quasi-contractual arrangements between individuals and the state. This mindset, which is encouraged by the misleading insurance metaphors in which the programs are cloaked, may make old-age benefits more difficult to reform in the United States than in Europe’s large welfare states.