Social Security, as a concept and a practice, first emerged under Otto von Bismarck, the “Iron Chancellor” of Germany. He was chancellor in the period 1871-1890, and it was under him, just before he left, that the first Old Age and Disability Insurance Bill was passed in 1889. The system was viewed as a pension annuity. Workers paid into the system and began collecting pensions at the familiar age of 65. Now Bismarck, mind you, was not a socialist by any measure. Quite the contrary. So what was the level of the first ever social security contribution? It was 1.7 percent of earnings. Bismarck’s program, by the way, is still up and running in Germany today, 122 years later. Imagine that. Two world wars and so on later. Oh, and yes. Before Bismarck got around to pensions, he first passed a Health Insurance Bill in 1883 and an Accident Insurance Bill in 1884.
Our Social Security Act was signed into law on August 14, 1935. It took the Great Depression to produce that law. The rate set in that year was 1 percent of earnings, to be matched by the employer. The combined rate (which is what I always show hereafter, thus employee and employer contributions) began in the United States at 2 percent of income.
What I will show next is the history of contributions, in the United States and in Germany, throughout this history beginning in 1891 for Germany and from 1949 forward for both countries. In 1949 the U.S. rate was 2 percent in the United States and to 10 percent, same basis, in Germany.
The sources for this graphic are here (for the German rates, German-language Wikipedia) and here (for the U.S. from the Social Security Administration). The bulleted portion of the German curve is for years 1891, 1924, and 1928 respectively.
The striking difference shown by this graphic is that the German rate of contribution is significantly higher than the rate here at home. In both cases the employee and the employer contribute the same amount. Today these rates apply to earnings up to €63,600 (about $93,492) in Germany and $106,800 in the United States. In both countries the social security disbursement depends on the individual’s earnings history. In Germany a lower maximum income is used, €54,000, in the regions formerly part of East Germany; that region is getting a temporary reprieve from the full weight of contributions—presumably to stimulate the economy of that region.
Social security programs are not only viewed but also managed as insurance programs in Europe, thus as annuities. Contributions to these funds from annual government budgets are tiny and specifically related to extra benefits not directly related to the pension or disability funded by the contributions. For these reasons I think, virtually all European programs require much higher contributions from employees and employers than Social Security does in the United States.
The German rate, it turns out, is one of the lowest in Europe. In the following table I present the rates for eighteen European countries, Germany included, all based on old age, survivors, and disability insurance (OASDI) programs, in both cases including employee and employer contributions. The tabulation may be found in this publication of our Social Security Administration. I have deliberately left out countries (e.g. the United Kingdom with 23.8 and France with 16.55) because they either collect for other social programs or just for portions of the OASDI mix. The U.K. rate supports additional programs; France only collects for old age benefits under the shown category. Herewith the table:
| Austria | 22.8 |
| Belgium | 16.4 |
| Bulgaria | 22.0 |
| Czech Republic | 28.0 |
| Estonia | 22.0 |
| Finland | 21.7 |
| Germany | 19.9 |
| Greece | 20.0 |
| Italy | 32.7 |
| Lichtenstein | 23.1 |
| Lithuania | 26.2 |
| Luxembourg | 16.0 |
| Netherlands | 24.7 |
| Poland | 27.5 |
| Rumania | 38.5 |
| Slovak Republic | 18.0 |
| Sweden | 18.9 |
| Switzerland | 23.8 |
Please note that each country on this list has rates higher than the United States on a directly comparable basis. What this tells me is that these programs are differently administered than our program. I hope to discuss some of these differences in the future. They appear to derive from the fact that these programs are more independent of political influence and handled more like real annuities.
Filed under: Insurance, Social Security
The other reform they have that we do not is that the retirement age was raised to 67 in 2007, and there is a chance they will raise it to 70 soon.
When they did so, it impacted only those under 40, so there was plenty of time to adjust for younger workers.
Similar adjustments must be made here, although I would prefer an extension of the current sliding scale to allow people to decide when they want to start collecting and gradually move that scale to favor later retirement ages.
One wonders what would have happened if Social Security was run more like CALPERS, where significant investment in public companies is the norm, not just paper from the Treasury.
As a construction worker, it seems like Social Secuirty is the only thing I can count on, even the piddling amount that I would get, at least it would keep me out of dog food. Seems hard for me to believe my construction co-workers will have to work till 67 or even as you say to 70??? I am lucky because I am 62, but most of my younger co-workers still do not contribute to 401K as it is hard enough just to pay for the 2 kids, 2 cars, house, and all of life’s little economic tricks. I understand that SS is a huge part of the debt and the middle working class has to pay their fair share, however I do not see the wealthy along with U.S. Corp. paying their fair share. As there was a backlash 2 years ago, beware of having the low, and middle class pay more than their share, because they will vote, and the playing feild will be re-set as they see fit. The perception is that many U.S. billionaires and Corp pay 0 taxes, better fix that first.
Perception, but not fact.
There is no fair amount of taxes you can take to balance the budget, not from the rich, not from the middle class, not from the poor.
In fact, if you just took EVERYONES paycheck, 100%, you still don’t balance the budget.
That is how bad it is, taxing is not the solution.
Eat the rich, feed the poor, until there ain’t no more rich no more…
Wow, who knew Bismarck was such a “lefty”?
Hello again RGCONNER. I’ve got to ask, what are you talking about here?
Personal income in the U.S. is four times the national budget… so, the idea that 100% of it wouldn’t balance the budget is… well, bad math. Even total household incomes are more than twice the federal budget…
You must be thinking of trying to wipe out our federal deficit in one fell swoop… and that, of course, would take more than 100% of our incomes for years!
What struck me in this blog post has to do with how a people can decide to manage a system of retirement insurance in such a way that it does not become a huge problem, even with a nice, big, distorting demographic bubble like the baby boom.
I find it interesting too that the Germans have a lower cut off for their contributions than we do. I wonder what percentage of all earned income that lower cut off represents?
I recently heard an interesting commentary on the last revision of our Social Security System contribution rates. That revision was done in the late 1980s, as can be seen in the graphic above. Contribution levels were last revised—they were revised in order to be sure that SS withholding was taken on 95% of all earned income. Since then, the rich have gotten richer to the point that withholding on the first $106K earned now only covers around 85% of all earned income annually…
All so interesting, though I’m now getting off track a bit… and rambling a bit… and lunch time is over so…
Back to work for me.
Looking forward to the next installment on this hot topic!
First, a correction: I used the median number, ~$24,000, so I am a bit off. Damn Statistics…
So, the mean income is ~$36000x 130Million workers == $4.6T
Budget: 3.6T
That is NOT 4x the income. I think you mean GDP at ~14.6T which is the value of everything produced, not income. Not net earnings either, just the gross dollar value of all the goods and services.
The other key point is that Germany dealt with it’s baby boom issue 13 years before it happened. Because of the decimation of WWII, their baby boom is 10 years later than ours, and ours is just now coming into play.
That early intervention makes a huge difference in the run rate, not to mention that Germany’s system is more like CALPERS than Social Security: namely it does not only invest in paper from it’s own government.
Let me clarify where I got my numbers, RGConner. I’ll try and remember to cite my sources from now on. It is a good habit to cultivate.
The ~$12 Trillion I was referring to is the U.S. Personal Income, as stated by the Census Bureau in these two places:
http://www.census.gov/compendia/statab/2011/tables/11s0677.pdf
http://www.census.gov/compendia/statab/2011/tables/11s0672.pdf
Now, if you want to stick with actual money income… then we’re still talking about $8.072 trillion… as can be seen here:
http://www.census.gov/hhes/www/income/data/historical/people/P01AR_2009.xls
But really, I think we’re all in agreement here that what is needed is a more rational system of taxing, spending and managing our collective money to do the things that we do best collectively.
Cheers.
Monique,
I see where you are coming from, and I think your second number is closer.
However, it would include some 2.1T in government benefits, as well as 1.7T in income from investments.
So that explains the discrepancy of what people make as wages, vrs the total income of people in the United States.
Setting that aside, taxing and the sustainability of expenditures is what is up for debate.
It really bothers me when the sole solution presented is to tax more. There is no way out of the hole using that method, we must be more efficient, and where efficiency is not enough, we must cut.
if I were Dictator (in the best Roman sense of the word) I would institute a flat tax with a deductible tied to the poverty level. Look to reduce spending across the board by cutting waste. What is left, balance with 2 dollars in savings for every one in raised taxes.
I would privatize as much as I could. Hire ADP to do government disbursements, allow voluntary investment of Social Security (even reverting this to the States under Federal standards), and return power to the states.
Reduce the federal government to the following items:
Foreign Relations
Social Security
Commerce outside the US
Defense
Energy (what could not be handed to the States)
Interstate Transportation (FAA, DOT)
The original beauty of the State/Federal system as laid out by the Founding Fathers is that each State could craft it’s laws according to the needs of it’s citizens.
Don’t like it? Change the laws. Move to another state. Vote with your feet.
Federal laws make those options harder, they are one-size-fits-all, and therefore should be limited as much as possible.
Just one more detail to this discussion: the German babyboom may be smaller or arrive later, I am not sure. But the reunification brought in an enormous number of new retirees, all at once, who had to, and were, absorbed without creating a crisis. Yes, there was grumbling but not the sort of hysteria that is being heard now in our legislatures as the arrival at retirement of ALL our babyboomers looms.
One might ask oneself: why are we always so unprepared for ANY anticipated problem. The 911 tragedy, the housing bubble and financial collapse, climate change, peak oil; these are just a few examples. Warnings in each case were and are heard. But where is there evidence of any serious discussion or WILL to do the right thing by those in charge of governing? We hear excuses, such as “who could’ve…” or “no one saw it coming”…. by those who SHOULD HAVE!
Good point and especially salient when it comes to the baby boom. I mean, come on, the retirement of the baby boom generation could not be any more predictable! It is strange, it’s as if the deeper into the “Information Age” that we get, the less foresighted we seem…
Perhaps because at the time of unification there were 61.4m West Germans and only 16m East Germans?
That is not insignificant, but is further mitigated by the fact that there was a 3 year difference (less) in life expectancy in East Germany. 71 vrs 68 if I read the stats right, for men.
That means the average East German would get 3 year of benefits retiring at 65, and a West German 6.
Add to that the fact that East German wages were frozen as part of a deal to appease West German Unions, the impact to the social security net would be minimal.
Further, the sudden conversion of worthless East German currency (5:1 value) into Deutsche Marks at 1:1 ratio for private savings spurred the economy of German as a whole.
East German workers had there wages converted the same way, so while they made less than their West counterparts for the moment, it was still 5x their old wages in purchasing power…
and West Germany stood ready to meet the demand.
As for why Americans don’t see the obvious? Hell if I know, I saw many of the trends we have experienced in the last 10 years.
Not 9/11 though, for some reason even I had a “can’t happen here” mentality on terrorism. Terrorism was something that happened to the British and Israelis.
I would be interested in seeing a graph, showing from 2000 to the present , the increase in our budget deficit spending, specifically in what Gov, area, and with an overlay showing our decrease in tax revenue. I keep hearing about runaway Gov. spending??? Is it all in the stimulus’s bill, wall street bailout , Iraq, Education, Social Security? where?
In my previous comment, I was not trying to portray an absolutist perspective (poor eat the rich
), would rather see a thoughtful approach to this issue, with an emphasis on all economic groups paying their proportional share ( which I do not see).
I am generally not a numbers person, more interested in the social fallout that comes to roost 15 years after the decisions have been made.
One of the great benefits of working in Asia is getting exposed to all of the other societies that seem to have either reached a higher level in education, health-care, roads& tracks, and on and on. I actually find it exceedingly frustrating in that I believe that we (Americans) as a first rate country should and could be setting the standard, but generally I find myself the receiver of good hearted ribbing from either the Aussies, Chinese or Germans, although lately the Irish have been pretty quiet?? wonder why?
Good Post!
It can be found here:
http://www.whitehouse.gov/omb/budget/Historicals
with some analysis:
http://adarnay.wordpress.com/2011/02/21/federal-debt-and-tax-receipts/
But don’t take mine for it, use the numbers from the original.
I appreciate your perspective, Ivan.
I’ve always thought that whenever possible we should encourage young people to study abroad for a while, as I was fortunately to do. And if not abroad, then at least in a place other than their own for a while—the rural south if they are from the urban north, the urban midwest for those from, say… Georgia. There is nothing quite like it to open the mind to new possibilities, make us question… othodoxies.
In the end, you may well concluding that those orthodoxies are correct but at least you have done so after seeing various perspectives and thinking it through for yourself.
Gosh, this post is certainly getting us all going (I should speak for myself, probably)!
Russ, nice to know your name.
Another lunchtime spent on LaMarotte.
Russ, I guess you and I are coming at this whole subject with quite different understandings of how the world works.
History tells me that there are things that a society does better as a collective than through the free exercise of the profit motive. Not everything, mind you, not even most things, but some for sure.
And where exactly are you that you hear the suggestion that increased taxes are the sole solution to our deficit woes? I sure haven’t heard that.
In fact, since the 1980s taxes have been presented as the very essence of evil. Perhaps it is just a reaction to this long standing attitude generally that the mere questioning of its validity is causing some to react as if the devil were at the door.
We’re in a bind of our own making, shouldn’t ALL remedies be on the table? And let’s be serious, we are not overtaxed by any historical or international standards.
Of course, it does all boil down to what you think we should be done collectively and what we should leave to the market and/or to each man for himself / woman for herself.
Once again, I’ve gone on longer than I intended… interesting discussion.
Oh, wait, wait, I have to add something… let us not forget the data collecting arms of the Federal government when deciding what to keep and what to jettison. Where would we be without the riches of the data they collect and publish? Oh, and the Justice Department too… must have the legal system to help establish the nice, trustworthy, even ground upon which business people like to build businesses, sign contracts, etc… Oh, and… well, you get my point.
Cheers, all.
Another start of the day here. Good point regarding privatization, I would like to see how these idears work in another country before importing it to the good old U.S. (Mexiaco and Korea has some of the lowest taxes) . Personally I never minded paying taxes, as I never minded companies making a profit, as long as it seemed I was getting good service for the money, or my wages. The efficiency or quality of the service seems to be equal, I am not a believer that private companies always deliver, in fact it seems that we end up bailing out private companies. ( that would be another discussion ) A couple of personal issues I have had with private companies.
Phone companies? that is right , I can get better cell coverage in a rice field 100 kilometers from Hanoi, than and I can get 15 mile on a major highway south of Manchester N.H. and it does not seem to matter what company I go to, I have no options! the free market privatization has failed me. What are my options? I guess vote with my feet and move to Hanoi , LOL.
When i was in the Marine corp in 1967, I was attached to a F-4 phantom squadron, my job was related to jet maintenance , as was the few hundred other Marines in that squadron. We had all gone to different schools either in NJ or Tennessee , schools were from 6 months to 1year depending on the technical complexity. Theoretically you were put into the appropriate field based on your test scores, it was right for me. In 1968 I made $4500 a year, but I did have food and board so I was pretty content. Once a year all Marines would pick up mess duty, peeling potatoes, cleaning, dispensing food, etc. In fact the Marines did everything on that base. The training was only available for folks that volunteered for 4 years. At the end of our tour, a bonus was available for folks that wanted to re-up or if not ,than at least many of these folks had a marketable skills ( not all) . Truck mechanics , Truck drivers, radar techs , jet engine mechanics, electrical and on and on, this may not be what you wanted to do in your next life time, but still , the more skills one has the better prepared especially then, or now for that matter.
Now many of these jobs go to private contractors, the thinking is that the marines are hired to fight and not to peel potatoes or drive trucks, etc. Do I think that these private contractors are better trained? No I do not. Do i think they do a better job? No, to that as well. Do I think as taxpayer’s , we are getting a deal?? for going to private companies?
From my experience private companies , are never the only answer, all political or private systems are corruptable . These concepts only work in a test tube.
Sorry for the rant, now I better get to work, It is a beautiful 85 degrees here in south east Asia . LOL
Yes, very different.
I don’t qualify as a Libertarian, but I am somewhere on the continuum.
I am certainly made nervous by the statement: We are from the government and we are here to help.
I really have no problem if such things are done at the state level as they can tune programs to fit the needs of their state. There is no way solutions for New York fit Texas, Washington or Alaska, and vice versa.
As for taxes being the solution, they are certainly not suggesting we cut taxes. There is a current hue and cry over cutting just 6.4B out of a 3.6T budget. Hardly a “gutting” and not even statistically significant.