We thought we would do today's briefing on a recent report by Romina Boccia and Ivane Nachkebia of the Cato Institute on international inspirations for potential Social Security reforms. It's a very good report.

Because it's from Cato, you can probably already guess the general tenor; which is why, before going into the report itself, we thought we would start by laying out the moral case for protecting Social Security.

The political case is simple enough: Social Security is extremely popular, and its beneficiaries, pensioners, are not only a very large group of people, they vote disproportionately and are disproportionately active. One way President Trump has expanded the Republican coalition is by taking a strong stand in favor of protecting entitlements.

This is all well and good. But we would like to go deeper than that. The issue with entitlements such as Social Security and Medicare is that they are part of a social contract. The American people overwhelmingly oppose unearned benefits, but they overwhelmingly support earned benefits. Social Security and Medicare are popular, fundamentally, because the overwhelming majority of American people believe that they are earned by beneficiaries after paying into them over a lifetime of work.

Now, I already hear the policy wonk reading this, jumping up, exclaiming: but that's not true! People don't "pay into" Social Security and Medicare. Their Social Security and Medicare taxes go into a giant black hole; the so-called trust fund is merely an accounting fiction; and the government just pays out benefits, from general tax revenue, according to a formula that has nothing to do with how much has been paid in.

All very true! All, also, completely irrelevant.

What matters is that the overwhelming majority of Americans believe that when they are paying Social Security and Medicare taxes, they believe, sincerely, that they are paying into and earning future benefits. That they are playing by the rules. They believe this not because they invented it, but because that is what their leaders, of both parties, have told them, for many generations (indeed, all the way back to FDR).

This is why we mean a moral case. We cannot overemphasize this point: in a democratic republic, particularly one wracked by serious social tensions and hyperpolarization, the social compact is a psychosocial, not moral, reality. For decades and decades, hundreds of millions of Americans have accepted to forego earnings from the sweat of their brow, because of a sincere belief, justified by what they were told by their leaders, that in doing so they were paying into an entitlement system that would be there for them when they needed it. This is a fact, and it is reckless for a policymaker to ignore that fact or treat it as irrelevant. They made a contract, in good faith, with their government and with their elected representatives. They have a moral right to the completion of the contract.

Does that mean that Social Security should never be reformed? No, of course not. In fact, it is a virtual certainty that we will be forced to one day. Arithmetic is a stubborn thing.

But we wanted to lay out this case to counter the idea, popular among right-of-center wonks, that entitlement reform is automatically Good because the accounting calls for it, and that the only reason a politician might oppose it, or be reluctant, is political cowardice. We would simply like those who read this to try to look at it from the perspective that a policymaker's job is also to be a prudent steward of a social compact between the leadership class and the citizenry.

Now, on to the report. The basic recommendation is simple: Social Security should transition to a basic income system, with most of the money going to private investment accounts.

The report reviews a number of countries that have similar systems: Canada (that beacon of free markets), Germany, New Zealand, and Sweden.

They all have a similar basic structure. The two most interesting ones, to our mind, were Canada and Sweden.

"The public side of the Canadian retirement system includes Old Age Security (OAS), which is a basic pension that provides a nearly universal flat-benefit pension; the means-tested Guaranteed Income Supplement (GIS); and the earnings-related Canada Pension Plan (CPP). A notable aspect of the Canadian approach is the high degree of individual autonomy offered in retirement planning. Many workers save through various private retirement accounts, with a significant portion owning Tax-Free Savings Accounts (TFSAs) that are flexible in accessing funds for nonretirement reasons." So the public side isn't just a basic safety net, but also includes an earnings-related component. And private accounts, in a very liberalized way, come on top of that.

In Sweden, "alongside an earnings-related and PAYGO government Income Pension," the system "includes the Premium Pension, in which workers’ mandatory contributions are saved in individual private accounts and invested in markets. Sweden also provides a means-tested Guarantee Pension that supports about half of seniors and effectively reduces old-age poverty while costing less than 1 percent of GDP. Additionally, over 90 percent of Swedish workers are covered by mandatory occupational schemes." It's that Nordic model. Here, direct government payments are much lower, but because almost everyone is enrolled into some sort of pension scheme through their employer and/or their union, they still have a good amount of retirement security, and enjoy the benefits of investing their retirement money in the market, while having that warm fuzzy Nordic feeling of not giving your money to a grubby banker who's going to (Heaven forbid) profit from helping you invest.

There's much more in there and we would recommend browsing.

We would add a further few thoughts about Social Security reform.

The first is what we referred to, some time way back during the era of the SuperCommittee (remember that?) as the "PEG Quadrant". The PEG Quadrant asks: what happens in a future America with socialized pensions, versus a future America with private pensions? And what happens in a future America that has strong demographic and productivity growth, and what happens in a future America that has undewhelming demographic and productivity growth? In an America with strong demographic and produdctivity growth, a socialized pensions system will be fine, since tax revenue will be high; in an America with strong demographic and produdctivity growth, a private pensions system will be fine, since the stock market will be fine. In a future (indeed, present) America that has undewhelming demographic and productivity growth, a socialized pensions scheme will be in trouble, because there will not be enough workers and tax revenue to sustain the system; however, and this is the key point, in an America with undewhelming demographic and productivity growth, a private pensions system will also be in trouble, because the stock market will be anemic, and will not provide the expected real returns. Reforming the entitlement system to add more private investment may make things more efficient at the margins, and may be necessary given the scale of the deficit, but it doesn't address the fundamental problem that leaves us where we are now.

The second is that the most important pensions reform we would like to see would be one that directly links benefits to number of children. This seems like the most common-sense pensions reform imaginable. But nobody discusses it…

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