Thursday, January 29, 2015

Social Security Trust Funds to Run Out in 2029?

That’s what Jed Graham of Investors Business Daily crunches out of the latest budget numbers from the CBO. Says Jed:

CBO's updated financial path for Social Security runs through fiscal 2025, in which year the program's benefits are projected to exceed its tax revenues by $359 billion, up from a $73 billion shortfall in 2014, as the $2.8 trillion trust fund shrinks to $1.6 trillion.

Plugging in CBO's long-term Social Security projections detailed in December for 2026 and later leaves little doubt that its estimates now put the trust fund's depletion in the fall of 2029. A similar analysis correctly predicted that CBO would move up the trust fund's end date by two years (to 2031) in 2013.

Click here to read the whole story.

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House Budget Chair: Social Security Reforms Coming

The Atlanta Journal-Constitution reports that Rep. Tom Price (R-GA), the incoming chair of the House Budget Committee, said that he wants the Committee to take up Social Security reform.

“On the issue of Social Security, it has indeed been the third rail as Tim [Chapman, COO for Heritage Action] mentioned, and what I’m hopeful is what the Budget Committee will be able do is to is begin to normalize the discussion and debate about Social Security. This is a program that right now on its current course will not be able to provide 75 or 80 percent of the benefits that individuals have paid into in a relatively short period of time. That’s not a responsible position to say, ‘You don’t need to do anything to do it.’

“So all the kinds of things you know about – whether it’s means testing, whether it’s increasing the age of eligibility. The kind of choices — whether it’s providing much greater choices for individuals to voluntarily select the kind of manner in which they believe they ought to be able to invest their working dollars as they go through their lifetime. All those things ought to be on the table and discussed.”

Check out the whole story for more details.

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Wednesday, January 28, 2015

New paper: “Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?”

Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?

January 2015, Nicole Woo, Cherrie Bucknor, and John Schmitt

On January 1st, the maximum amount of annual earnings subject to the Social Security tax – a.k.a. the payroll tax cap – increased to $118,500. Every year, this cap is adjusted to keep up with inflation. However, many American workers are not aware that any wages above the cap are not taxed by Social Security.

This issue brief analyzes Census Bureau data to determine how many workers would be affected if the Social Security payroll tax cap were raised or phased out. We find that the richest 6.1 percent of workers (less than 1 in 15) would pay more if the cap were scrapped. Only the top 1.5 percent (1 in 67) and 0.7 percent (1 in 140) would be affected if the tax were applied to earnings over $250,000 and $400,000, respectively.

When we look at the wage earners according to gender, race or ethnicity, age, or state of residence, the share of workers who would be affected by increasing or phasing out the cap varies widely.

Click here to read the whole paper.

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Friday, January 23, 2015

New papers from the Social Science Research Network

"From Status-Based Privilege to Old Age Security: Rethinking Public Pension Reform in China"
UMKC Law Review, Volume 82, Number 4, Summer 2014

QIAN HAO, China University of Political Science and Law

Pension reform poses a formidable challenge to China’s development and has become a topic of intensive debate in recent years. Nonetheless, various reform measures based on legislations adopted since the 1980s have largely failed to be implemented, including the 1997 three-pillar pension plan. While the current debate on pension reform in China centers on how to address the financial crisis of the public pension system, this article argues that widening pension deficit has been only a symptom rather than the root cause of the reform stalemate. China’s old socialist pension benefits were developed as a status-based privilege rather than provision of old age economic security. As China transits from a centrally planned economy to a market economy, the old pension system has increasingly become inadequate and inequitable. The remaining socialist pension obligations are incompatible with the emerging market, and the majority of the population is exposed to market risks without protection in retirement. However, those structural challenges have not been successfully addressed by deficit-driven reform plans or short-sighted measures that focus on having current workers pay for the heavy cost of pensions for retirees under the previous system. The right reform strategy will require that efforts be redirected towards addressing the fundamental transition issues.

"Recruiting and Retaining High-Quality State and Local Workers: Do Pensions Matter?"
Center for Retirement Research at Boston College Working Paper No. 2015-1

ALICIA H. MUNNELL, Boston College - Center for Retirement Research
JEAN-PIERRE AUBRY, Boston College - Center for Retirement Research
GEOFFREY SANZENBACHER, Boston College Economics Department

Many state and local governments have responded to challenges facing their pension plans by cutting benefits. Will these cuts make it harder for state and local governments to recruit and retain high-quality workers? To date, the answer has been difficult to obtain; most micro-level datasets contain information on the existence of pensions but not on pension generosity. To get around this constraint, this study uses a unique source, the Public Plans Database, to obtain data on the pension generosity of state and local workers’ pensions. These data are merged with the Current Population Survey to investigate how pension generosity affects the gap between the private sector wage of workers that states and localities recruit from the private sector relative to the workers that they lose to it. The findings suggest relatively generous pensions help reduce this “quality gap,” making it easier for state and local employers to recruit high-earning workers from the private sector and retain those workers. The effect is similar regardless of whether employer or employee contributions finance the benefits. The study suggests states should be cautious as they cut their pension benefits and that a strategy to maintain benefits by shifting some costs onto employees may help maintain states’ ability to recruit and retain high-quality workers.

"Measuring and Communicating Social Security Earnings Replacement Rates"

ANDREW G. BIGGS, American Enterprise Institute
GAOBO PANG, Towers Watson

Financial advisors commonly use earnings replacement rates to assist workers in their retirement planning. Policymakers and analysts use them to gauge the adequacy of Social Security benefits and other retirement income in allowing retirees to maintain preretirement living standards. In recent years, the Social Security trustees regularly published replacement rates that have been widely interpreted as the extent to which Social Security benefits replace earnings of workers at various points in the lifetime earnings distribution. However, the trustees’ replacement rates are calculated differently than those generally used for retirement planning purposes possibly leading to confusion among policymakers and others regarding how much of workers’ earnings are replaced by Social Security and how much those workers need to save on their own for retirement. Financial planners calculate replacement rates by comparing an individual’s retirement income to that same individual’s pre-retirement earnings, generally earnings in the years immediately preceding retirement. The Social Security Administration, by contrast, effectively calculates replacement rates by comparing retiree incomes to the incomes of contemporaneous workers. This latter measure is often used in other countries, but differs both qualitatively and quantitatively from the more common replacement rate calculations used for financial planning purposes. We find that replacement rates calculated on a financial planning basis are generally higher than those published by the Social Security trustees and that Social Security benefits generally replace somewhat more of individual workers’ earnings than the trustees’ rates suggest.

"Reforming Old Age Security: Effects and Alternatives"
Industrial Alliance Research Chair on the Economics Working Paper 14-10

JEAN-YVES DUCLOS, Laval University, Institute for the Study of Labor (IZA)
BERNARD FORTIN, Laval University
STEEVE MARCHAND, Laval University

The federal government announced in its 2012 budget its intention to delay the age of eligibility for Old Age Security and the Guaranteed Income Supplement from 65 to 67 years. By the time the policy is fully implemented (i.e., in 2030), this delay will have increased net revenues of the federal government by 7.1 billion dollars per year (in constant 2014 dollars), but will reduce net provincial revenues by 638 million dollars. With constant labour and savings behaviour, this delay would also increase the percentage of individuals aged 65 and 66 years who are in the low income group from 6% to 17% (for an additional 100,00 low-income seniors in this age group) and would be most harmful to low-income seniors and to women. Alternative reforms to the Old Age Security could make it possible to achieve similar effects on public finances without having such large impacts on the low income rate among seniors.

"The Implications of Differential Trends in Mortality for Social Security Policy"

JOHN BOUND, University of Michigan, National Bureau of Economic Research (NBER)
ARLINE T. GERONIMUS, University of Michigan at Ann Arbor - School of Public Health
JAVIER M RODRIGUEZ, University of Michigan at Ann Arbor
TIMOTHY WAIDMANN, The Urban Institute

While increased life expectancy in the U.S. has been used as justification for raising the Social Security retirement ages, independent researchers have reported that life expectancy declined in recent decades for white women with less than a high school education. However, there has been a dramatic rise in educational attainment in the U.S. over the 20th century suggesting a more adversely selected population with low levels of education. Using data from the National Vital Statistics System and the U.S. Census from 1990-2010, we examine the robustness of earlier findings to several modifications in the assumptions and methodology employed. We categorize education in terms of relative rank in the overall distribution, rather than by credentials or years of education, and estimate trends in mortality for the bottom quartile. We also consider race and gender specific changes in the distribution of life expectancy. We found no evidence that survival probabilities declined for the bottom quartile of educational attainment. Nor did distributional analyses find any subgroup experienced absolute declines in survival probabilities. We conclude that recent dramatic and highly publicized estimates of worsening mortality rates among non-Hispanic whites who did not graduate from high school are highly sensitive to alternative approaches to asking the fundamental questions implied. However, it does appear that low SES groups are not sharing equally in improving mortality conditions, which raises concerns about the differential impacts of policies that would raise retirement ages uniformly in response to average increases in life expectancy.

"Creating French-Style Pension Funds: Business, Labour and the Battle Over Patient Capital"

MAREK NACZYK, Sciences Po Paris - Centre d’√©tudes europ√©ennes, Sciences Po Paris - LIEPP

Over the past few decades, European governments have increasingly retreated from public pension provision and promoted the expansion of private retirement savings accounts. Analysts of comparative social policy have traditionally considered that the politics of pension privatisation has been driven by politicians’ and socio-economic actors’ concerns about the relative generosity and costs of different pension arrangements. But, when they are fully-funded instead of being financed on a pay-as-you-go basis, pension arrangements generate funds that are injected into the financial system. The existence of such a welfare-finance nexus means that stakeholders in the pension system are also attentive to how pension funds invest their assets, and may try to actively shape the institutional design of old-age pensions in accordance with such concerns. This paper focuses on the role of socio-economic actors – employers, trade unions and the financial services industry – in pension privatisation and develops theoretical expectations on how these actors’ interest in maximising control over private pension plans’ financial assets affects pension politics. The argument is tested with a case study of French pension debates between the 1980s and the 2000s.

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Friday, January 16, 2015

Confessions of a Social Security Mooch?

Is Social Security actually a great deal? For some people, as Brenton Smith writes over at You can check it out here.

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Thursday, January 15, 2015

Blahous: Disability Insurance Heading for a Wall

Chuck Blahous of the Mercatus Institute, one of Social Security’s public trustees, has a very good article over at e21 on the impending insolvency of Social Security’s Disability Insurance program:

The problem in a nutshell is that Social Security’s disability trust fund is running out of money.  The latest trustees’ report projects a reserve depletion date in late 2016.  By law Social Security can only pay benefits if there is a positive balance in the appropriate trust fund (there are two: one for old-age and survivors’ benefits (OASI), the other for disability benefits).  Absent such reserves, incoming taxes provide the only funds that can be spent.  Under current projections, by late 2016 there will only be enough tax income to fund 81 percent of scheduled disability benefits.  In other words, without legislation benefits will be cut 19 percent. 

Check out the whole article here.

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Disability Rubber-Stamping is What Some in Congress Seem to Want

Just prior to Christmas, the House Government Reform and Oversight Committee released a troubling report on how the Social Security Administration has overseen the adjudication of disability insurance applications. SSA has long had a backlog of applications awaiting decisions, due to a process (set in place by Congress) that gives applicants multiple levels of appeal before a final decision is made. As a result, applicants usually wait a year or more before getting a hearing. This Washington Post article provides some interesting background.

All of this puts pressure on the agency to move applicants as quickly as possible. As the Committee’s report states:

The agency was singularly focused on churning out a large volume of dispositions, which led to inappropriate benefit awards. It takes significantly less time for an ALJ to award benefits than to deny them, and decisions awarding benefits are not appealed.

In effect, some SSA disability judges were rubber-stamping applications and, the Committee argues, the agency wasn’t doing much to stop it. To be fair, since the judges are nominally independent, it’s not an easy problem to fix. At any rate, since each incorrect granting of disability benefits costs the program about $300,000 in future benefits, rubber-stamping is a big deal.

I wouldn’t go so far to say as that SSA doesn’t care about the quality of disability decisions. But here’s how the incentives work: higher quality decisions demand more staff and more time. The agency doesn’t have a lot of each and Congress isn’t so keen on paying for more. When wait times are long, constituents complain to their Congressmen, who then complain to the agency.

Moving decisions quickly eases this pressure and many elected officials don’t seem to care if adding people to the disability rolls exhausts the program’s trust fund more quickly. The consensus position among most Democratic lawmakers (and, I’m guessing, some Republicans) is simply to paper over the disability program’s funding gap with tax revenues taken from the retirement program, with no reforms to make the program or its decision-making work better. Republicans recently passed a rule against fixing disability solely through a revenue transfer, but will need to come up with reform ideas of its own.

In any case, if Congress shows that it cares about the speed of disability decisions but not their quality, it’s likely they’ll get what they want.

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