Saving Retirement

Because of continuing increases in life expectancy, the number of eligible retirees is rising more rapidly than the tax revenue available to finance public pension benefits. The best solution would be to enact legislation that keeps constant the average life expectancy at the age of eligibility for full benefits.

CAMBRIDGE – Public pension programs around the world are in financial trouble. Because of continuing increases in life expectancy, the number of eligible retirees is rising more rapidly than the tax revenue available to finance benefits.

In the United States, the Congressional Budget Office projects the relative cost of the Social Security program’s old-age pension benefits to rise by more than a quarter over the next 25 years, from 4.9% of GDP today to 6.2% in 2038. Because the taxes that are earmarked to support Social Security do not automatically rise faster than GDP, either the growth rate of benefits must be reduced or tax rates must be increased.

One reason for the rapid rise in benefits stems from how they are adjusted for inflation. Under current US law, retirees’ benefits are automatically adjusted to account for increases in the traditional consumer price index (CPI). But experts have long understood that the CPI overstates the true increase in the cost of living, and that the resulting over-indexing of benefits should be fixed.

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