The official retirement age in Japan is 60. – Getty Images
Here’s the good news: Social Security recipients — all 70+ million of them — will get a cost-of-living adjustment of 2.8% next year.
And the bad news: That’s not going to be enough to keep up with the current inflation rate. But don’t take my word for it — check out the latest data from the Trump administration itself. Just as the Social Security Administration was announcing the 2.8% raise, the Bureau of Labor Statistics said that inflation is now rising at a 3% annual rate.
Econ 101 taught us that when you’re not keeping up with inflation, your standard of living falls.
And speaking of falling living standards, I have to mention (as I usually do in these columns) that unless something is done to shore up Social Security’s finances, recipients could face sharp cuts — perhaps as much as 24% of their benefits— as soon as 2032.
What’s interesting at this critical moment is the fact that other Western nations face similar challenges. Europe and Japan also have rapidly graying societies, where more seniors are living longer — and therefore drawing benefits for longer — while fewer younger workers pay into the system. They too have tax structures and minimum retirement ages that, some say, need to be tweaked.
The question, then, is what are other countries doing to fix their public pension systems? And what can we learn from them? Here are some ideas.
Starting next year, citizens of retirement age (66 for most people, but rising to 67 by 2031) who want to keep working can earn up to 2,000 euros a month (about $2,330) without paying income tax on those earnings. They would still be subject to social security taxes. This “Aktivrente,” or active pension, is an attempt by the German government to address three issues simultaneously: labor shortages, retirement savings and tepid economic growth.
Could American “retirees” be induced to work if they didn’t have to pay income taxes on a big chunk of their earnings?
The full retirement age in the United Kingdom is currently 66, a year younger than for many Americans. But over a two-year period starting in January, it will rise to 67. And over another two-year period starting in 2044, Britain’s full retirement age will go up again, to 68. This gradual increase will ease the fiscal burden on Britain’s public pension system — although of course making citizens wait longer to reach full retirement age is hardly popular.
Should the U.S. retirement age — either the minimum age of 62 or the full retirement age of 67 — also be raised?
This country — consistently ranked as one of the world’s happiest — is doing something that might not make Danes too happy. It is linking its full retirement age, which is currently 67, to rising life expectancies, meaning that full retirement age will increase to 68 in 2030, to 69 in 2035 and to 70 in 2040, for those born in 1971 or later. The initiative is part of a 2006 government measure that acknowledges that as Danes live longer, they will also need to work longer to ensure the pension system’s sustainability. The change has drawn criticism from some unions and workers who argue it’s unfair to those in physically demanding jobs, although the Danish government is working with employers to help shift such workers into less physically demanding roles as they age.
Could U.S. federal and state governments and employers work together to find less stressful, less physically demanding jobs so some workers could work longer if they wanted or needed to?
Consider it the un-Denmark: The official retirement age is 60, and the vast majority of companies require that their workers retire at that age. But unofficially, some retirees work until they’re 65 in less demanding roles. I don’t think Japan can maintain such a low retirement age much longer, though. The average life expectancy there is 84 (compared with 78.4 for Americans, according to the World Bank). The country also has just two workers for every retiree, which said to be the world’s highest ratio of elderly to working-age people.
Japan’s worker-to-retiree ratio may be so low because of that country’s longstanding position of generally being closed off to immigration. The United States is also moving in that direction, at least at this moment in time, in a trend that could further lower our own worker-to-retiree ratio — which is currently about 2.7 to 1.
Should the U.S. increase its worker-to-retiree ratio by allowing more legal immigrants into the country to work and pay into the system?
The Swedes allow workers to divert a small percentage of their wages (2.5%) from that country’s equivalent of Social Security and put it into the stock market. I’ve written about this before. Stocks can go down, of course — suddenly and sharply — but history shows that over the long run, equities are the place to be.
Should American workers be allowed to take a small portion of what they now pay in Social Security taxes and put it into stocks? A well-diversified basket of index funds could boost returns over the long run. And don’t forget the incredible power of compounding, which can be a way to get rich slowly — just in time for retirement.
Many advanced countries also have higher Social Security taxes than ours — which totals 12.4%, split between worker and employer. According to the International Social Security Association, Austrian companies and workers have a combined retirement tax of 22.8%. In France it’s 28.3%, and in Italy it’s 33%. You get the idea.
This is a moot question, given antipathy toward higher taxes in Congress (at least this Congress), but raising the rates paid by workers and companies would shore up Social Security’s finances and prevent the sharp cuts that are projected to begin in just a few years. And speaking of higher taxes, what about lifting the so-called cap on earnings? In 2026, the first $184,500 of someone’s salary is subject to Social Security taxes — but after that, not a dime.
Should mega-tycoons like Tesla TSLA and Space X CEO Elon Musk, Oracle ORCL Executive Chair Larry Ellison and Amazon AMZN Executive Chair Jeff Bezos pay more?
Again, this is a critical moment. More than 70 million Americans currently receive Social Security benefits. A lot of financial pain is fast approaching, unless our politicians act. We need to think differently and act urgently. Looking at what others have done could provide answers.
