Tuesday, May 16, 2017

Charles Schwab: Cut Payroll, Income Taxes on Retirees

Writing in the Wall Street Journal, investment guru Charles Schwab argues for lowering Social Security payroll taxes on older Americans as a way to encourage them to work more, while also lowering the income taxes that retirees pay on their Social Security benefits:

As deliberations about tax reform begin in earnest, Congress should consider a simple fix to help millions of older Americans: Eliminate Social Security and Medicare payroll taxes after age 65 on the first $50,000 of earned income. These Americans have already contributed to the two programs over a lifetime. Yet even after they hit the retirement age, they continue to pay Social Security and Medicare taxes on income they earn.

This reform could significantly benefit seniors with modest incomes. Nearly 20% of people 65 and over are still working—more than eight million in all—according to the Bureau of Labor Statistics. Of people 65 and older who reported income in 2014, about 80% took in less than $50,000, according to the Administration on Aging. The median was just over $22,000. This proposal would boost their spending power significantly.

Take a 70-year-old woman who earns $25,000 a year in California. Today the combined Social Security and Medicare tax on that income is approximately $1,900. Federal and state taxes further reduce her take-home pay to roughly $21,000. Exempting her from Social Security and Medicare taxes effectively would increase her spending power by more than 9%. She is likely to put that additional $1,900 toward day-to-day living expenses. It’s enough to have a real positive effect on her quality of life.

I’ve written extensively, including in the Wall Street Journal, about cutting payroll taxes on older workers as a way to encourage delayed retirement. You can check out one of those articles here. Read more!

Friday, May 12, 2017

“The Democrats’ Social Security Plan Means Much Higher Taxes”

I have a new piece in the Wall Street Journal looking at the Social Security 2100 Act, authored by Rep. John Larson (D-MN) but co-sponsored by 83% of House Democrats. That’s much more consensus than any reform plan had during the GOP heyday of personal accounts. But is the plan any good?

The article is still behind the Journal’s paywall, but I believe non-subscribers can access the full article at the Journal’s Twitter account.

Social Security may be the “third rail” of U.S. politics, but congressional Democrats are suddenly eager to risk touching it. Over a remarkably short time they have embraced an ambitious but flawed policy of expanding the program’s benefits via tax increases on all workers, including doubling payroll taxes on high earners.

Since its release on April 5, Rep. John Larson’s Social Security 2100 Act has accrued 160 co-sponsors, more than any other reform proposal in recent history. With support from 80% of House Democrats, Mr. Larson’s legislation can fairly be called the Democrats’ Social Security plan.

Democrats have always been reluctant to cut Social Security benefits, favoring tax increases to fix the troubled program’s long-term deficit of more than $10 trillion. But today’s Democrats have gone further, embracing an expanded Social Security program to address what they claim is inadequate retirement saving outside the government-run system.

For subscribers, the full article is available here.

Read more!

New paper: "The Importance of Social Security Benefits to the Income of the Aged Population"

"The Importance of Social Security Benefits to the Income of the Aged Population"
Social Security Bulletin, Vol. 77(2), p. 1-12, 2017

IRENA DUSHI, U.S. Social Security Administration
Email: irenad1@gmail.com
HOWARD IAMS, U.S. Social Security Administration
Email: Howard.m.iams@ssa.gov
BRAD TRENKAMP, Government of the United States of America - Social Security Administration
Email: Brad.Trenkamp@ssa.gov

Social Security benefits comprise the most important source of income for people aged 65 and over. However, changes in the last decades in employer-provided pensions, Social Security program, and societal changes may have altered the composition of income sources among the elderly. Some researchers have argued that the Current Population Survey (CPS ASEC) doesn’t properly measure income from retirement accounts and thus overestimate importance of Social Security and underestimate reliance on income from pensions. Given changes to the CPS, we focus on reliance on Social Security benefits among the elderly, using data from the 2015 CPS, and validate the CPS estimates with those from the Survey of Income and Program Participation and the Health and Retirement Study. Despite differences across the three surveys, estimates are quite similar regarding the share of income from Social Security. Findings suggest that about half of elderly receive at least 50% of their family income from Social Security benefits, whereas for a quarter of elderly Social Security benefits comprise at least 90% of their family income.

Editorial note: Ideally, a paper like this would rely on IRS data, which better captures retirement account income (e.g., Bee and Mitchell, 2016). Lacking that, as a check, this paper could sum the incomes of retirees in the CPS, SIPP and HRS and check them against publicly-available IRS data. If total incomes fall short – which they will with the IRS and SIPP (less sure about the HRS) then these datasets will overestimate dependency on Social Security benefits.

Read more!

Monday, May 8, 2017

New papers from the SSRN

"Rising Inequality in Life Expectancy by Socioeconomic Status"
Center for Retirement Research at Boston College WP No. 2017-2

GEOFFREY SANZENBACHER, Boston College Economics Department
Email: geoffrey.sanzenbacher.1@bc.edu
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu
CANDACE M. COSGROVE, U.S. Census Bureau
Email: candace.m.cosgrove@census.gov
NATALIA ORLOVA, Boston College, Center for Retirement Research
Email: nataliyaorlova@mail.ru

Inequality in life expectancy is growing in the United States, but evidence is mixed regarding how much it has grown. Some studies have found that life expectancies have decreased for those with the lowest socioeconomic status (SES). Other studies have found that while inequality is rising, there have been life expectancy gains across the board. A primary difference in these studies is how SES is measured. Some studies use an absolute measure, such as years of school completed, while others use relative measures, such as a person’s ranking of years of school completed compared to others born at the same time. This study uses regression analysis to assign people a relative education ranking and, in doing so, attempts to isolate the changing relationship between SES and mortality from the fact that certain education-based groups, especially high school dropouts, actually have a lower SES level today than in the past. The study finds that when SES is defined in this way – relatively – inequality in mortality by SES is increasing but life expectancies have also increased across SES groups. The study also finds that white women in the bottom of the education distribution have experienced the least improvement of any group. This research suggests efforts to improve the finances of Social Security through higher retirement ages will have to reckon with the distributional effects of increasing inequality in mortality, but not with increases in mortality for large segments of the population.

"Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test"
Kelley School of Business Research Paper No. 17-39

ALEXANDER GELBER, National Bureau of Economic Research (NBER), University of California, Berkeley
Email: agelber@nber.org
DAMON JONES, University of Chicago - Irving B. Harris Graduate School of Public Policy Studies
Email: damonjones@uchicago.edu
DANIEL W. SACKS, Indiana University - Kelley School of Business - Department of Business Economics & Public Policy
Email: dansacks@indiana.edu
JAE SONG, U.S. Social Security Administration
Email: jae.song@ssa.gov

We develop a method for estimating the effect of a kinked budget set on workers' employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting elasticity point estimate for the AET is at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.

"Disarming Puerto Rico's Pension Time Bomb"
Law360, April 19, 2017

RICHARD J. COOPER, Cleary Gottlieb Steen & Hamilton LLP - New York Office
Email: rcooper@cgsh.com
LUKE A. BAREFOOT, Cleary Gottlieb Steen & Hamilton LLP - New York Office
Email: lbarefoot@cgsh.com
DANIEL J. SOLTMAN, Cleary Gottlieb Steen & Hamilton LLP
Email: dsoltman@cgsh.com
ANTONIO PIETRANTONI, Cleary Gottlieb Steen & Hamilton LLP - New York Office
Email: apietranton@cgsh.com

With the long-delayed commencement of negotiations between the new government of the Commonwealth of Puerto Rico (the “Commonwealth”) and its financial creditors finally underway, and the expiration of the existing stay on creditor actions looming, much of the financial press’ attention over the next several weeks will undoubtedly be focused on whether the government of Puerto Rico can reach an out of-court settlement with its financial creditors. One issue that has received less attention in the financial press, but which is of paramount importance to a financially secure local economy, is the challenge Puerto Rico confronts in reforming its multiple pension systems. This article identifies the two legal mechanisms available to the Commonwealth government to reform its public pension systems — namely, legislative action or implementation of reforms through one or more Title III proceeding(s) under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). Focusing on the central government’s Employee Retirement System, which is the largest of the Commonwealth’s public pension systems, we analyze the key considerations that will undoubtedly influence the decision of how to proceed.

"Social Security is Fair to All Generations: Demystifying the Trust Fund, Solvency, and the Promise to Younger Americans"

NEIL H. BUCHANAN, George Washington University Law School
Email: nbuchanan@law.gwu.edu

The Social Security system has come under attack for having illegitimately transferred wealth from younger generations to the Baby Boom generation. This claim is incorrect, because it fails to understand how the system was altered in order to force the Baby Boomers to finance their own benefits in retirement. Any challenges that Social Security now faces are not caused by the pay-as-you-go structure of the system but because of Baby Boomers’ other policy errors, especially the emergence of extreme economic inequality since 1980. Attempting to fix the wrong problem all but guarantees a solution that will make matters worse.

"Extending the 'Social Safety Net': Female Labor Supply and Pension Eligibility"

BENJAMIN THOMPSON, University of Michigan at Ann Arbor, Students , University of Michigan at Ann Arbor - Population Studies Center
Email: bpthomp@umich.edu

A 1991 legal change extended the coverage of pensions in rural Brazil to include large numbers of previously uncovered women, conditional on subjective work requirements. This change was accompanied by an increase in female employment, in particular among newly covered women. This paper analyzes the extent to which a causal relationship existed between these two phenomena; specifically, the extent to which women increased their labor supply in response to future pension eligibility. Using a differences-in-differences approach, I find evidence that pension eligibility increased the labor supply of rural women in two ways. First, I find that rural women made immediately eligible by age temporarily increased labor supply, and second, I find that at least some cohorts of younger rural women eligible in the future also increased labor supply, presumably as an anticipatory response. These results shed light on the capacity of elderly workers to respond to financial incentives for old-age labor supply participation, in addition to the extent to which younger workers might be forward-looking in their responses to retirement incentives.

Read more!

Sunday, May 7, 2017

Upcoming event: EBRI Policy Forum, May 11th

EBRI 80th Policy Forum

On Thursday, May 11th, the Employee Benefit Research Institute (EBRI) will conduct their 80th Policy Forum, sponsored by the EBRI Education and Research Fund (ERF). Hosted at the 20 F Street, NW Conference Center, the Forum is scheduled from 8:30am to 12:30pm.

Please visit here for the full agenda. To register, please visit here.

The 80th EBRI-ERF Policy Forum’s theme is “Retirement Policy Directions in 2017 and Beyond” and takes on critical retirement policy issues, moderated by an all-star lineup of speakers, including:

    • Retirement Plan Portability & Public Policy (Jack VanDerhei, EBRI Research Director and Spencer Williams, Retirement Clearinghouse President & CEO)
    • The Lillywhite Award (Olivia S. Mitchell, Economist and International Foundation of Employee Benefit Plans Professor at The Wharton School)
    • What’s Enough? A Conceptual and Empirical Investigation of Retirement Adequacy (Peter J. Brady, Senior Economist, Retirement and Investor Research Division, Investment Company Institute)
    • Fixing the Saver’s Credit and Other Ways to Help At-Risk Workers (Catherine Collison, President, Transamerica Institute and Transamerica Center for Retirement Studies)
    • EBRI Research – Update (Jack VanDerhei, EBRI Research Director, Craig Copeland, Senior Research Associate and Sudipto Banerjee, Research Associate)

Whether you’re an EBRI sponsor, congressional or executive branch staff, a benefits expert, a representative from academia, or affiliated with an interest group, the Policy Forum is an ideal opportunity to examine public policy issues, supported by the latest in EBRI research.

Read more!

Saturday, April 29, 2017

Upcoming event: “The Real Retirement Crisis: Not the One You Think,” featuring Andrew Biggs

 

 

Guest Speaker
Andrew Biggs
on
"The Real Retirement Crisis: Not the One You Think"
Thursday, May 4th, 2017
12:00 p.m. - 1:00 p.m.
RSVP


  Location:  
The Tax Foundation
1325 G St NW
Suite 950
Washington, DC 2000

Featured Guest:

Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits. Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President’s Commission to Strengthen Social Security. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future. In 2014, Institutional Investor Magazine named him one of the 40 most influential people in the retirement world. In 2016, he was appointed by President Obama to be a member of the financial control board overseeing reforms to Puerto Rico’s budget and the restructuring of the island’s debts.

Biggs holds a bachelor’s degree from Queen’s University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

Andrew Biggs
Resident Scholar
AEI

 

Savings & Retirement Foundation

2012 Wyoming Avenue, Northwest

#301

Washington, DC 20009

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