Thursday, March 13, 2008

Mark Thoma on John Shoven and raising the retirement age

Stanford economist John Shoven argues for increasing the Social Security retirement age, based on a novel redefinition of the term “age”: for Shoven, age should be measured in terms of years from death rather than years from birth. The Social Security retirement age should rise in years-from-birth terms, Shoven says, given that years from death are increasing as mortality declines. Shoven says:

Just consider the consequences of altering the age when entitlement benefits kick in or retirement becomes mandatory to these new inflation-adjusted measurements. It doesn't mean shortening retirements, just stabilizing them. In 20th-century America, the average length of retirement grew from two years to more than 19 years. As life expectancies continue to rise, retirements will continue to get longer -- and the pension bill far larger. If benefits and retirements are governed by mortality risk instead of age, the costs will be far more manageable. We've witnessed dramatic improvements in life expectancies over the past century. It's time we dramatically improve the way we measure age as well.

Mark Thoma disagrees. First, he says:

there is no guarantee that the ability to work and lead a productive life expands at the same rate as life expectancy (e.g., if most of the extension in life expectancy in the future comes from expensive interventions toward the end of life rather than improvements in health during, say, the late 60s, that make working easier then there would be no reason to extend the retirement age). It would be better to define retirement in terms of the minimum of these two concepts, the time at which the typical person can no longer be expected to work full-time on a typical job that may have physical demands, and the life expectancy adjusted retirement age discussed above.

Of course, there are no “guarantees” that the ability to work rises commensurately with expected age of death, but this seems a remarkably high standard of evidence to demand. The evidence seems to indicate that health status is improving with longevity – that is, we are not simply surviving a few more years in decrepitude but the process of aging is in fact moving more slowly.

For instance, John Turner examines health status by age and ethnicity among individuals aged 50 to 64. In all categories, the percentage of individuals reporting fair or poor health status has declined significantly since 1982.

The percentage of individuals with physically demanding jobs has also declined: from 1950 to 1992, the percentage of individuals reporting jobs requiring frequent lifting of heavy objects has fallen by from 20 to 8 percent. Turner concludes that “it appears clear that if demand for older workers were sufficient, it would be feasible to raise the Early Eligibility Age for Social Security to 63.5 in order to promote longer worklives.”

Thoma’s second objection to Shoven’s argument is “that Social Security is not the entitlement problem we should worry about, that title belongs to Medicare where costs are expected to increase rapidly in the future.”

This argument is flawed, for two reasons. First, simply because one problem is larger than another does not mean that we address only the largest one. Social Security is the largest program of the federal government and its costs are projected to rise by over 20% relative to its tax base in the next 10 years, with further increases in following decades. Given that reform is essentially a problem of smoothing cost burdens over different cohorts, it’s not clear how delaying action makes for a better outcome.

Second, Social Security is a more mature policy issue than health care. We know fairly precisely what the cost drivers are for Social Security, while for health care the components of excess cost growth are less clear cut. Moreover, for Social Security we know the range of options fairly well, making a potential compromise easier to envision. On the health care side it’s not well understood even the degree to which we should want to restrain cost growth, much less the most efficient ways to do so.


Bruce Webb said...

Well I left extensive comments at Economist's View.

I hope you were not too offended by the tone over there, if so I would like to apologize on behalf of my friends. You would have to understand the history of the Social Security debate as it actually developed over the last three years at places like Economist's View and Angry Bear, people like coberly and Lee A. Arnold and well me have had to press back pretty hard at some posters who ranged from low information to outright trollish on this topic. I tried to warn them off by pointing out that even though you fell on the other side of the debate, that you fell into the category of high-high information and needed to be taken more seriously, but some times you just can't call off the dogs once they start barking and biting.

Andrew G. Biggs said...

Not at all -- these are important issues and people take them seriously. I've always enjoyed reading Economist's View, Angry Bear, Brad DeLong, etc., even if I don't always agree. Hopefully this blog can play a similar role; folks may not agree with me, but at least they'll have a better idea of why people like me think the way we do.

Denis Drew said...

As possibly the oldest f__t on this thread:

Being employable means not just health as in lack of disabling disease, and, not just physical strength (as you point out: the requirement for that has dropped drastically) but also physical energy, attention and, yes, even fully working memory.

Problem is, even if you think people over 60 are just fine in these departments, EMPLOYERS do not. Try to get a job other than WalMart greeter over 60; good luck.

PS. I am 64 (this week) and employers are not all wrong. When your muscles go (without heroic efforts, in your very late 50s) a part of you energy and ambition go that cannot be compensated for by the biggest adrenal glands (which I have); short term memory can become a genuine problem too.
But, as I posted somewhere above: S.S. is really a REVERSE Ponzi scheme based on average income more than doubling over a working life time (as it has since the industrial revolution -- Malthus is out :-]).

Meaning that each new retiring generation can expect to soak the young for more than they were soaked for (in absolute terms) -- especially once S.S. levels off permanently at 6-7% of GDP (CBO) a couple of generations from now.

Meaning that, ultimately, the S.S. retirement age can expect to come down. Even without the "reverse Ponzi" effect, lowering the retirement age would force each generation to pay more for S.S. -- while they collected earlier in their turm; perfectly doable; done all over the world.

Bruce Webb said...

Denis more likely than retirement ages coming down will be reductions in FICA tax rates.

The older narrative made certain intergenerational issues seem moot: Social Security goes 'bankrupt', benefits get sharply cut, end of story. What we haven't seen is a serious examination of what would happen post-solvency. As a thought experiment suppose we achieved consensus tomorrow that Low Cost was in fact a pretty good median projection and that the real odds were 50/50 on being able to pay full scheduled benefits through the 75 year window with a normal distribution on either side of the median. What happens then?

Well all kinds of things. For example our mental picture of the long bond builds in the need to start paying off the principal in the Trust Fund starting in 2023, a credit card bill with a $6 trillion dollar balance and an initial finance charge of $300 billion plus coming due all of which needing to be funded by income taxes or borrowing. But under Low Cost the principal never needs to be repaid and only 25% of the interest. That is Intermediate Cost is the equivalent of a fully amortized 20 year mortgage at 5%, while Low Cost is an interest only at an effective rate of 1.25%. If you examine the 30 year period from 2011 to 2041 you have a potential difference in borrowing needs of something close to $10 trillion dollars. Well that is a hell of a lot of Dark Matter and most of it within the term of the current 30 year bond. Table VI.F8.-Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2007-85

Potential removal of that borrowing need from our mental models changes everything from our view on current account deficits to affordability of tax cuts going forward, people have priced in an event that may never happen. Solvency and even confidence in solvency would move the markets in very powerful ways, by no means is this whole story limited to retirement security. (I put up some musing on this and related post solvency issues in 2005 at my Social Security blog Solvency and the Long Bond: Economic LIfe After Crisis)

But to return to my original point. Solvency or the perception of solvency allows us to take a hard look at the current schedule of benefits vs current levels of payroll tax. Once we accept a post-crisis narrative we can take a look at such things as making retirement benefits increase in real terms. Yeah it is nice that a fully funded Social Security system makes it an ever better deal for retirees but have we really found the perfect balance between current and future utility of that payroll dollar? Under the narrative of 'crisis' and 'bankruptcy' this question didn't seem particularly relevent, the working assumption was that benefit cuts would be so drastic as to make the question moot. But what if there were no prospective cuts? Does it still make sense to whack low income workers at the combined 12.4% rate? Or should we let them retain some of that spending power. We are calling for workers to sacrifice current Pampers for future Depends. It is not at all clear that we have struck the right balance here.

Low Cost is out there.

Andrew G. Biggs said...

Bruce said: "Low Cost is out there." I guess I'd reply, "So is Big Foot, but we haven't seen him lately." The Trustees assumptions get examined very closely, through different administrations, through a parallel analysis by the CBO, and by Technical Panels appointed every four years by the Social Security Advisory Board. Do they find things they disagree with? Sure. Do they recommend new assumptions that would get Social Security to the Low Cost scenario? Not even close. CBO's assumptions are a little more optimistic than SSA's but not much. Two technical panels have recommended slightly more optimistic assumptions, but one recommended more pessimistic ones. The Trustees projections are sure to be wrong, simply because any long-term projection will be wrong. But there's no group of experts out who really believe Social Security will be sustainably solvent without change.

Denis: You're right that it's hard for people to find new jobs as they get older. But it may have been even harder in the past, when most jobs demanded a great deal of physical strength. And it may be easier in the future, when the supply of workers will be smaller so employers will have to accommodate older workers better than they do today.

So we're not assuming every person can work until age 70, merely that as people's capacity to work improves (and hopefully, as the demand for older workers rise) that a higher early retirement age makes some sense. The UK, a very similar economy to ours, is considering raising their age of first eligibility from 65 to 68 over several decades. It's not clear we need to stay at 62 forever.

Also, I think policy steps to make older workers more attractive could help. I'd consider lowering the payroll tax on older workers, to make them more attractive to employers and work more attractive to seniors. There's no perfect solution, but we might be able to get to a better situation than today.

Andrew G. Biggs said...

Bruce's post raises another interesting point I should have touched on: even if you think the Low Cost assumptions are the best ones, that still only implied a 50% probability results will be as good as the Low Cost scenario.

Now, there's also a 50% probability things would be even better than Low Cost. Some people would think this uncertainty is a reason to delay action on reform. Actually, it strengthens the case for acting today.

People fear the downside more than they relish the upside (this explains why stocks have high returns, for instance, or why people purchase insurance against unlikely events), meaning that they'd be willing to act today -- and risk over-correcting -- in order to avoid a really bad outcome. So even if you think Social Security is likely to remain solvent without reform, it sill makes sense to think about reforms that would make it more certain to be solvent.

Bruce Webb said...

"But there's no group of experts out who really believe Social Security will be sustainably solvent without change."
No doubt. On the other hand that is a statement that probably could have been made any year out of the last eleven. But the historical record is against that expert opinion, basically everybody got it wrong. I did a little data extraction for Prof. Rosser of JMU that he used to forward a policy paper to Economists for Obama and just pasted it to a post at my site. I need to massage the formatting but the data is clear enough.
Reality vs IC vs LC
The six columns represent 1) previous year actual Real GDP 2) IC current year projection 3) IC second year projection 4) LC current year projection 5) LC second year projection 6) actual number from the next years Report. These are the year by year numbers as reflected in the Reports and have not been revised and so will not match BEA historical tables.

The pattern is clear as day. Despite substantially underestimating growth year after year the Report keeps lowballing LC. Take 1997. IC 2.5% LC 3.2% actual 3.8%. In this case we know that LC did not in fact represent a ceiling, sensitivity analysis or not. What was the response? 1998. IC 2.5% LC 3.1% actual 3.9%. Despite essentially blowing 1997 the simply stuck with their original second year numbers. 1999. IC 2.6% LC 3.4% actual 4.0%. Well pardon mon francais but this is where I personally said 'bullshit'. Okay in 2000 they conceded a little to reality. 2000 IC 3.1% LC 3.5% reality 5.1%.

I understand the natural conservatism of actuaries but this is frankly ridiculous. We have a four year stretch where actual Real GDP blew by what were supposedly optimistic projections. The pattern is a little more mixed during the 2001 to 2004 period but the bias is still to the low side with the results as seen in this table EPI: Changes in Trustees Projections over Time: depletion pushed from 2029 to 2041 and payroll gap decreased from 2.23% to 1.89%.

Logically it would seem that if you have a string of results where the actual result falls outside your confidence interval you would adjust your model. It is fairly absurd to insist that the very best the economy could possibly do the next year is to dramatically slow. In the face of actual 3.8% in 1997 would anyone assert that 3.2% was the top end of a range for 1998? In the face of actual 3.9% why would you actually lower the top possible performance even more to 3.1%?

Well about 2000 I formulated an empirically based explanation for this phenomenon, it held up through 2004 at which point I published it on my blog. It subsequently held up under test in 2005, 2006 and 2007. This theory is both testable and falsifiable and so is in that sense scientific, and if accepted explains exactly why Intermediate Cost has been such a lousy predictor of actual economic performance. The only weakness is one of huge proportions, there seems exactly no way of actually having this result come about as the result of deliberate human design, too many people with too many divergent motives would have to be in on what could only be described as a conspiracy. On the other hand 'Eppur si muove'. In eleven straight years the output of the Low Cost alternative has been exactly the same: fully funded Social Security with no changes in tax rate, benefit or retirement age with flat Trust Fund Ratio through the 75 year window. I call this the Baby Bear alternative, the porridge is never too hot or too cold, it is always just right. A lot of things fall into place if you assume that Low Cost is being fitted to a curve, that the model starts with the ideal outcome as seen in Figure II.D7 and works back from there. What is the Low Cost Alternative

This theory is nuttier than a fruitcake, and given the really poor GDP figures actually reported for 2007 more likely than not going to be thoroughly discredited with the release of the next Report in a few weeks. On the other hand it has had a pretty good run since I stuck it up on Nov. 20, 2004.

( And for what it is worth combined OASDI year end balances came in about $3 bn ahead of 2007 IC projections even with a horrendous Nov-Dec performance, and about halved the difference between IC and LC. The models are still under projecting actual system performance.)

Anonymous said...


you are operating under the fallacy that Social Security is a GOVERNMENT expense.

It is not. the people pay for their own retirement. And yes pay as you go means... etc etc... it still means people pay for their own retirement.

And by paying a mere twenty dollars a week more, out of an income projected to be 300 dollars a week more, they can pay for their own expected extra six years in retirement.

The idea of counting backwards from death is so lunatic only a professor blinded by ego and or greed would have thought of it.

Given a choice, people will retire earlier even if it means retiring on less.


Anonymous said...

Biggs said

"costs are projected to rise by over 20% relative to its tax base in the next 10 years"

this is too cute by half. the tax base is currently 6.2% (for each worker and employer), so a 20% increase is 1.2% or about 8 dollars per week.

which the employee pays for his own retirement.

and another 8 dollars which the economists say is his own money, though he would never see it without SS.


Anonymous said...

forgot to note that that 8 bucks will come out of a pay that is a hundred dollars more per week than today's.

but next up:

"reform is essentially a problem of smoothing cost burdens over different cohorts"

it is not clear what is "essential" about this.

different "cohorts" face different situations. my grandparents paid for their parents retirements by room and board at home. my parents faced the depression and the world war. my generation faced the draft. we also build the schools that make it a lot easier for the next generation to make money. but all of a sudden some economists trying very hard to find a reason to jigger social security have discovered "generational equity."

this is insane. we will all get very close to what we pay in to Social Security. crying because we are told that someone else got a better deal, or because we could have should have would have invested the money and got a better return is the devil's accounting.