I disagree with professor Martin Feldstein’s views on many points (How to rescue social security in an aging world,” Dec. 3, page 7). I do agree that most pay-as-you-go (PAYG) systems are in trouble. Some of the troubles come from the design of PAYG systems and some come from the way in which they are implemented. An open discussion of these aspects appears to be needed.
Launching a system to fund retirement brings the challenge of adequately funding the system, requiring either a large supply of funds or a substantial source of income.
Germany — the first country to adopt PAYG — in 1881 opted for a system in which employers, employees and general tax revenue funded payments for new retirees who had contributed little or nothing to their retirement account.
Much later, other countries followed that lead, but a few opted for fully funded systems, in which workers and their employers contribute to their individual accounts with the provision that the funds revert to the social security system in the event that they die before reaching retirement age.
The second system is flawed in that people who retire soon after its adoption would get little or no pension, while the first system must rely in perpetuity on a stable structure of employment, inflation, demographic change and mortality.
Feldstein focuses only on PAYG systems and pays virtually no attention to the need to forecast changes in factors that might be assumed as stable to make such systems operate smoothly. I think this is misguided.
The usual way in which mortality is forecast is flawed. Forecasts are based on the traditional use of “period life tables,” which are based on demographic data in a given year and the number of deaths in that year.
That by itself is a problem: If the period table for 2010 were used to forecast death rates for 2050, then the assumption is that people who die at, say, age 90 in 2050 are the same as people who died in 2010 at age 90. However, the former would have been born in 1960 and the latter in 1920. Is it certain that changes in the healthcare system, the social hygiene system and the standard of living would have had no effect on mortality?
If there are such effects, the period tables are bound to overestimate mortality, underestimate longevity and thus lead to bad outcomes for social security systems, even if all other factors are kept under control. What is worse, the assumptions used to construct period life tables bias the estimates even more.
For example, it is usually assumed that there is a “maximum age” beyond which nobody survives. For many years, Taiwanese life tables assumed that nobody reached their 61st birthday. A few years ago, local media reported a surprisingly large increase in longevity. Nobody reported that the calculation was based on the revised assumption that the maximum age was 85 and this accounted for most of the reported increase.
Most other assumptions in the calculations work in the same direction and, on balance, longevity estimates are too low. The use of period life tables has contributed to chronic underfunding of both PAYG and fully funded systems.
Cohort life tables, which are based on tracking lifespans for people born in particular calendar years, are much less prone to such distortions, but rely on forecasting methods, because data on recent cohorts is necessarily incomplete. They should generally be preferred, because the errors in forecasting are random whereas the errors in period life tables are chronically biased.
The demographic balance is also subject to change. The birthrate in most countries has decreased substantially since the threat of overpopulation became a serious topic of discussion. This has also contributed to the woes of social security.
As Feldstein said, if the number of workers increases more slowly than the number of retirees, the stresses on PAYG systems become worse.
However, assuming that the trend would continue forever is misguided. If the trend were to continue indefinitely, it would reach a point at which the working population is not large enough to produce the food and provide the medical care to keep reducing mortality. Then, difficult social choices would have to be made over whether to neglect vulnerable young people or vulnerable mature people. That would afftect a PAYG system, but not a fully funded system.
Feldstein’s focus on mixed PAYG systems has some merit, but seems to be misguided in the absence of complete information on how taxes on dividends, short-term gains and long-term gains from investments would be levied.
The focus on PAYG systems seems overly restrictive. It is not difficult to suggest a path to switch from the current system to a fully funded system by moving as-yet unborn future recipients to a plan that provides full funding at birth.
Instead of subsidizing families to have children, each child could be endowed at birth with an account with enough principal and a guaranteed interest rate of return on the accumulated funds sufficient to support the newborns’ living expenses in retirement. Such an account would be a substitute for the old social security system and would, in the long run, replace the PAYG system with a fully funded one. This is not a panacea — the issue of forecasting long-term inflation remains — but it would avoid or minimize the other problems, if done correctly.
Among other things, the individual could choose their age of retirement, which could alleviate problems if the cost of living between the time of birth and the contemplated date of retirement has changed compared with what was anticipated in the guaranteed interest offered at birth.
Emilio Venezian is a former visiting professor at Feng Chia University.
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
As Maldivian President Mohamed Muizzu’s party won by a landslide in Sunday’s parliamentary election, it is a good time to take another look at recent developments in the Maldivian foreign policy. While Muizzu has been promoting his “Maldives First” policy, the agenda seems to have lost sight of a number of factors. Contemporary Maldivian policy serves as a stark illustration of how a blend of missteps in public posturing, populist agendas and inattentive leadership can lead to diplomatic setbacks and damage a country’s long-term foreign policy priorities. Over the past few months, Maldivian foreign policy has entangled itself in playing
A group of Chinese Nationalist Party (KMT) lawmakers led by the party’s legislative caucus whip Fu Kun-chi (?) are to visit Beijing for four days this week, but some have questioned the timing and purpose of the visit, which demonstrates the KMT caucus’ increasing arrogance. Fu on Wednesday last week confirmed that following an invitation by Beijing, he would lead a group of lawmakers to China from Thursday to Sunday to discuss tourism and agricultural exports, but he refused to say whether they would meet with Chinese officials. That the visit is taking place during the legislative session and in the aftermath