Friday, November 20, 2015

Simple Truths on Social Security

Writing in U.S. News & World Report, I argue that the technical side of Social Security reform should wait until we consider some of the broader issues on what we want a social insurance program to accomplish and how different households react to government plans offering retirement benefits.

First, we must recognize that while Social Security is a progressive program and does help reduce poverty in old age, most benefits don't go to poor households. In fact, the highest-earning fifth of the population receives about one-third of total Social Security benefits, and the next fifth receives almost another third. Social Security doesn't pay benefits to middle- and high-earning households because those households can't save on their own. It pays those benefits based on a political calculation, dating from the time of Social Security's founding, that middle- and higher-earning Americans wouldn't support a program that benefits the poor unless they themselves received a benefit from it. But paying generous benefits to middle- and high-earning households gets very expensive as the population ages and the workforce paying into Social Security shrinks.

And second, there is plenty of evidence that middle- and high-earning households treat Social Security and personal saving as substitutes. That is, if you increase Social Security benefits, these households will save less on their own. If Social Security benefits are lower, middle- and high-earning households tend to save more to make up the difference. Research from the U.S., United Kingdom, Canada and Poland finds similar results: If future Social Security benefits are lowered, middle- and upper-income workers save more. But if future benefits are made more generous, working-age households will save less. The result of the Democratic candidates' plans to expand Social Security benefits would very likely be less individual retirement saving by middle- and upper-income Americans.

Click here to read the whole article.

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Smith: “What should Social Security do?”

Writing in The Hill, Brenton Smith asks what I think is an important question: “What should Social Security do?”

Depending upon which part of the debate about Social Security reform that you follow, the program is either welfare, forced savings, or old-age insurance.  We pay for the benefits with revenue that is either called taxes or insurance premiums. The program contributes to our deficit, depending upon what definition of deficit is used.  

We should be asking what Social Security should do before we look for ways to pay for what it is doing. Andrew Biggs notes in his article in National Review, "Social Security needs a new paradigm for how individuals and government programs contribute to retirement security."

He argues that Social Security needs a new charter, poverty prevention. Biggs provides ample evidence that Social Security is horribly inefficient at poverty prevention.  His solution would replace the purpose of Social Security which is old-age insurance with a basic income payment.

If you want Social Security to serve as a program to end poverty in the elderly, the answer is simple. Just end the program, and transfer the resources to a program such as the Supplemental Security Income program that actually serves to eliminate of poverty, probably better than Social Security ever will.

While I don’t think the solution Smith suggests in his final paragraph is feasible – a strong means-tested guarantee against poverty in retirement probably requires forced saving, as in Australia – I strongly endorse Smith’s argument that we think about what we want Social Security to accomplish before we start on the technical changes needed to get Social Security to long-term solvency.

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A flat benefit plan for Social Security reform

Over at National Review online, I outline what I’ve called the “flat benefit plan” to reform Social Security. It’s modeled after the retirement systems of New Zealand and the U.K., with some nods to Australia and Canada as well.

Read the article, but the main outline is:

  • Beginning immediately, institute a minimum social security benefit for all long-term U.S. residents set at the single, over-65 poverty threshold (about $950). This would increase access to Social Security and raise benefits for about the bottom third of retirees.
  • The minimum benefit would be paid regardless of work history and earnings. Other than current law’s taxation of benefits, it would not be means-tested. The poverty-level minimum would be indexed over time with wages.
  • Over several decades, gradually reduce the maximum social security benefit so that eventually everyone receives the same flat dollar amount. 
  • Expand personal retirement saving through universal auto-enrollment in 401k plans, auto-escalation of contributions, and regulatory relief to make it less costly for small employers to offer retirement plans.

In addition, there are several other provisions to the plan that I don’t discuss much in the NRO article.

  • Immediately eliminate the 12.4% Social Security payroll tax for workers 62 and over.
  • Gradually raise the early retirement age from 62 back up to its original level of 65.
  • Pay COLAs on a progressive basis, so that current retirees receiving a sub-poverty level benefit receive an above-inflation COLA, those with mid-level benefits receive the CPI-W, and those with higher benefits receive COLAs base on the Chained CPI.

The plan would be solvent over 75 years and thereafter.

Take a look at the article and let me know what you think.

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Tuesday, November 17, 2015

New paper: “The Potential Effect of Offering Lump Sums in the Social Security Program”

Authors: Raimond Maurer, PhD; Olivia S. Mitchell, PhD; Ralph Rogalla, PhD; and Tatjana Schimetschek, MSc

  • Political debate has focused on the question of whether Social Security solvency should be achieved by larger benefit cuts or higher taxes, which in effect asks which people—current or future generations—should bear the greater burden of fixing the system.
  • But new research reframes this debate, offering a budget-neutral, actuarially fair lump sum payment, instead of the current delayed retirement credit, as a way to encourage people to delay claiming their Social Security benefits and work longer.
  • Under one of the lump sum alternatives presented here, survey participants indicated a willingness to delay claiming Social Security by up to eight months, on average, compared to the status quo, and to continue working for four of them.
  • Delayed claiming would mean additional months or years of Social Security payroll tax contributions, which could modestly improve the program’s solvency. Other benefits are possible as well: improved physical and mental health among the elderly from extended labor force participation, which could reduce the strain on health care programs like Medicare and Medicaid and help offset the macroeconomic costs of an aging population.

Click here to read the whole paper.

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Monday, November 16, 2015

New papers from the Social Science Research Network

"Changes to the Ticket to Work Regulations in 2008 Attracted Providers and Participants, But Impacts on Work and Benefits are Unclear"
Social Security Bulletin. 75(4): 15-33, 2015

JODY SCHIMMEL, Mathematica Policy Research, Inc.
DAVID C. STAPLETON, Mathematica Policy Research, Inc.

In this article, the authors use administrative data from the Social Security Administration to explore employment service provider and beneficiary participation in the Ticket to Work program over time and to assess the extent to which participants had earnings sufficient to have their cash benefits suspended or terminated for work. The authors focus on the effects of 2008 regulatory changes to the program on participation and participant earnings.

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Tuesday, November 3, 2015

New papers from the Social Science Research Network

"Phantoms Never Die: Living with Unreliable Population Data"

ANDREW J. G. CAIRNS, Heriot-Watt University - Department of Actuarial Science & Statistics
DAVID P. BLAKE, City University London - Cass Business School - The Pensions Institute
KEVIN DOWD, City University London - Sir John Cass Business School
AMY R. KESSLER, Prudential Retirement

The analysis of national mortality trends is critically dependent on the quality of the population, exposures and deaths data that underpin death rates. We develop a framework that allows us to assess data reliability and identify anomalies, illustrated, by way of example, using England & Wales (EW) population data. First, we propose a set of graphical diagnostics that help to pinpoint anomalies. Second, we develop a simple Bayesian model that allows us to quantify objectively the size of any anomalies. Two-dimensional graphical diagnostics and modelling techniques are shown to improve significantly our ability to identify and quantify anomalies. An important conclusion is that significant anomalies in population data can often be linked to uneven patterns of births in cohorts born in the distant past. In the case of EW, errors of more than 9% in the estimated size of some birth cohorts can be attributed to an uneven pattern of births. We propose methods that can use births data to improve estimates of the underlying population exposures.
Finally, we consider the impact of anomalies on mortality forecasts and annuity values, and find significant impacts for some cohorts. Our methodology has general applicability to other population data sources, such as the Human Mortality Database.

"How Does the Probability of a 'Successful' Retirement Differ Between Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment 401(k) Plans?"
EBRI Notes, Vol. 36, No. 10 (October 2015)

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)

This paper begins with a review of the previous academic literature and summarizes previous Employee Benefit Research Institute (EBRI) research analyzing the conditions under which voluntary-enrollment (VE) 401(k) plans are likely to provide an accumulation of retirement assets at least equivalent to those provided under a counterfactual final-average defined benefit (DB) plan. New research is then presented to show the percentage of “successful” retirements by income quartile for workers currently ages 25-29 who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. Results are first presented for both voluntary-enrollment 401(k) plans and final-average DB plans with a 1.5 percent accrual rate. Sensitivity analysis is provided by also analyzing the comparative success rates of final-average DB plans with accrual rates of 1.0 and 2.0 percent. Using baseline assumptions (defined in the study), it appears that the DB plan has a higher probability of achieving a real replacement rate (when combined with Social Security payments) of 60 percent than the VE 401(k) plans for the first three income quartiles. If a 70 percent replacement rate is used as a threshold, participants in the third- and fourth-income quartiles have a much higher probability of success with the 401(k) plans than the DB plans. When the threshold is set at a higher (and according to many financial planners, more realistic) replacement rate of 80 percent, the 401(k) plans have a much higher probability of success than the counterfactual DB plans for all groups except for the lowest-income quartile (where the results are virtually even).

"The Impact of Temporary Assistance Programs on the Social Security Claiming Age"

GEOFFREY SANZENBACHER, Boston College Economics Department
APRIL YANYUAN WU, Mathematica Policy Research, Inc.
MATTHEW S. RUTLEDGE, Boston College, Center for Retirement Research

Delaying claiming past the early eligibility age of 62 has taken on increased importance. Individuals turning 62 with no job and limited income may be able to use temporary assistance programs such as Unemployment Insurance (UI), Medicaid, and the Supplemental Nutrition Assistance Program (SNAP) as sources of support prior to collecting Social Security benefits. To what extent do these programs allow recipients to delay Social Security claiming? The challenge in answering this question stems from the fact that program users’ dire economic straits may make them more likely to claim benefits from both Social Security and these programs, generating a misleading correlation between Social Security claiming and temporary assistance benefits. This paper constructs instruments for program generosity that vary with an individual’s state of residence but should not reflect the characteristics or circumstances of the individual.

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Wednesday, October 28, 2015

CRFB estimates of solvency effects of Bush Social Security plan

The Committee for a Responsible Federal Budget released their estimates of the effects on Social Security’s financing of the reform plan released yesterday by Gov. Jeb Bush. Overall, the CRFB estimates are very close to the figures contained in an analysis I released yesterday.


What we both find is that the Bush plan could be expected to eliminate Social Security’s 75-year actuarial deficit and to produce a small trust fund surplus at the end of 75 years. Where we differ is that the CRFB analysis finds that, despite the program being solvent over the long term, the Social Security trust fund would go through a period of insolvency that would require that the trust fund be granted the authority to borrow. That borrowing would be repaid by the end of 75 years. In my analysis, the trust fund remained solvent throughout the 75 year period.


The differences are likely due to small details of how we set up the provisions to be simulated. But again, both analyses show a similar picture: that the Bush proposal would substantially improve the long-term solvency of Social Security.

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