Social Security and Retirement Around the World

The United States and many other developed countries around the world face looming financial crises in their social security programs. For example, member countries in the Organization for Economic Cooperation and Development are projected to experience a roughly 50% increase in the share of GDP devoted to old age pension expenditures over the next fifty years, from 7.4% of GDP to 10.8% of GDP. ⁽¹⁾ The aging of the population is widely recognized as one important cause of these financial crises - most countries' programs are financed on a "pay as you go" basis, and a rising fraction of the population will be retired and collecting benefits as the population ages, causing program expenditures to swell. Less attention has been paid, however, to the fact that the provisions of social security programs often penalize work beyond the first age of benefit eligibility. If workers are induced to retire earlier as a result of these incentives, this will magnify the financial burden caused by population aging.

For over five years, NBER researchers Jonathan Gruber and David Wise have led a team of researchers in twelve countries in conducting a cross-country analysis of the relationship between social security and retirement. In the first stage of the research project, ⁽²⁾ Gruber and Wise documented the enormous disincentives for continued work at older ages in many countries. The authors also found a strong correspondence across countries between social security program incentives to retire early for a typical worker ("tax force" in the figure below) and the proportion of older persons that have left the labor force. The authors suggested that the relationship between incentives and early retirement was likely causal, but that further analysis would be required to establish this.

In "Social Security Programs and Retirement Around the World: Micro Estimation," (NBER Working Paper No. 9407), Gruber and Wise present the results of the second stage of this research project, which revisits the link between social security and retirement using micro data.

For this analysis, researchers in each country compile a large database of near retirement-age individuals from their country, compute the incentives for continued work for each individual, which depend on the provisions of the country's social security program and the individual's work history and family situation, then estimate models of retirement behavior.

Strikingly, Gruber and Wise find very similar results across countries: in ten out of twelve countries, workers are significantly less likely to retire when additional work results in larger increases in "social security wealth," the stream of benefits workers and their families receive in retirement. This strongly suggests a causal interpretation of the results from the first stage of the project. The authors conclude that in spite of non-trivial cultural differences across countries, there is an important relationship between the incentives for continued work resulting from the provisions of social security programs and the labor force participation of older workers.

To better illustrate the magnitude of the estimated relationship, researchers in each country simulate the effect of two sample policy changes, a three-year increase in the age of benefit eligibility and a move to a common social security system where benefits are equal to 60% of average lifetime wages. Researchers estimate that these policies would have large effects on retirement: averaging across countries, the three-year delay policy would reduce the proportion of men aged 56-65 out of the labor force by as much as one-third, while the common reform would have very different effects on countries depending on whether the common system is more or less generous than the country's current system.

In the next phase of the project, researchers will use the results and methods developed in this phase to estimate the fiscal impact of social security reforms on the balance sheets of the social security system and the government.

¹ "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Paper #305.

² "Social Security and Retirement Around the World," Jonathan Gruber and David A. Wise, eds., Chicago: University of Chicago Press, 1999.