Tax Foundation: State-level statistics on effect of lifting payroll tax ceiling

The Tax Foundation provides state-by-state data on the number of individuals who would be affected by proposals to eliminate the payroll tax ceiling, with or without a "donut hole" as proposed by Sen. Obama. One thing that becomes apparent is that very few workers would be affected with the $200k or $250k donut hole exemptions, which is one reason why they address less than half the 75-year shortfall while eliminating the cap for all workers above the current ceiling of $102,000 would come close to fixing it.

Also worth noting is that the Tax Foundation's data is based on an annual cross section; while very few people earn over the taxable maximum in any given year, over their working lifetimes around one-in-five has at least some earnings above the cap. Read more!

A Social Security pander from Obama

I know that much of my published work seems to be picking on Barack Obama (see here and here…). This isn't really intentional – the vast majority of what I'm working on has nothing to do with the candidates or the election. Nevertheless, things continue to pop up…

The latest Social Security-related proposal from Sen. Obama is to exempt any senior earning less than $50,000 from income taxes. His campaign claims this would save 7 million retirees an average of $1,400 per year.

Why is an exemption from income taxes a Social Security proposal? Because most income tax revenues from lower income seniors are from income taxes levied on their Social Security benefits, and under law those income tax revenues go back to Social Security to help keep the system solvent for the future. In other words, this income tax cut for seniors would be paid for largely out of Social Security money.

How much would it affect Social Security? This is very ballpark, but $1,400 times 7 million equals $9.8 billion per year in lost income tax revenues per year. Let's assume that all of that would otherwise flow to Social Security. The total payroll tax base in 2008 is estimated by the Trustees at $5.567 trillion, so a reduction of $9.8 billion is equal to around 0.18% of payroll. Assuming this ratio remains constant in coming years, the income tax reduction for seniors would increase Social Security's 75-year shortfall of 1.7% of payroll by around 10%.

To me, that seems a bit much for what's pretty clearly an election-year pander to a voting group – older voters – that Obama has a distinct weakness with. According to Gallup, McCain leads Obama among older voters by 51% to 35%, which almost matches Obama's 57%-37% lead among individuals aged 18-29 and would certainly more than match Obama's advantage among young voters due to older folks far greater likelihood of voting. (According to the Census Bureau, individuals age 65 and over are twice as likely to vote as individuals age 18-24.)

I don't take particularly seriously any candidate's claim to be a "different kind of politician" – our problems with partisanship are basically a function of our political structures and the fact that neither party is currently dominant. But still, Senator Obama has placed a lot of emphasis on practicing "a new kind of politics" and this Social Security pander looks distinctly old school to me.

Granted, Senator Obama has proposed a tax change that would more than cover the cost of the tax cut for seniors. Obama would eliminate the current "cap" on the 12.4 percent payroll tax, though with a "donut hole" exemption for workers earning between $102,000 and $250,000 per year. Phased in over 10 years, my estimate is that this would fix around 36% of the 75-year shortfall, though at the cost of raising the top marginal tax rate on earned income from around 37.9% – 35% income taxes and 2.9% Medicare taxes – to over 50%.

Whatever the merits of the Obama proposal, after netting out the tax cut for seniors Obama's plan would fix only around one-quarter of the long-term shortfall. To his credit, Obama has taken the Social Security problem seriously, at least in rhetoric. As the campaign has progressed, though, his policy seems less and less serious on the issue.

Read more!

IBD: Obama And McCain Divided On Reform For Social Security

Jed Graham writes in Investor's Business Daily on how Senator's Obama and McCain stack up on Social Security reform. I'm briefly quote, and will expand on the point at the bottom.

The Social Security fixes touted by John McCain and Barack Obama couldn't be any further apart — unless Obama was offering a true fix.

McCain would close looming Social Security shortfalls by curbing benefit promises. Obama would leave benefits untouched and rely just on tax hikes — though not nearly enough to erase the funding gap.

But their plans do share one common feature: Both would likely be dead on arrival in Congress, say Social Security reform advocates.

"They're both very politically attractive options if you're running in a primary," said Andrew Biggs, resident scholar at the conservative American Enterprise Institute. "I don't see either as being politically feasible."

Still, their plans give a sense of the priorities each would bring as president to any serious talks with Congress. McCain would push for Social Security reform that depends much more on spending restraint than new taxes. He is prepared to ask for broad sacrifice.

"My children and their children will not receive the benefits we will enjoy," he said in a 2006 speech on entitlements. "That is an inescapable fact, and any politician who tells you otherwise, Democrat or Republican, is lying."

Half A Plan

Obama doesn't want to ask anyone who isn't rich to sacrifice. He'll push for a big tax hike on higher earners and eschews benefit cuts.

"The best way forward is to adjust the cap on the payroll tax so that people like me pay a little bit more and people in need are protected," Obama said recently. "That way we can extend the promise of Social Security without shifting the burden on to seniors."

The 12.4% Social Security tax phases out at $102,000, but Obama would slap the tax on high earners.

He says he would create a "donut hole," shielding some wages above $102,000 from the tax so as not to "ensnare middle class Americans."

Only the tiny fraction of workers earning perhaps over $200,000 would be hit. While workers only pay half the 12.4% tax, employers would most likely pass on their share by reducing worker salaries.

This hike would come on top of Obama's bid to reverse the Bush tax cuts for higher earners to pay for expanding health care coverage. Thus the top marginal rate on wages could near 55% vs. 37.9% now, including Medicare taxes.

By reserving such a big tax hike for Social Security, Obama would limit the options for dealing with far more daunting fiscal challenges posed by Medicare and Medicaid.

"It's important for people not to look at Social Security in isolation," said Robert Bixby, executive director of the fiscal watchdog Concord Coalition.

"It's easier to do cost control for Social Security than it is for Medicare," he said. "If you use the revenue option for Social Security, that means it might not be available for other things."

But Bixby suspects that any politically viable Social Security fix will include benefit cuts and tax hikes.

Closing entitlement deficits by relying "exclusively or perhaps even primarily on increased revenues . . . could significantly impair economic growth," the Congressional Budget Office has said.

An IBD analysis shows that a 12.4% tax on wages over $200,000 would only delay Social Security's cash-flow deficits by four years to 2021. Over 75 years, the plan would erase just half of the $6.5 trillion unfunded liability at present value.

That includes $2.2 trillion of government IOUs in the trust fund. As Social Security's trustees noted last year, "Treasury must still come up with this amount in future cash" to make good on those IOUs.

McCain has yet to spell out how he'd alter benefits, such as lifting the retirement age. But the changes would be big. By 2041, Social Security could only pay 78% of scheduled benefits without tax hikes.

McCain has long backed the idea of letting workers invest some of their Social Security taxes to try to offset some of the benefit cuts.

President Bush pushed personal accounts in 2005, but made little headway on Capitol Hill.

Obama has attacked the idea as a way to "gamble away people's retirement on the stock market."

In a possible hint at compromise, McCain said he favors "some form of personal retirement accounts."

McCain might accept accounts financed via a dollop of income on top of the payroll tax, Bixby says.

"Then you get into the question of whether it's a tax increase," he said. "I don't think it is. The money wouldn't be going to the government."

Some context on my thoughts: In a Republican primary, it's almost impossible to talk about any form of increased revenues for Social Security, while in a Democratic primary it's almost impossible to talk about any reductions in benefits. This is not to say that either candidate favors a path other than the one they've outlined, but merely what is appealing to either party's base is not necessarily something that can pass in Congress and be signed by the President. Ultimately, Social Security reform will be a package of different provisions. While interest groups on either side pressure candidates to rule out provisions they don't favor, Congress and a President McCain/Obama will in the end have to say yes or no to a package. Should a president oppose an otherwise perfect bill because it contained a penny of tax increases/benefit cuts? If not, then it probably makes sense for them to keep their options open and focus on how to build a process where both sides can get together to hash things out. Read more!

Response to questions on Angry Bear

Over at Angry Bear, Bruce Webb posts a number of questions on Social Security financing and reform put together by Arne. These raise a number of important and interesting issues which deserve treatment at some length, so rather than post in the comments I thought I'd do a fresh post here.

 

1. What should we do if the SSA intermediate forecast is right? When and how would we change?
   

   The intermediate forecast is the Social Security trustees and actuaries "best guess" of the program's finances going out into the future. CBO also puts out a forecast based on its own best guess, which is slightly more optimistic than SSA's but qualitatively similar.
   

   If we assume the intermediate forecast is correct, what should we do? Actually, the easier question to answer is 'when should we do it?', the answer to that being that we should start immediately. Why? Because any solution will be both economically more efficient and generationally fairer if we spread it across as many cohorts as possible. The deadweight losses associated with tax increases are more than proportional to the tax rate, so it's better to have a small tax increase over a long time than a large tax increase focused on a smaller number of cohorts. Likewise, it is easier to adjust to small benefit reductions than to large ones, so starting today means everyone make adjust a bit.
   

   How should we fix Social Security? This demands a long answer, but to make it short I would: a) focus on reducing promised benefits rather than increasing taxes. Why? Principally because we're going to need all the taxes we have, plus some, to fix Medicare; it's relatively easy for people to make up for reduced Social Security benefits by saving more, while it's tougher on the health care side. b) I would introduce some measure of prefunding; this is designed to smooth cost burdens over generations, such that today's generation pays more so future ones can pay a bit less. I'm fine on this being a 'carve-out' financed from the existing payroll tax so long as the associated transition costs are 'paid for', meaning not borrowed. Otherwise, an add-on funded with new contributions is preferable. c) I'd change the tax/benefit structures to simplify the program to make it more understandable; equalize treatment between different household types (why should single earner couples get a better deal than dual-earners?); and encourage delayed retirement (say, by increasing the early retirement age, reducing the payroll tax at older ages to encourage work, and increasing the normal retirement age). This is a rough sketch, but more or less lays things out.
   

2. Which is really more important, productivity or demographics?
   

   Demographics are almost certainly more important than productivity (a view I believe most experts on either side would share). Because retirement benefits are indexed to wages, higher productivity/wages translates to higher benefits. Because benefits for current retirees are indexed to inflation, not wages, increased wage growth will reduce costs relative to the wage base for a while. But once the higher wages start to filter through to new benefits, costs stop declining.
   

   Fertility and mortality (i.e., life expectancies) play a more direct and longer-lasting role. Increased life expectancies have only a small positive effect through taxes (a few working age people live longer and pay in more) but a large negative effect through benefit costs (if people live longer, we must pay them for a greater number of years). Fertility has a large effect by increasing the ratio of workers to retirees, which directly reduces costs. The effects of fertility may be exaggerated in the 75-year financing measure, since it counts all the taxes these new workers pay but not all the benefits that will be owed to them, but it's still a major factor.
   

   Anyone interested in the relative importance of the different variables should check out the sensitivity analysis in the Trustees Report, which shows the effects of different values for each.
   

3. Given that the TF lasts at least 20 more years, is moving (some of) it from US Treasuries to equities a good idea? How does that change with LC instead of IC?
   

   While I tend to favor private investment (through personal accounts) for purposes of pre-funding – i.e., putting aside more money today to reduce costs in the future – I don't believe switching from bonds to stocks is of major importance. Any investment has a combination of risk and return, and at market equilibrium the total 'value' provided by each investment is around the same. That is, the safety of bonds compensates for their lower returns, while the high returns on stocks compensate for their higher risk. There's reason to believe that stock returns still tend to be higher than is necessary to compensate for their level of risk, meaning there's something of a 'free lunch' to holding them. For that reason, some stock holdings may make sense, especially for low earners who can't save on their own. But overall I've shifted toward CBO's view of things, in which stocks aren't treated as 'free money' for the system, versus the SSA actuaries' view which tends to focus on returns more than risk.
   

4. Is solvency relevant?
   

   If the program becomes insolvent, by law it can no longer pay full scheduled benefits. That will be a pretty important consideration for people at the time. More broadly, we should be thinking in terms of the efficacy of the program and the relative costs and benefits allotted to different generations. Those aren't solvency related, but are nevertheless quite important.
   

5. Are the stochastic projections (Appendix E) meaningful?
   

   The stochastic projections, which attempt to quantify the uncertainty regarding future financing projections, are far superior to the Low Cost/Intermediate Cost/High Cost scenarios the actuaries have traditionally used. CBO uses only a stochastic simulation to portray uncertainty. Why are the Low/High Cost scenarios flawed? Each demographic and economic variable (wage growth, fertility, etc.) is assigned a high and low cost value, in addition to the intermediate value that we generally focus on. The Low or High Cost scenarios combine the low and high cost values for each variable to show how things turn out if everything goes right or everything goes wrong. What's wrong with this? First, there is no probability assigned to the low and high values for each variable – they're just 'low' and 'high'. What's that supposed to mean? Is there a 10% chance of being low or high? 5%? 1%? We don't knows. Second, the Low Cost and High Cost scenarios assume that every variable takes its low or high cost value, regardless of whether it's likely that they would occur together. That is, there's no accounting for the covariation between the different variables.
   

   How does the stochastic analysis work? Each variable has an average value derived from the Trustees intermediate projections. However, it's also allowed to randomly vary from year to based on how that variable varied in the past. For instance, let's assume that real wage growth has an average value going forward of 1.1% per year (this is the intermediate projection, but also the average over the past 40 years). Based on historical date, real wage growth has a standard deviation of 2.1 percentage points. Using a random number generator, the actuaries create thousands of outcomes for real wage growth in each year going forward. They do a similar exercise for each of the other variables. They then feed each random scenario into the actuarial model to calculate the actuarial balance. Each individual random scenario has no real meaning, but together they give a much better view of the level of uncertainty regarding future Social Security financing. The stochastic model isn't perfect, and work is continuing to improve it. But now that the stochastic analysis is available, I personally believe that relying on the Low and High Cost scenarios is all but indefensible – they're simply inferior to the stochastic analysis.
   

6. What do the 1984 and 1985 reports show us about intent?
   

   This question is a little hard to understand, since the Trustees Reports in general don't discuss Congressional intent. If the question is, did Congress in the 1983 reforms intend to cause a big trust fund buildup over the next four decades, which would then be drawn down over the following four decades or so, the general view is 'no.' Neither the Greenspan Commission nor Congress were very well aware that the system would be running large surpluses through the early 21^st century, largely because the SSA actuaries didn't provide them with this information. The Commission's concern was maintaining short-term solvency through the 1980s, since benefits were at risk of not being paid, and then reaching 75-year solvency. They would submit potential reforms to the actuaries, who would then tell them whether they system was solvent or not. As I understand it, the Commission was not provided with the year by-year data we take for granted today. There's a good report from the Congressional Research Service on this episode – very instructive.
   

7. Why did the TF ratio outperform expectations in the late 90's? Can it do so again?
   

   The main reason the Trust Fund ratio (and system financing in general) outperformed expectations in the late 1990s was that the Trustees and actuaries underestimated the strength of the economy at that time. The Trustees are reluctant to jump on board with new trends in economic or demographic thinking, at least in terms of applying them to their long-term projections. This caused their Reports in the late 1990s to look pessimistic. However, most economists have now backed off the most optimistic views of the "new economy" and extremely high future productivity. Had the Trustees bought into that view their Reports in the 1990s would have looked more accurate, but they'd be forced to back off significantly today. Can the system outperform expectations again? Sure, and it almost surely will. But it will almost surely underperform expectations as well. For instance, recent Reports might not have anticipated the current economic slowdown and so the system might underperform for a year of two. But the ups and downs of the business cycle aren't very meaningful with regard to their longer term projections.

Read more!

GAO: Long-term still unsustainable

The Government Accountability Office released an update to their long-term fiscal outlook. GAO illustrates taxes and spending under two baselines:

The first is “Baseline Extended,” which follows the CBO’s January baseline estimates for the first 10 years and then simply holds revenue and spending other than large entitlement programs constant as a share of gross domestic product (GDP). The second is the “Alternative simulation” based on historical trends and recent policy preferences. Under these alternative assumptions, discretionary spending grows with the economy rather than inflation during the first 10 years, Medicare physician payments are not reduced as in current law, and revenues are brought down to their historical level.

The following table summarizes the fiscal gap under the two baselines.

So we have a choice between a 17% increase in federal taxes or reduction in spending under the optimistic baseline, or a 36% increase in taxes or reduction in spending in the other. As with other analyses, most of this is driven by cost growth in health care, with smaller contributions from Social Security and other programs. Sobering stuff. Read more!

Obama discusses Social Security reform

Here's Barack Obama in Gresham, Oregon discussing Social Security reform, both his own ideas and criticism of Sen. McCain:



Obama says that a first priority is to stop spending the Social Security surplus, which implies balancing the non-Social Security "on-budget."

Second, he opposes any changes such as increasing the normal retirement age or reducing annual cost of living increases, because he believes his own plan -- eliminating the payroll tax ceiling, with a "donut hole" between the current ceiling of $102,000 and around $250,000 -- will be sufficient.

Obama proposes eliminating income taxes on Social Security benefits for individuals earning less than $50,000 in retirement. Obama says this will benefit around 7 million people, at an average of $1,400 per person. As this income tax revenue currently flows to Social Security, this will reduce the program's solvency. (While I don't know the source of his numbers, taking him at his word this would cost around $9.8 billion annually -- a lot of money, though relatively small on Social Security's scale.)

Obama also discusses his plan to automatically enroll individuals in workplace defined contribution pension plans. This is a very good idea, with bipartisan support. (See this proposal from the Retirement Security Project at the Brookings Institution.)

Update: A friend emails: "I guess Obama is unconcerned about generational equity. He wants to reduce taxes on people already getting the best deal (current retirees) and increase them on the generations already getting the worst deal (current workers)."

Me: Hard to deny that's the net result Sen. Obama's policies. To a large degree, Social Security is all about spreading cost burdens over time; making Social Security an even better deal for current retirees will require larger tax increases or benefit reductions on future participants. It's not clear why that's justified on either a policy or a moral basis, though electorally it's got an obvious appeal. Read more!

New paper: Social Security Cost-of-Living Adjustments and the Consumer Price Index

Clark Burdick and Lynne Fisher of SSA have an interesting paper in the latest issue of the Social Security Bulletin, which includes a lot of information I'd not previously known on the CPI and the CPI for the elderly (CPI-E), which some have proposed using to calculate Social Security Cost of Living Adjustments. Here's the summary of "Social Security Cost-of-Living Adjustments and the Consumer Price Index."

OASDI benefits are indexed for inflation to protect beneficiaries from the loss of purchasing power implied by inflation. In the absence of such indexing, the purchasing power of Social Security benefits would be eroded as rising prices raise the cost of living. By statute, cost-of-living adjustments (COLAs) for Social Security benefits are calculated using the Bureau of Labor Statistics (BLS) Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI‑W). Some argue that this index does not accurately reflect the inflation experienced by the elderly population and should be changed to an elderly-specific price index such as the Experimental Consumer Price Index for Americans 62 Years of Age and Older, often referred to as the Consumer Price Index for the Elderly (CPI‑E).

Others argue that the measure of inflation underlying the COLA is technically biased, causing it to overestimate changes in the cost of living. This argument implies that current COLAs tend to increase, rather than merely maintain, the purchasing power of benefits over time. Potential bias in the CPI as a cost-of-living index arises from a number of sources, including incomplete accounting for the ability of consumers to substitute goods or change purchasing outlets in response to relative price changes. The BLS has constructed a new index called the Chained Consumer Price Index for All Urban Consumers (C‑CPI‑U) that better accounts for those consumer adjustments.

Price indexes are not true cost-of-living indexes, but approximations of cost-of-living indexes (COLI). The Bureau of Labor Statistics (2006a) explains the difference between the two:

As it pertains to the CPI, the COLI for the current month is based on the answer to the following question: "What is the cost, at this month's market prices, of achieving the standard of living actually attained in the base period?" This cost is a hypothetical expenditure—the lowest expenditure level necessary at this month's prices to achieve the base-period's living standard. . . . Unfortunately, because the cost of achieving a living standard cannot be observed directly, in operational terms, a COLI can only be approximated. Although the CPI cannot be said to equal a cost-of-living index, the concept of the COLI provides the CPI's measurement objective and the standard by which we define any bias in the CPI.

While all versions of the CPI only approximate the actual changes in the cost of living, the CPI‑E has several additional technical limitations. First, the CPI‑E may better account for the goods and services typically purchased by the elderly, but the expenditure weights for the elderly are the only difference between the CPI‑E and CPI‑W. These weights are based on a much smaller sample than the other two indices, making it less precise. Second, the CPI‑E does not account for differences in retail outlets frequented by the aged population or the prices they pay. Finally, the purchasing population measured in the CPI‑E is not necessarily identical to the Social Security beneficiary population, where more than one-fifth of OASDI beneficiaries are under age 62. Likewise, over one-fifth of persons aged 62 or older are not beneficiaries, but they are included in the CPI‑E population.

Finally, changes in the index used to calculate COLAs directly affect the amount of benefits paid, and as a result, projected solvency of the Social Security program. A switch to the CPI‑E for the December 2006 COLA (received in January 2007) would have resulted in an average monthly benefit $0.90 higher than that received. If the December 2006 COLA had been adjusted by the Chained CPI-U instead, the average monthly benefit would have been $4.70 less than with current indexing. Any changes to the COLA that would cause faster growth in individual benefits would make the projected date of insolvency sooner, while slower growth would delay insolvency. Hobijn and Lagakos (2003) estimated that switching to the CPI-E for COLAs would move projected insolvency sooner by 3–5 years. A projection by SSA's Office of the Chief Actuary estimated that annual COLAs based on the Chained C‑CPI‑U beginning in 2006 would delay the date of OASDI insolvency by 4 years.

My take-away from this is that there isn't currently a perfect option for measuring price changes for the elderly. The CPI-W suffers from overstatement; the CPI-U is a better measure overall but not well-geared toward the elderly; and the CPI-E would need further development before it could be well utilized. For reform purposes, a well developed chained-CPI-E might be a good compromise: it would track the spending patterns of the elderly better than any current measure, and would likely reduce COLAs somewhat but not so much as using the current chained CPI. However, developing a new measure of inflation would be major undertaking by BLS.

Update: A friend emails that Social Security is not by law required to use the CPI-W. When BLS introduced the CPI-U SSA considered using it, but decided to remain with the CPI-W. What I'm wondering is whether this discretion implies that SSA could shift to the chained CPI without legislation.

Read more!

Rep. Paul Ryan to Introduce Entitlements Bill

Wisconsin Republican Rep. Paul Ryan, the ranking Member on the House Budget Committee, previews in the Wall Street Journal comprehensive legislation he will introduce regarding health care, Medicare, Social Security and tax reform. Here are the relevant portions on Social Security reform:

Social Security. Workers under 55 will have the option of investing over one-third of their current Social Security taxes into personal retirement accounts. These personal accounts are likely to grow faster than the traditional benefit. They are also the property of the individual, and are thus fully inheritable. The bill includes a guarantee that no one's total Social Security benefits from the personal accounts will be less than if he had chosen to say in the current system.

Combined with a more realistic plan for growth in Social Security benefits, and an eventual increase in the retirement age, the Social Security program can thus become sustainable for the long term.

While more details would obviously be needed, I can say at this point that I prefer this formulation to Ryan's previous Social Security reform bill, co-sponsored with Sen. John Sununu of New Hampshire. The current Ryan approach would make (yet unspecified) reductions in the growth of future benefits along with increases in the retirement age to help maintain solvency.

Note: An article on the Ryan plan in National Review Online appears to miss these aspects of the bill, saying "the legislation provides a federal guarantee that workers with personal accounts will get at least as much from the accounts and continuing Social Security benefits as promised by Social Security under current law." That's not the case: the plan would guarantee that individuals choosing person accounts would receive benefits at least as high as those who chose to remain wholly within the current program, in which benefits would be reduced for solvency purposes. Roughly speaking, this would guarantee that account holders would receive a return on their account investments at least equal to the return on the bonds in the Social Security trust fund.

In general I'm not a fan of guarantees against market risk, which can be extremely expensive (see here for analysis of the cost of guarantees under the old Ryan-Sununu bill). However, this guarantee is more modest than in the prior Ryan plan and so is moving in the right direction.

Update: Here's some more details on the Social Security elements of the plan, from an extensive document circulated by Ryan's staff:

TITLE IV: SOCIAL SECURITY REFORM

Creation of Personal Accounts. Beginning in 2011, provides workers under 55 the option of dedicating portions of their FICA payroll taxes toward personal accounts, or remaining in the current Social Security system. Automatically enrolls these workers in personal accounts, but provides the option to withdraw. Those who opt out have one opportunity to re-enter the system. Those who originally decide to enter the system will have one opportunity to withdraw.

Account Phase-In. Gradually phases in accounts equivalent to 5.1 percent of the current 12.4-percent payroll tax over a 30-year period. Allows lower-income workers to contribute a higher percentage of their payroll taxes than high-income workers. Phase-in proceeds in four periods, as follows:
- First-Stage Initial Phase-In. For the first 10 years of the program, workers are allowed to invest 2 percent of their first $10,000 of annual payroll into personal accounts, and 1 percent of annual payroll above that up to the Social Security taxable maximum amount of $115,500. The $10,000 level is indexed to inflation. Taxable payroll also is indexed for inflation, as under current law.
- Second-Stage Phase-In. Beginning in 2021, workers are allowed to invest up to 4 percent of payroll of the first $10,000 (indexed to inflation), and 2 percent of payroll above that up to the Social Security taxable maximum amount (indexed to inflation).
- Third-Stage Phase-In. Beginning in 2031, workers are allowed to invest up to 6 percent of payroll of the first $10,000 (indexed to inflation), and 3 percent of payroll up to the Social Security taxable maximum amount (indexed to inflation).
- Fourth-Stage Phase-In. Beginning in 2041, workers are allowed to invest up to 8 percent of payroll of the first $10,000 (indexed to inflation), and 4 percent of payroll up to the Social Security taxable maximum amount (indexed to inflation).

Personal Accounts Deposits. Deposits each personal account contribution into a Social Security Savings Fund, bearing the individual’s name. Converts individual accounts into annuities upon retirement.

Guaranteed Minimum Benefit. Guarantees that those who select personal accounts the minimum benefits they would receive if they stayed in the current system, subject to the changes made to the current system. Should an individual’s account be too small to provide an annual annuity equal to this minimum level, the Social Security Trust Fund would make up the difference.

Property Right. Provides that each account is the property of the individual, allowing holders to pass on accumulated wealth to descendants.

No Change for Those Over 55. Retains the current system for those currently over 55, with no changes.

No Change for Survivors and the Disabled. Retains current survivor and disability benefits as under the current system, without change.

Increased Minimum Benefits for Low-Income Individuals. Provides that all individuals choosing personal accounts receive annuity payments of at least 150 percent of the poverty level. Increases to at least 120 percent of the poverty level the benefits for low-income individuals who choose to remain in the current system and meet certain working requirements.

Social Security Personal Savings Account Board. Creates a Board to administer the Savings Fund into which contributions to the personal accounts are deposited. Makes the Board responsible for paying administrative expenses and regulating investment options offered by nongovernment firms. Provides that the Board consist of five members – required to have substantial experience, training, and expertise in the management of financial investments and pension benefit plans – appointed by the President, two of whom are appointed after consideration of the recommendations by the House and Senate. Establishes 4-year terms for Board members.

Three-Tier Structure. Structures individual accounts in three tiers, with investment options similar to the Thrift Savings Plan [TSP].
- Tier One. Originally, the Board would invest the contributions in regulated, low-risk instruments until the personal account reached a low threshold.
- Tier Two. Once this threshold is reached, individuals are automatically enrolled into a “life cycle” fund that adjusts for risk and automatically invests the portfolio in a blend of equities and bonds appropriate for the individual’s age. An individual could remain in the “life cycle” fund or choose from five different options that are the same as offered under the TSP: 1) a Government Securities Investment Account; 2) a Fixed Income Investment Account; 3) a Common Stock Investment Account; 4) a Small Capitalization Stock Index Investment Account; and 5) an International Stock Index Investment Account.
- Tier Three. Once an account accumulated over $25,000 in inflation adjusted dollars, an individual could choose an option provided by a nongovernment firm certified by the Board. The Board certifies only those firms meeting a set of standards. These nongovernment funds also are subject to regulation by the Board to ensure their safety and soundness.

Purchase of Annuity. Provides that, when an individual either reaches the normal retirement age or decides to retire early, the individual will purchase an annuity to provide monthly payments equivalent to at least 150 percent of poverty. An individual may purchase a larger annuity if they choose. As described above, if the individual’s personal account is inadequate to purchase an annuity that would provide a monthly payment as large as would be received under the traditional system, the government will make up the difference. If an individual has excess money in their account, they may receive it in a lump sum payment and use it as they choose.

Early Retirement for Personal Account Participants. Allows an individual to retire and begin receiving an annuity at any time that their personal account has accumulated enough funds to purchase an annuity equivalent to at least 150 percent of poverty.

Annuity Purchase and Regulation. Establishes within the Office of the Board, an Annuity Issuance Authority [AIA], which will provide annuity options to be purchased by retiring individuals.

Provision for Early Death. Provides that, if an individual dies before their full annuity has been paid, the amount of funds left over in their annuity or personal account will be made available to their designated beneficiaries or estate.

No Taxation of Personal Account Benefits. No tax will be paid on the receipt of Social Security benefits generated from personal account payments either as a part of an individual’s Federal income tax or estate tax.

Progressive Price Indexing. Excluding those now over 55, employs, starting in 2016, a mix of wage indexing and “progressive price indexing” for calculating initial Social Security benefits under the traditional system, with adjustments for income levels as follows:
- Low-Income. Individuals who make less than a certain threshold level (approximately $25,000 per year in 2016) will continue to receive initial benefits based on wage indexing. Threshold will be indexed for inflation.
- Middle-Income. Individuals who make between the minimum threshold and the maximum taxable amount (approximately $25,000 and $113,000 in 2016) will have initial benefits adjusted upward by a combination of wage and price indexing that becomes more oriented toward price indexing as they move up the income scale. For example, an individual whose income is half way between $25,000 and $113,000 (in 2016 dollars) will have his initial benefit adjusted upward approximately 50 percent by wage indexing and 50 percent by price indexing. These amounts will also be adjusted for inflation.
- Upper-Income. Individuals who make more than the taxable maximum amount (approximately $113,000 in 2016) will have initial benefits adjusted upward by price indexing, also adjusted for inflation.
- No Effect on COLAs. The proposal does not affect the cost-of-living adjustment [COLA] that Social Security beneficiaries receive each year once they have already begun receiving benefits. Further, it does not affect any individuals over 55, as it is not applied to Social Security beneficiaries until 2016.

Acceleration of Ongoing Retirement Age Increase. Advances by 1 year the current retirement age adjustment, which, under current law, gradually rises to 67 years of age for those who reach that age in 2027.

Modernizes the Retirement Age. After the normal retirement age of 67 is reached in 2026, indexes further adjustments in the retirement age in accordance with the Social Security Administration’s projected life expectancy, which is expected to gradually increase the normal retirement age by 1 month every 2 years. At this rate, the normal retirement age would remain below 70 years until 2098. Does not affect the ability of an individual to retire early if he or she elects to retire early and has accumulated enough wealth to retire early.

I've attached a copy of the full document circulated by Rep. Ryan's office.

Read more!

USA Today: Taxpayers' bill leaps by trillions

USA Today has long had an interest in budget accounting and entitlement reform. Yesterday's front page story attempts to make an all-in measure of government obligations, expressed both in total and on a per-household basis. While one can quibble with how certain things are measured, the broader point is that we have a large number of very significant financial obligations that are "off the books" -- that is, distinct from explicit debt issued by the government. Going forward, we must decide how much of these future obligations to honor and how to raise funds for those that remain.

Taxpayers are on the hook for a record $57.3 trillion in federal liabilities to cover the lifetime benefits of everyone eligible for Medicare, Social Security and other government programs, a USA TODAY analysis found. That's nearly $500,000 per household.

When obligations of state and local governments are added, the total rises to $61.7 trillion, or $531,472 per household. That is more than four times what Americans owe in personal debt such as mortgages.

The $2.5 trillion in federal liabilities dwarfs the $162 billion the government officially announced as last year's deficit, down from $248 billion a year earlier.

As an aside, I spent yesterday in Jacksonville, Florida appearing with the Fiscal Wake-Up Tour, a Concord Coalition project featuring former Comptroller General David Walker, who now heads up the Peter G. Peterson Foundation. While running the GAO, Walker put together a list of obligations similar to that published yesterday by USA Today. Read more!

Wash Post: Obama Knocks McCain on Social Security

From the Post's On the Trail blog:

GRESHAM, Ore. Sen. Barack Obama came to a senior citizens center here to discuss the squeeze faced by middle-class retirees and reiterate his longstanding proposal to eliminate income taxes for any senior making less than $50,000 per year.

The proposal came as the Illinois senator continued to focus his intentions not on Sen. Hillary Rodham Clinton, his rival in a Democratic primary contest in Oregon Tuesday, but instead on Republican Sen. John McCain.

Obama has spent the past week seeking to tie McCain to President Bush and foregrounding the differences between Obama's views and McCain's on a range of issues, including foreign policy, rural and farm issues, manufacturing jobs, energy reform and health care.

In an hour-long forum with about 50 seniors, Obama turned his attention to the financial pressures facing those in retirement, which he said is something people are "most worried about."

"That American dream feels like it's slipping away," he said.

The senator laid out a plan to "adjust the cap on the payroll tax so that people like me pay a little bit more and people in need are protected. That way we can extend the promise of Social Security without shifting the burden onto seniors." He said the plan would include "a donut hole" to make sure that the change did not "ensnare" middle class Americans.

He also suggested eliminating income taxes for any retiree making less than $50,000 per year.

Obama said his approach differed sharply from that of McCain, who "has already said that he supports private accounts for Social Security -- in his words, 'along the lines that President Bush proposed.'"

"Let me be clear: privatizing Social Security was a bad idea when George W. Bush proposed it. It's a bad idea today. It would cost a trillion dollars to implement at the front end, and would put the retirement plans of millions of Americans at risk on a volatile Wall Street," Obama said. "That's why I stood up against this plan in the Senate, and that's why I won't stand for it as president."

Tucker Bounds, a McCain spokesman, responded to Obama's Oregon remarks this afternoon, saying "Barack Obama's response to our slowing economy is to raise taxes on job creating investment. His response to high gas prices is to raise taxes on oil."

"With his lack of experience, it should be no surprise that Barack Obama's response to the problems facing Social Security is to raise Social Security taxes, while making mis-informed partisan attacks," Bounds said. "His proposal for billions upon billions in tax increases on Social Security is just another example of his weak economic judgment. John McCain has been clear about his belief that we must fix Social Security for future generations and keep our promise to today's retirees, but raising taxes should not be the answer to every problem."

Not much of substance to add here, except a couple quick points:

• First, Obama's plan -- even excepting the reduction in income taxes on retirement benefits -- wouldn't come close to saving Social Security. He's still further along than McCain, who hasn't endorsed anything specific yet, though he has stated he'd focus on holding back on benefit growth;
• Second, the question of whether to have personal accounts isn't related to solvency. Rather, it's about how to spread the costs of solvency over time -- accounts, if properly structured, can set aside money today to ease burdens on future generations -- and the costs and benefits of allowing low-income workers to diversify their retirement portfolio to include stocks and bonds.

Read more!

John McCain on Social Security

Courtesy of The Wonk Room, which takes a decidedly negative view of McCain's staement, is a short passage on Social Security reform from, of all places, the Regis and Kelly show:

MCCAIN: What should be partisan about the fact that Social Security is going to go broke? I mean, should we be divided up among Republican and Democrat…

REGIS: Do you have a plan?

MCCAIN: Yes, sir. It’s gonna require, though, cooperation and participation by the other side. And I’ll reach my hand out…

REGIS: Is it privatization of the Social Security program?

MCCAIN: No, no it isn’t. But I would say that I support…I’d put everything on the table to start with…but second of all…young workers ought to be able to put part of their salary, part of their taxes into Social Security, into an account with their name on it. But that would not in any way effect older workers. But you’ve got to have a negotiation.

The running question underlying this and previous statements from McCain and his campaign is whether he supports so-called "carve out" accounts funded from the payroll tax or "add-on" accounts funded with additional contributions.

Here is the McCain campaign's "official" position on Social Security reform:

Reform Social Security: John McCain will fight to save the future of Social Security and believes that we may meet our obligations to the retirees of today and the future without raising taxes. John McCain supports supplementing the current Social Security system with personal accounts -- but not as a substitute for addressing benefit promises that cannot be kept. John McCain will reach across the aisle, but if the Democrats do not act, he will. No problem is in more need of honesty than the looming financial challenges of entitlement programs. Americans have the right to know the truth and John McCain will not leave office without fixing the problems that threatens our future prosperity and power.

This statement talks about accounts "supplementing" traditional Social Security benefits, which some have take as implying an add-on account, while today's statement seems to point toward a carve-out.

I suspect the true answer is that the "add-on vs carve-out" question hasn't really been decided, and at this point there probably isn't too much need to. Social Security reform will ultimately be a negotiated settlement between the parties, so what matters most will be the reform package, not the individual provisions. Read more!

New paper: Have People Delayed Claiming Retirement Benefits?

CBO released a working paper (available here) by two of my very talented former SSA colleagues, Jae Song of Social Security's Office of Retirement and Disability Policy and Joyce Manchester, now of the Congressional Budget Office.

Here's the abstract:

Two changes have been made recently to rules governing the Social Security program: the retirement earnings test was eliminated in 2000 for people aged 65–69, and the full retirement age (FRA) for people born in 1938 or later was scheduled to gradually increase in two-month increments until reaching age 67. This paper examines changes in the age at which people claim Social Security retirement benefits in response to those changes. Data come from a 1 percent sample of administrative data from the Social Security Administration for 1997 to 2007.

Descriptive and regression analyses show that the largest effect of eliminating the earnings test in 2000 occurs at age 65. At that age, the proportion of people who claim retirement benefits increases by 4.6 percentage points among men and 2.4 percentage points among women. In addition, eliminating the earnings test significantly increases—by more than 20 percent—the benefit entitlement hazard for those turning the FRA (that is, the percentage of people who are newly entitled in a given year among those who are fully insured but were not previously entitled). Moreover, the response to the gradual increase in the FRA occurs not only among those who are close to the FRA but also among those who are close to the early retirement age.

Read more!

Obama's Faulty Tax Argument

I have an article in today's Wall Street Journal:

As the presidential campaign heats up, a key issue is whether to extend the 2001 and 2003 income tax cuts, which expire in 2011. John McCain wants to make the tax cuts permanent. Barack Obama and Hillary Clinton want to let the rates rise.

Opponents of the tax cuts point to spending programs that could be financed by the extra revenues. Chief among these is Social Security. Sen. Obama's Web site, for example, argues that "extending the Bush tax cuts will cost three times as much as what is needed to fix Social Security's solvency over the next 75 years."

Such statements imply that if we return to the seemingly modest tax rates of the 1990s, we could fund the $4.3 trillion Social Security deficit, and so much more. As Mr. Obama recently told Fox News, "I would roll back the Bush tax cuts on the wealthiest Americans back to the level they were under Bill Clinton, when I don't remember rich people feeling oppressed."

This argument seems compelling, but it is misguided. In reality, repealing the tax cuts would raise taxes far above Clinton-era levels. Due to quirks in the tax code, average taxes would be almost 25% higher than during the 1990s.

Mr. Obama's claim that the lost revenue from the income-tax cuts exceeds the Social Security shortfall derives from an analysis by the Center on Budget and Policy Priorities. The Center's conclusions have been widely cited, but rely on dubious assumptions.

The basic methodology is simple: Compare the income-tax revenues if the tax cuts expire to revenues if the tax cuts are extended. The Center measures the difference in revenue 10 years from now – to match the government's 10-year budget measurement period – then extends the difference over 75 years to make it comparable to the 75-year Social Security shortfall.

To account for the effects of inflation and economic growth, analysts compare tax revenues to the size of the economy. The Congressional Budget Office projects that if the tax cuts expire, income-tax receipts in 2018 will be 1.5% higher relative to gross domestic product than if the cuts are made permanent. By comparison, Social Security's 75-year shortfall is just 0.6% of GDP.

So Social Security is a costly problem, but the tax cuts cost much more. Open and shut case, right?

Not exactly. Tax revenues would skyrocket if the tax cuts expire, due to "bracket creep." Average incomes are higher today than in the 1990s, but income-tax brackets aren't adjusted for the growth of earnings. As a result, Americans will shift into higher tax brackets and pay a greater share of their incomes in taxes.

Going back to the tax rates of the 1990s doesn't mean that households will pay 1990s taxes. Because the tax brackets haven't risen along with incomes, average taxes would be significantly higher, and grow each year.

If the tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.

Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average. Thus even with the tax cuts, revenues will increase by more than enough to fix Social Security.

So even if the tax cuts are made permanent, future Americans will pay a greater share of their incomes to the government than in the past. But for some in Washington, that's not enough.

Not surprisingly, neither party highlights these rising tax receipts. They undercut liberal arguments that the government is starved of revenue. And they render conservative claims for the tax cuts unimpressive. ("Vote GOP: A smaller tax increase than the other guys!")

The next president will face difficult choices regarding how much to collect in taxes, and how much to spend on entitlements like Social Security. Future citizens may decide that paying higher taxes is worthwhile. But in any event, the misleading tax cuts vs. Social Security argument should not guide policy makers on this issue.

Mr. Biggs, a resident scholar at the American Enterprise Institute in Washington, D.C., is the former principal deputy commissioner at the Social Security Administration.

The basic story is that the actual tax you pay is a function both of the tax rates (10%, 15%, etc.) and the tax brackets, that is, the dollar values determining to what income each rate applies. Since the brackets are indexed only to inflation while incomes tend to rise faster than inflation, taxes will tend to rise as a percentage of income. There are two ways this can happen: first, you may shift into a higher tax bracket. And second, even if you don't shift brackets, a greater portion of your income will be in the highest bracket to which you are subject, and so your average tax rate will rise even if your marginal rate does not. The tax cuts vs Social Security argument focuses only on the rates, not the brackets, and in this way is misleading.

Read more!

(Bad) Idea of the Day: Eliminate the Employer Social Security Payroll Tax Cap

The Center for American Progress puts forward a new idea for Social Security financing:

We propose eliminating the payroll tax cap on the employer side to make businesses pay Social Security taxes on all of the income of the highest paid employers, just like they do for those earning less than $97,500. This is the fairest way to help shore up the finances of Social Security. This change would impact the taxes that businesses pay for only the top 6.5 percent of earners (couples and individuals), yet would yield significant additional revenue to reduce the deficit and bring the Social Security system closer to solvency.

According to the Social Security and Medicare Board of Trustees, the long range, 75-year actuarial deficit is equal to 1.95 percent of taxable payroll. Eliminating the cap on both the employer and employee side would be more than enough to bring the system into long-range balance. Removing the cap on the employer side would thus go a long ways toward restoring solvency as well as help ensure greater progressivity and fairness in the payroll tax.

This idea seemingly has political merit, since it would ostensibly hit businesses (who don’t vote) rather than individuals (who do). But it’s worth thinking how this would play out in practice. To understand that, consider two things:

First, in a competitive economy an employee is compensated according to his contributions to the business (technically, the marginal product of his labor). If he is paid more than he contributes, the firm goes out of business; if he is paid less, he will be lured away by a competing firm. Second, the firm cares about the employee’s total compensation, not about how compensation is divided into salary, health benefits, pension contributions or payroll tax contributions on the employee’s behalf. The employee may care, but the employer focuses on the total amount.

Given these facts, what happens if the employer share of the payroll tax is increased? The employer simply reduces other parts of the employee’s compensation to make up for it. Let’s say a given employee receives $200,000 in salary, $20,000 in health and pension contributions, and $6,200 in Social Security payroll tax contributions, for a total of $226,200. If the $100,000 cap on payroll taxes is eliminated, the employer’s contribution will rise from $6,200 to $12,400. Our best guess is that the worker’s salary and benefits will be reduced by the amount of the tax increase, in order to maintain total compensation at $226,200. Why? Because that’s how much the employee is worth to the firm. Is this always true? Of course not, but it’s the best approximation of what would take place in practice.

For this reason, it’s the standard practice of government agencies such as CBO and SSA to attribute the employer share of the payroll tax to employees. So increasing the employer share has no merit different from increasing the employee share, and potentially less because of the lack of transparency involved.

However, raising the tax cap on employers would have one effect distinct from increasing the employee tax cap: it would tend to reduce non-Social Security tax revenues. Employees pay both state and federal income taxes on the wages that are taxed for Social Security purposes. However, if their wages are reduced by their employers to cover the employers’ increase payroll tax obligations, those wages would no longer be subject to state/federal income taxes. If the marginal tax rate for high earners is in the range of 35-40%, the total revenue raised by this plan could be substantially lower than the static projection based on Social Security taxes alone.

Overall, if the folks at the CAP want to increase the tax cap, they should probably focus on employees or both employees and employers; focusing on employers only isn't particularly good policy.

As an aside, there is one instance in which the cap on employer taxes has already been lifted: for individuals with multiple jobs. Individual wages subject to Social Security taxes are capped at $102,000; if an individual has multiple jobs, each earning under the cap, he may end up paying Social Security taxes on more than $102,000 in earnings. At the end of the year, however, he can claim these excess taxes back on his tax return. His employers, however, cannot do so. Read more!

Entitlement reform event with Sens. Conrad and Gregg

On May 12 from 3-5 p.m. the Woodrow Wilson International Center for Scholars in Washington DC will hold an event entitled "The Seniors’ Entitlement Crunch: The Politics of Social Security and Medicare Reform," featuring Sen. Kent Conrad (D-N.D.), Chairman, Senate Budget Committee; Sen. Judd Gregg (R-N.H.), Ranking Republican, Senate Budget Committee; Asst. Prof. Kimberly J. Morgan Dept. of Political Science, George Washington University; Julie Rovner, Health Correspondent, NPR & Congress Daily.

Here's the event description:

When the next President and new Congress take office next January, they will face a critical issue that has not been addressed in either the current presidential campaign or the congressional budget resolutions, and that is how to deal with the impending insolvencies of the Medicare and Social Security Trust Funds in the next decade. The top two senators on the Senate Budget Committee have cosponsored legislation to deal with the problem early in the next Congress by acting on the recommendations of a bipartisan commission of House Members, senators, and administration officials that would be created and mandated to report findings next January. Similar bipartisan process approaches have been introduced in both houses of Congress and proposed by prominent economists of various political stripes. Will the political will exist to address this long festering fiscal fissure? This forum will explore these vital economic security and political issues.

You can RSVP here; a webcast will be available here. Read more!

Met Life Social Security Claiming Age Calculator

Met Life has released an online calculator to help people determine the best age at which to claim Social Security benefits. This is obviously a step in the right direction, given how many people choose to claim at 62, the earliest age at which retirement benefits available. As best I can tell, the underlying approach is taken from SSA's own retirement calculators, though Met Life tweaks it with gender specific life expectancies and a generally snazzier interface (including Snoopy).

In short, the user inputs their age, earnings and gender, and the calculator estimates their benefits and life expectancies at different ages. Users compare claiming benefits at age 62 with claiming at some higher wage (say, the normal retirement age or age 70). The calculator then calculates the break-even age -- the age at which total benefits received are equal between the two claiming ages -- and the probability of the user surviving to the break-even age.

That said, and as much as I'm reluctant to criticize something which attempts to move in the right direction, there are a couple problems with the Met Life calculator.

First, if you're going to do a break-even analysis, total benefits should be calculated as a present value, meaning that the interest value of benefits is included, rather than simply summing benefits received in multiple years. Granted, SSA also simply adds up benefits, but this is wrong; no economist or actuary would do it this way.

Second, the break-even age approach isn't really the best way to choose a retirement age. Choosing your retirement age isn't a game in which you try to maximize lifetime benefits. Rather, you should retire at an age that provides you with an adequate income. Imagine, for instance, that you could maximize your lifetime Social Security benefits by claiming at age 62, but that your benefit at 62 would be below the poverty line. Would it make sense to claim then, or delay a few years to receive a higher benefit? Common sense says to delay, if you are able, but the considerations of benefit adequacy aren't accounted for in break-even exercises.

Third, the calculator doesn't take into account the annuity value of Social Security benefits. Retirement benefits are paid as an annuity, meaning that they last as long as you live. Annuities are very valuable compared to lump sums since they insure against the chance of outliving your assets. (So much so that even groups with below-average life expectancies, like black males, benefit from the Social Security annuity. See here.) By delaying claiming benefits, you're essentially "buying" more of the Social Security annuity. The insurance value of an annuity is hard to represent in an online tool, but it's worth bearing in mind research showing that a retiree would need a lump sum of around $150,000 to provide the same lifetime income security as an actuarially fair annuity with a premium of $100,000.

Fourth, the calculator doesn't tell the full story on the Social Security earnings test. It does note that early retirees with earnings above $13,560 will have their benefits reduced on a $1-for-$2 basis. What it doesn't tell is that at the full retirement age, Social Security not only stops reducing your benefits, but actually increases them to make up for benefits lost to the earnings test in earlier years. Over the course of a full retirement, total benefits are around the same. So the earnings test shouldn't discourage people from working while collecting benefits.

Overall, the Met Life calculator is a welcome addition to financial planning tools, particularly since it's designed to be easy to use. However, with improvements it could be significantly better.

Read more!