Consider some of the most common:
Myth A: Old people are poor, so government programs to alleviate poverty should be directed to the old.
Fact: In most countries poverty rates are higher among the young than among the old, and families with small children are the poorest of all. The old are even better off when comparisons are based on lifetime income rather than current income. Why? Because people with higher incomes are more likely to live long enough to become old, whereas people with low incomes are more likely to have many children and die young. Targeting young families with children is a better measure for alleviating poverty than targeting the old.Â
Myth 2: Public social security programs are progressive, redistributing income to the old who are poor.
Fact: Even if benefit formulas look progressive, four factors neutralize most of the progressive effect. The first people to be covered when new plans are started are invariably middle- and upper-income groups, and they typically receive large transfers. The longer life expectancy of the rich severely reduces or eliminates the apparent progressiviry of social security programs when redistribution is calculated on a lifetime rather than an annual basis. Ceilings on taxable earnings keep the lid on tax differences between rich and poor. And when benefit formulas are earnings-related or subject to straiegmc manipulation, as in many countries, upper-income groups benefit even more, so the net redistrilautional effect can be regressive .
Myth 3: Social security programs insure pensioners against risk by defining benefits in advance.
Fact: Benefit formulas are redefined frequently, so substantial political risk remains.
Myth 4: Only governments can insure pensioners against group risks, such as inflation, and most do so.
Fact: Most developing countries do not index pension benefits for inflation in their publicly managed old age programs. And most OECD countries have skipped some cost-of-living adjustments during the past decade. Failing to index for inflation is the most common method governments use to reduce real benefit levels and escape from unsustainable benefit promises. In countries prone to inflation, the best insurance would be international diversification of pension fund investments—which is more likely when investment decisions are made by private managers rather than government .
Myth 5: Individuals are myopic but governments take the long view.
Fact: Governments have repeatedly made decisions about old age programs based on short-run exigencies rather than long-run benefits. One example is the use of early retirement programs as a temporary solution to unemployment that in the long run costs the economy in lost labor and the public treasury in large pensions payments. Another is pay-as-you-go financing instead of full funding, allowing generous pensions initially but discouraging saving and growth and lowering pensions in the long run.
Myth 6: Government action is needed to protect the interests of generations yet unborn.
Fact: Most public pay-as-you-go pension schemes provide the largest net benefits ro workers who are 30 to 50 years old when the schemes are introduced. The unborn children and grandchildren of these workers are likely to receive negative transfers as the system matures and the demographic transition proceeds.