Friday, May 29, 2009

Chuck Blahous: Is health care reform really entitlement reform?

Here's the Hudson Institute's Chuck Blahous talking about the Obama administration's argument that the key to fixing entitlements is first reforming private sector health care.

Readers know what I think about this... Read more!

Got $546,668? Neither does the government.

USA Today
reports that the total obligations of the federal government, including entitlements, civil service retirement and other costs, total $63.8 trillion in present value. Your share? $546,668. Think about that when people want to add new entitlement programs rather than fixing the ones we already have.

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Thursday, May 28, 2009

Jim Capretta on a fiscal wake up call

The Ethics and public Policy Center's Jim Capretta blogs at National Review on the danger that fiscal profligacy will cause a downgrade of U.S. treasury bonds:

At the end of 2008, our national debt burden stood at 41 percent of GDP. The Congressional Budget Office (CBO) expects the Obama budget plan to push it above 82 percent at the end of 2019.

And that's before the retirement of the baby-boom generation hits with full force. Between 2020 and 2030, the number of Americans age 65 and older will increase from 53.7 million to 68.9 million — a jump of 16 million over a decade.

But would a bond downgrade finally spur Congress to action? You'd like to think so. But as I argued here, under standard Social Security and Medicare accounting a financial crisis could actually make the programs' problems seem smaller and less urgent.

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Monday, May 25, 2009

Samuelson: Insolvency? Bring it on.

Newsweek's Robert Samuelson writes that if Congress only addresses entitlements in a crisis, the sooner the crisis comes the better:

Like General Motors and Chrysler, we continue self-defeating habits because we can—temporarily. These are not easy issues. But procrastination is a bad policy. The longer changes are postponed, the more wrenching they will be. The hurt for retirees and taxpayers alike will only grow with time. Social Security last faced a forcing event in 1983, when a dwindling trust fund prodded Congress to make changes. The counterintuitive lesson: a "crisis" is just what we need.

A couple thoughts. First, I was recently at a dinner with a retired very senior Member of Congress, who – like Samuelson – predicted that it would take a crisis to spur Congress to action. Congress, he said, is like a high schooler waiting until the night before the exam to study. My question – and for better or worse I voiced it – is whether we have a right to expect our elected representatives to approach issues of national importance with greater seriousness than a teenager devotes to Friday's math quiz.

Second, Samuelson's column brought back thoughts of President Bush's reform efforts in 2005, where he spent a great deal of time talking about the problem of Social Security solvency before he began to discuss reforms. A constant cry from the left (and from much of the press) was that Bush was "crisis mongering," claiming a crisis where none existed. Let's leave aside that Bush rarely if every called Social Security a crisis, while President Clinton regularly did so – and more recently, so has then-Senator Obama. My question was, are we supposed to wait until it's a crisis to act? Because at that point it would be, well, a crisis? Shouldn't we act before a crisis comes, and wasn't that exactly what President Bush was advocating?

All rhetorical questions, obviously, but perhaps still worth asking.

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Thursday, May 21, 2009


I have an article in this morning's Los Angeles Times about the lack of a Social Security Cost of Living Adjustment this year.

The COLA wars

Outrage about the absence this year of a cost-of-living adjustment for Social Security recipients is based on ignorance of the system.

By Andrew G. Biggs
May 21, 2009

There's a cola war going on, but it has nothing to do with Coke versus Pepsi.

It began earlier this month when the Congressional Budget Office projected that for the first time in three decades, there would be no cost-of-living adjustment -- or COLA -- for Social Security recipients in 2010, 2011 and 2012.

These adjustments are designed to keep elderly Social Security recipients from losing purchasing power as prices rise, so it's not surprising that the initial reaction was one of concern.

"The absence of a cost-of-living adjustment ... will be a shock to older Americans already hit by plummeting home values, investment losses and rising health costs," wrote the New York Times.

Senior groups were predictably up in arms. An AARP spokesman moaned that "most seniors have never been through a year in which there was no Social Security COLA." Some liberal bloggers accused the Obama administration of betraying seniors. And there's already talk of legislation to address this perceived inequity.

But the outrage is unwarranted. It's true that most seniors have never faced a year without a COLA, but that's only because they've never experienced a year without inflation, which is what the Congressional Budget Office says is what's happening now.

The COLA is not supposed to be a "raise" in Social Security benefits, even if seniors often see it that way. Rather, when the consumer price index, or CPI, rises in a given year, Social Security benefits are adjusted upward to match that rise in inflation. If done accurately, the purchasing power of Social Security benefits before and after a COLA will be precisely the same.

Under law, Social Security benefits are not allowed to outpace inflation except in one special case: when prices fall. That's because Congress, leery of the political consequences of cutting anyone's benefit check, structured the Social Security Act so that when inflation is negative, COLAs don't go down, but they remain at zero. And when inflation is negative and the COLA is at zero, purchasing power is actually going up. If retirees understood that, they'd hope to never receive another COLA.

That's what's happening now. Rising energy prices drove the CPI sharply upward last year, and as a result, seniors received a large 5.8% COLA to compensate in 2009. Since then, however, almost that entire CPI increase was lost as energy prices dropped, and the CPI is projected to remain below 2008 levels through 2012.

In a world in which policy trumped politics, falling prices would lead to negative COLAs just as rising prices lead to positive COLAs. But that's not the world we live in.

And there's another twist: Congress also has ruled that increases in Medicare Part B premiums, which are automatically deducted from retirees' Social Security benefits, cannot result in benefits declining from year to year. If there is no COLA this year, this implies that Medicare Part B premiums cannot increase either, despite the fact that by law these premiums must finance 25% of total Part B costs.

Legitimate questions remain regarding Social Security COLAs. Many economists think that the CPI overstates inflation; if true, that means that existing COLAs are too high. Seniors groups, on the other hand, think that the CPI, based on working-age Americans' spending habits, doesn't adequately address seniors' heavy healthcare spending. By that way of thinking, the CPI may understate price increases for seniors. But these matters are entirely separate from the COLA dispute currently underway.

Groups such as the AARP are surely aware that a zero COLA actually means higher real benefits and lower Medicare Part B premiums. But the AARP nevertheless warns that seniors "feel like they are falling behind." That's irresponsible -- especially from such a powerful lobbying organization with the ability to change the debate in Washington. If the AARP seeks to be something more than a mere "union for retirees," it must use its considerable influence more carefully.

Inflation protection for retirees is important, but it's just as important not to increase Social Security benefits and reduce Medicare premiums when it's not necessary -- and when these programs are, as the federal government regularly informs us, vastly underfunded.

If Congress were to succumb to political pressure and provide a COLA when none is needed, it would only compound the problem.

One part of the solution is to make sure retirees understand how inflation and COLAs work. A second part is for Congress to say no to powerful voting blocs when they're out of line.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute and was previously the principal deputy commissioner of the Social Security Administration.

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Wednesday, May 20, 2009

Michael Lind weighs in again on Social Security

The other day I ran through some of the claims made by the New America Foundation's Michael Lind and, well, found them a bit wanting. (Sorry about the "lefty claptrap" line…) Since then, Lind has again written on Social Security and his arguments are typical enough of those you hear from the left that they're worth revisiting.

To start, Lind says:

Last Tuesday, just before the release of the annual Social Security trustees report, I predicted that no matter what the report contained the perennial enemies of America's most effective and efficient universal social insurance program would cite it as proof that Social Security needs to be means-tested, privatized or both. The report is in, and its contents are far from dramatic. The (dubiously) estimated date at which, absent changes, the trust fund dries up and Social Security shifts to a pay-as-you-go program paying most, but not all, promised benefits has moved up slightly from 2041 to 2037.

In the 2008 Report, Social Security's long-term deficit was 1.7 percent of payroll; in the 2009 Report, it's risen to 2.0 percent of payroll. By my math, that's an 18 percent increase. One would think that a nearly one-fifth rise in the deficit would be at least worth mentioning.

Next, Lind says:

The "unfunded liabilities" argument is … only applied to programs that, like Social Security and Medicare, are paid for by a dedicated tax like a payroll tax. The projected gap between future revenues and future outlays from this special-purpose tax is the "unfunded liability." Why do we never hear of the "unfunded liabilities" of Pentagon spending -- the third of the big three spending programs (Social Security, Medicare, defense) that take up most of the federal budget? Defense spending comes out of general revenues, not a dedicated tax.

A couple points: one reason Social Security has a dedicated tax was to wall it off from the rest of the budget. So long as it's adequately funded, Roosevelt reasoned, it would be very hard to cut the program's benefits. Fine. But the same holds true on the negative end: if the program is supposed to be self-financing, then any shortfalls are reported. I'm not sure what the problem is with that, unless Lind disagrees with how Roosevelt established the program. Second, defense spending is largely done on a year-to-year basis; at most, the government pays for a ship today that it won't receive for several years. Social Security, by contract, taxes you from the day you begin working and upon those taxes incurs an obligation to pay you benefits until you die. The 75-year reporting horizon was chosen for exactly that reason: to span the typical life of an individual entering a program, to let him know the sufficiency of the program's funding to the approximate maximum age he might live. (I can probably find this explicitly stated somewhere in the Trustees Report if needed.)

Next, Lind tackles the trust fund debate:

Cato's [Michael] Tanner does concede that the Social Security Trust Fund will pay benefits until 2037. He claims, however, that "that figure is misleading, because the Trust Fund contains no actual assets. Instead, it contains government bonds that are simply IOUs, a measure of how much the government owes the system." So government bonds backed by the full faith and credit of the U.S. government, a government that has never defaulted on its obligations in its entire existence since 1776, are not actual assets?

Imagine you're a taxpayer and you're offered two possible options: first, the trust fund is filled with U.S. Treasury bonds. When Social Security starts running deficits in 2016 it redeems those bonds and to finance the redemption the government raises your taxes, cuts other programs or increases the deficit. What this points to is that the trust fund, while an asset to Social Security, is an equal and opposite liability to the Treasury – and to you, the taxpayer. Now imagine instead that the Trust Fund held, say, Canadian government bonds. Come 2016, it's our friends up north who have to raise taxes, cut spending or run a deficit. This is the point people on the center and right make about the trust fund: not whether it will be paid back, but how. The trust fund is an asset to Social Security, but it's not an asset to taxpayers.

Next, Lind moves to reform options:

[E]ven when the trust fund runs out and Social Security becomes a pure pay-as-you-go system… lifting the cap on the amount of income subject to the payroll tax would eliminate that problem forever. In other words, the contract between elderly Americans and the rest can be honored in half a century by slightly higher taxes that would fall chiefly on much richer Americans in a much richer America."

Unfortunately, this really isn't the case. Even if we eliminated the payroll tax ceiling in 2037 – something that would radically change the nature of Social Security as originally designed – and if we didn't pay any additional benefits in exchange for the extra taxes – another blow at Social Security's founding ethos – the program wouldn't even be solvent in 2037, much less forever. That is to say, Lind's proposed tax increase, which would raise the top marginal tax rate by 12.4 percentage points, by the by – wouldn't even cover the deficit in that year.

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Obama Misdiagnoses ‘Real Deficit Threat’

Deconstructing Peter Orszag's Wall Street Journal article, over at AEI's Enterprise blog.

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Tuesday, May 19, 2009

Roll Call: Obama was ready to pull trigger on Soc. Sec. reform, but backs off under pressure

Keith Koffler reports for Roll Call that the Obama administration was ready to move ahead with a Social Security reform group consisting of Members of congress and potentially outside experts, but backed off under pressure from House Speaker Pelosi and outside interest groups. With Pelosi weakened by her conflict with the CIA over torture briefings and with her second-in-command, Majority Leader Steny Hoyer, openly calling for action on reform, it will be interesting to see if Obama will be ready to buck pressure and move ahead.

The White House quietly sought to get the ball rolling on overhauling Social Security earlier this year, but it either abandoned or significantly downgraded the process under pressure from Speaker Nancy Pelosi (D-Calif.) and outside liberal interest groups, according to sources familiar with the stalled effort.

Though President Barack Obama wants to move first this year on health care reform and energy legislation, senior aides — and according to one Congressional source, the president himself — were in touch with lawmakers about putting together a task force of Members and possibly others who would informally compile recommendations about what should be done to shore up Social Security and what would be feasible politically.

With a recent Social Security Trustees report showing the system's financial prospects to have worsened, White House aides are now reassessing the timing of a move on Social Security. But with health and energy legislation both well out of the gate, it is unlikely that Social Security could find an opening until next year at the earliest. And the prospect of Congressional action on the "third rail" of U.S. politics during an election year is dim at best.

Sources cited several reasons for the White House outreach early this year, not the least of which is the long-standing interest of top White House aides in fixing the nation's retirement system.

Among the key players on the White House side was Office of Management and Budget Director Peter Orszag, who as an economist was a recognized expert on the issue. During former President George W. Bush's failed effort to overhaul Social Security in 2005, Orszag co-authored one of the prominent reform plans designed to influence debate. Also involved was White House Chief of Staff Rahm Emanuel, who is avidly maintaining his wide contact base on Capitol Hill.

But officials with knowledge of White House strategy said the president's advisers also hoped the task force could be used as ammunition to help pass the economic stimulus bill, which they knew would cost hundreds of billions of dollars even as the federal deficit ballooned. The task force would become a public sign of Obama's commitment to taming the government's long-term fiscal crisis, something that might pick up votes for the stimulus among Blue Dogs and other fiscally conservative lawmakers.

The effort also came at a time when the White House was touting its outreach to Republicans. Several GOP lawmakers were contacted by Obama aides, and the task force was envisioned as a bipartisan affair. Among the lawmakers said to be in the loop on the discussions are several long known to be concerned about the issue, including Senate Majority Whip Dick Durbin (D-Ill.), Senate Budget Chairman Kent Conrad (D-N.D.), Senate Budget ranking member Judd Gregg (R-N.H.), Sen. Lindsey Graham (R-S.C.), Pelosi, several members of the Blue Dog Coalition and House Budget ranking member Paul Ryan (R-Wis.). Most of the major seniors groups were also aware of the push, as were labor officials.

But Pelosi, backed by union allies and officials with some of the more liberal seniors advocacy groups, was cool toward addressing the issue. "Pelosi pushed back," said an official with one of the outside organizations. He indicated that moving hastily in a climate of urgency might lead to hasty solutions that could weaken the program. "She has the same reasons we do — this should go through the regular committee process and be handled by people who have proper knowledge of the program," he said. "We don't want to see any fast-track, 'base closing'-style effort."

But Pelosi, whose office did not respond to requests for comment, is said to be wary of touching the politically charged issue. Pelosi also argued that the task force would take power away from her committee chairmen, according to a senior House Democratic aide. And she asserted it would distract from the effort to move health care and energy legislation, the Democratic aide said.

A statement released by Pelosi in response to the trustees report omitted a specific commitment to Social Security overhaul and instead suggested indirect methods of fixing the system. "By strengthening our economy and creating jobs and by finally tackling the challenge of health care, we are already working to protect the promise of Social Security and Medicare for all Americans," she said.

By contrast, House Majority Leader Steny Hoyer (D-Md.) is publicly pushing for Congress to begin addressing the issue later this year.

In a statement after the latest report was issued, Treasury Secretary Timothy Geithner, who serves as one of the trustees, signaled Obama's determination to fix Social Security at some point. "The longer we wait to address the long-term solvency of Medicare and Social Security, the sooner those challenges will be upon us and the harder the options will be," Geithner said. His rationale was reminiscent of that made by Bush officials during 2005. "This president will work to build a bipartisan consensus to ensure the long-term solvency of Social Security," Geithner said. "The president explicitly rejects the notion that Social Security is untouchable politically and instead believes there is opportunity for a new consensus on Social Security reform."

But without a public commitment to move forward on a date certain, some are skeptical whether Obama has the will to spend political capital and defy the powerful political forces arrayed against acting in the near term. White House officials did not respond to requests to comment.

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The Federal Budget -- and Ours (letter in Washington Post)


I have a letter to the editor in today's Washington Post, responding to a recent article by David Ignatius in which I believe he was too quick to accept the idea that there is a "retirement crisis."

David Ignatius's evidence of a "retirement crisis" is mostly anecdotal ["Boomers Going Bust," op-ed, May 7]. Analyzing whether someone will have sufficient retirement income demands a knowledge of the person's resources, which include Social Security, pensions and private savings, as well as the working-age incomes that retirement savings seek to replace.

In published work, John Karl Scholz and Ananth Seshadri of the University of Wisconsin and Surachai Khitatrakun of the Urban Institute found that nearly 85 percent of Americans born between 1931 and 1941 have sufficient retirement income resources and that savings shortfalls, where they exist, are generally small. In later work, they tentatively find that baby boomers born through 1954 are also preparing well for retirement.

My own work found that the typical retiree born in 1940 has a combined Social Security and pension income equal to 92 percent of pre-retirement earnings. Most financial advisers recommend a replacement rate of 70 to 80 percent. Among the bottom third of the lifetime earnings distribution, only around 10 percent have replacement rates below 60 percent. Future retirees will receive lower replacement rates from Social Security, but if they work even a year longer than current retirees did they can have income replacement rates resembling those of retirees today.

Casual talk of a "crisis" can lead policymakers to act before they think. Given the stakes, that would be unfortunate.


Resident Scholar

American Enterprise Institute


In addition to the works cited, a paper I co-authored with Glenn Springstead of SSA found similar results.

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Sunday, May 17, 2009

CRFB releases Social Security issue brief

The Committee for a Responsible Federal Budget released a summary and discussion of the new 2009 Social Security Trustees Report.

Although its problems are not as large as Medicare's, Social Security still represents the single largest government program – and projections show its costs are growing faster than its revenues. Addressing Social Security now leaves more time to phase-in changes, making it easier for workers to adjust. Acting on Social Security now will also signal to markets and lenders that we are dedicated to controlling our debt, and will signal to the American public that our political system still works, and is capable of making hard choices.

Click here to read the whole article.


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Walker: Entitlements put America’s triple A rating is at risk

Former GAO head David Walker writes in the Financial Times that a day of reckoning on entitlements may be closer than it seems, as credit markets won't continue to treat U.S. Treasury bonds as riskless when the government continues to pile up unpayable pension and health care debts:

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?

Click here to read the whole article.

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Saturday, May 16, 2009

Bruce Bartlett on the trust funds

Bruce Bartlett writes on what the Social Security trust fund is – and isn't.

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."

The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.

Click here to read the whole article.

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Thursday, May 14, 2009

Michael Lind’s Social Security Straw Men

I have an article at The American, AEI's online magazine, digging through a piece by the New America Foundation's Michael Lind in which he claims to debunk claims that Social Security faces a significant shortfall. New America, whose founding premise was "radical centrism," surely has many analysts who still adhere to that approach. Lind's article, however, best fits under the moniker "lefty claptrap."

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Wednesday, May 13, 2009

U.S. News: “What Social Security's Underfunding Means for Your Retirement”

Emily Brandon writes for U.S. News & World Report on how ordinary Americans planning for retirement should think about the recent Social Security Trustees Report.

Social Security and Medicare will still be around for younger generations. But there is some uncertainty about whether there will be tax increases, benefit cuts, some combination of the two, or other fixes to correct the underfunding. "You can sort of count on the fact that if there are any changes in benefits they will be in a downward direction, and then individuals like us will have to provide more of our own income through our own personal savings and our employer-provided plans," says Bruce Schobel, president-elect of the American Academy of Actuaries. "I think it's a very safe bet that in the process of restoring financial soundness, the government is very unlikely to expand the benefits."

Click here to read the whole article.

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Obama budget on the Social Security trust fund: “Only in a bookkeeping sense.”

Interestingly, the Obama administration's budget made only minor changes to language used in previous budgets to describe the Social Security and other trust funds.

These balances are available for future benefit payments and other trust fund expenditures, but only in a bookkeeping sense. The holdings of the trust funds are not assets of the Government as a whole that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury. From a cash perspective, when trust fund holdings are redeemed to authorize the payment of benefits, the Department of the Treasury finances the expenditure in the same way as any other Federal expenditure—by using current receipts or by borrowing from the public. The existence of large trust fund balances, therefore, does not, by itself, increase the Government's ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the Government as a whole.

From an economic standpoint, the Government is able to prefund benefits only by increasing saving and investment in the economy as a whole. This can be fully accomplished only by simultaneously running trust fund surpluses equal to the actuarial present value of the accumulating benefits while maintaining an unchanged Federal fund deficit, so that the trust fund surplus reduces the unified budget deficit or increases the unified budget surplus. This would reduce Federal borrowing by the amount of the trust funds surplus and increase the amount of national saving available to finance investment. As long as the increase in Government saving is not offset by a reduction in private saving, greater investment would increase future national income, which would yield greater tax revenue to support the benefits.

See page 345 of the analytical perspectives volume of the budget.

Read more! Social Security – It just got even worse

I have some comments on the Trustees Report over at

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Why Robert Reich probably should never have been a Social Security Trustee

I like Robert Reich – he's funny and he talks straight when everyone else is preprogrammed. But on Social Security it's clear he paid a lot less attention to his staff when he was one of the program's Trustees than he does to lefty bloggers today. Here are some excerpts from his comments in Salon on yesterday's release of the Social Security Trustees Report:

Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years.

First, there's a lot more to the Trustees Report process than simply signing off on what the actuaries come up with. There are meetings throughout the year between the Trustees' staff – yes, Mr. Secretary, you had several staff who attended these meetings. The key assumptions are agreed upon by the Trustees staffs; if they say no, it doesn't matter what the actuaries say. Second, and more importantly, when the SSA actuary told you what the rate of projected GDP growth was, did you ever think to ask why it's lower for the future than it was in the past?? If you did, I think he'd have given you an answer that resembles this:

GDP growth is a function of productivity growth and labor force growth; birth rates are lower today, meaning the labor force will grow more slowly tomorrow. Even with increased immigration, slower labor force growth will result in slower GDP growth.

The Congressional Budget Office does similar projections to those done by Social Security, and their projections for GDP growth – and for the system's finances overall – are very similar to the Trustees. In other words, Reich's basic argument about the assumptions used to project Social Security's finances is almost surely incorrect, but in such a simplistic way that it's embarrassing that he continues to make these claims.

Moreover, Reich says that higher economic growth would fix the problem. Well, GDP growth isn't a direct input into the system – we don't tax GDP and we don't pay benefits based on GDP – but we can analyze how higher wage growth would affect Social Security's finances. The answer is that even if real wage growth doubled, that would fix only around half the long-term Social Security deficit. And there's no way any policy can make long-term real wage growth double.

Reich's lack of attention to detail continues when he talks about solutions to the Social Security deficit, but I can't really be bothered to go on. I suspect that what makes Reich so interesting as a commentator – his quick wit and ability to seemingly discuss any topic under the sun – has a downside, in that he seemingly just doesn't pay enough attention to facts and numbers to get this important issue right.

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Deciphering the Social Security and Medicare Trustees Reports

I give some thoughts over at National Review's The Corner…

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Blahous: Background on the Worsening Social Security outlook

Chuck Blahous of the Hudson Institute has a good explanation of the changes in the 2009 Social Security Trustees Report, coupled with sound general analysis of the situation.

On Tuesday, May 12, the Social Security Trustees released their 2009 report.  The following summary of the report is intended for those already familiar with the basics of Social Security financing, and who are looking primarily to understand what is different about the 2009 projections relative to previous ones. 

In a nutshell, the story is this:  Social Security's finances are significantly weaker than foreseen even just a year ago.  Last year, the Trustees projected that the program would enter permanent cash deficits in 2017.  This year, that date has been moved forward slightly, to 2016.  Not since the 1983 reforms has the program been so close to operating deficits.  The projected Social Security insolvency date (of legal significance but less meaningful as a measure of the program's economic impact) has advanced by four years, from 2041 to 2037.

The whole piece is well worth reading.

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SSA actuaries briefing materials on 2009 Trustees Reports

I've posted below materials the Social Security Office of the Chief Actuary used in briefing Congressional staff on the results of the new Trustees report. These are helpful, as they highlight key indicators and how they've changed over the past year.

09 Trustees Report - Trust Fund Status

Goss Briefing on 09 Trustees Report Read more!

New paper: “Measuring Social Security's True Liability”

The National Center for Policy Analysis released a new paper by Boston College economist Larry Kotlikoff titled "Measuring Social Security's True Liability." Kotlikoff's key insight is to apply market valuation techniques to Social Security's finances:

Every year the Social Security Trustees publish a report on the fiscal solvency of the program.  It details the program's unfunded liabilities, which is what the government will still owe after it uses current and future tax receipts to pay for current and future retiree benefits. In 2005, the Social Security Trustees estimated that the program's unfunded liabilities were $8.5 trillion.  This means that even after accounting for payroll tax revenues the federal government would have to have this much money in the bank today, accruing interest, in order to pay promises to future retirees.

However, the Trustees appear to be underestimating the value of Social Security's unfunded liabilities
because they are failing to take into account the riskiness of tax payments that have not yet been received and of benefits that have not yet been accrued
and the certainty of those benefits that have been established.  In effect, the Trustees are understating the
market value of Social Security's net liabilities - what the government would have to pay a private party or investor
to take the obligation off its hands.  As I showed in a recent paper with Alex Blocker and Steve Ross, to mark to market Social Security one needs to treat future government payments (Social Security benefits) and receipts (payroll taxes) as nontradable financial assets. 

Kotlikoff concludes that the market value of the Social Security shortfall – i.e., the amount the government would have to pay to get the private sector to assume Social Security's liabilities – is around 23 percent higher than the stated value reported in the annual Trustees Report. Click here to read the whole paper.

It's worth noting that the market valuation of Social Security financing is a developing field. Some economists, such as John Geanakoplos and Steve Zeldes, argue that on a market basis Social Security's shortfalls are smaller than reported. This is valuable work and hopefully the two sides will work toward common views.

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Tuesday, May 12, 2009

Miller-McCune on Social Security: Where Do We Go From Here?

An article by Tom Jacobs that's worth checking out.

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The best Social Security cartoon I've seen lately

Dear readers,
I assure you I rarely, if ever, have conservations resembling this one...

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Social Security deficits start 1 year earlier; trust fund loses 4 years; long-term deficit rises by 18 percent

Here's the press release for the 2009 Social Security Trustees Report. The surprising thing isn't the shift of the first cash deficit date from 2017 to 2016, or the shift of the trust fund exhaustion date from 2041 to 2037 (I'd guestimated something very close to that).

It's the increase in the long-term deficit from 1.7 percent of payroll to 2.0 percent. That's an 18 percent increase, which seems like a pretty big deal to me. According to the press release that's not all driven by the recession, though; part of it comes from lower assumed rates of mortality, which imply longer life spans and more beneficiaries. Plus, there could be some other technical changes which await a closer reading of the report.

Social Security Board of Trustees: Economic Downturn Leads to Worsening of Long-Range Financing Outlook

The Social Security Board of Trustees today released its annual report on the financial health of the Social Security Trust Funds. The Trustees project that program costs will exceed tax revenues in 2016, one year sooner than projected in last year's report. The combined assets of the Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds will be exhausted in 2037, four years sooner than projected last year. The worsening of the long-range outlook for the Social Security program is due primarily to the recent economic downturn and faster reductions in mortality than previously assumed.

In the 2009 Annual Report to Congress, the Trustees announced:

  • The projected point at which tax revenues will fall below program costs comes in 2016 -- one year sooner than the estimate in last year's report.
  • The projected point at which the Trust Funds will be exhausted comes in 2037 -- four years sooner than the estimate in last year's report.
  • The projected actuarial deficit over the 75-year long-range period is 2.00 percent of taxable payroll -- up from 1.70 percent in last year's report.
  • Over the 75-year period, the Trust Funds would require additional revenue equivalent to $5.3 trillion in today's dollars to pay all scheduled benefits.

"Today's Trustees Report contains some disappointing, but not unexpected, news about the financial condition of the Trust Funds," Commissioner Astrue said. "We should be neither casual nor hysterical about the revised insolvency dates. As with the economy as a whole, the Social Security system will weather this recession. However, the sooner we get on with the task of reforming the system, the easier it will be to make the tough choices that we all know we need to make."

Other highlights of the Trustees Report include:

  • Income including interest to the combined Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds amounted to $805 billion ($672 billion in net contributions, $17 billion from taxation of benefits and $116 billion in interest) in 2008.
  • Total expenditures from the combined OASDI Trust Funds amounted to $625 billion in 2008.
  • The assets of the combined OASDI Trust Funds increased by about $180 billion in 2008 to a total of $2.4 trillion.
  • During 2008, an estimated 162 million people had earnings covered by Social Security and paid payroll taxes.
  • Social Security paid benefits of $615 billion in calendar year 2008. There were almost 51 million beneficiaries at the end of the calendar year.
  • The cost of $5.7 billion to administer the program in 2008 was a very low 0.9 percent of total expenditures.
  • The combined Trust Fund assets earned interest at an effective annual rate of 5.1 percent in 2008.

The Board of Trustees is comprised of six members. Four serve by virtue of their positions with the federal government: Timothy F. Geithner, Secretary of the Treasury and Managing Trustee;

Michael J. Astrue, Commissioner of Social Security; Kathleen Sebelius, Secretary of Health and Human Services; and Hilda L. Solis, Secretary of Labor. The two public trustee positions are currently vacant.

The 2009 Trustees Report will be posted at by Tuesday afternoon.

Read more!

Shipman: Meltdown Was Perfect Stress Test For Market-Based Pension Reform

Meltdown Was Perfect Stress Test For Market-Based Pension Reform

Writing in Investors Business Daily, Bill Shipman – chairman of CarriageOaks Partners and co-chairman of the Cato Institute Project on Social Security Choice – argues that the market meltdown is evidence in favor of personal accounts, not against them. Bill's piece is below, followed by some notes from me.

We learned a few lessons in 2008. First, markets can decline dramatically everywhere, and all at the same time. Not just stocks, but bonds, commodities, real estate, you name it. Second, a leveraged economy is an ugly thing when the music stops. Third, government amplifies the ugliness by playing favorites. (Housing, for example.) Fourth, irrespective of the global market meltdown, saving and investing still provide greater retirement benefits than does Social Security, and by a lot.

The last lesson may seem counterintuitive, for many pundits suggest that the events of 2008 finally established that free-market Social Security reform is ill-advised. It isn't. Furthermore, 2008 provides an excellent stress test of the reform theory — for it is an almost perfect laboratory condition of what can go wrong.

The U.S. stock market fell by 37% last year, the worst year since 1931 when it plummeted by 43%. Given historical returns, the odds of such a decline were quite low. Not only was this unusual, but for someone set on retiring it was devastating.

The reason is not so much that the market fell so drastically, but rather that it did so when it did. A big portfolio loss is best endured at the beginning of a worker's career, not the end when all the accumulated assets are subject to the decline.

Balanced funds did poorly as well. A portfolio of 70% stocks and 30% bonds dropped 21%. Historically, this decline was also unusual and unusually bad; it was the third-worst year since 1926. And, importantly, this portfolio is one that workers could possibly choose as a replacement for Social Security.

To compare retirement benefits financed from this portfolio to Social Security's benefits, let's assume a worker with a history of average wages retires in 2008 at age 66 and receives his first Social Security check in January 2009. Based on Social Security's benefit formula, his first monthly check is $1,527, or $18,324 for all of 2009.

Under present law this benefit will increase with inflation. If our worker is married, his spouse, who is usually younger , may receive a benefit at the same time even if she does not have any wage history.

Their combined annual benefit of roughly $25,100 will drop by one-third on the death of either family member, and will be zero upon the death of both. These amounts are not guaranteed by the government, and beneficiaries have no legal right to their receipt.

Had it been legal, assume this wage earner chose to invest his past retirement-related payroll taxes in a balanced portfolio of 70% stocks and 30% bonds, and did so for the first 35 years of his working career, rebalancing the portfolio to 70%-30% at the beginning of each new year.

Ten years prior to retirement he adjusted the asset mix to 50%-50%, a common strategy to dampen risk when nearing retirement. Despite the market meltdown, and reasonable investment-related costs, this simple and time-tested strategy provided a $535,000 nest egg at 2008 year's end. At age 66, the Social Security actuaries estimate male/female life expectancy at 83 and 85.

For the market-based strategy to prove successful, the nest egg would have to last until her 85th birthday and pay inflation-adjusted benefits as well. As it turns out, and assuming the historic inflation rate of 3%, it achieved both goals. The nest egg, earning only a 1.7% — cost- and inflation-adjusted — annual return during retirement, lasted to his 90th birthday and her 87th.

Based on his estimated life expectancy of 83, and a reduction in family benefits upon his death at that age, the remaining portfolio lasted to her 94th birthday. If our worker were not married, his assets would have lasted until his 104th birthday.

Unlike Social Security, he owns the assets, which provides him many options. He could bequeath them to his kids or any organization he chooses. He could increase their combined first-year benefit to $30,000 — 19% over Social Security, and raise it each year by inflation — expecting each to live 20 years, marginally longer than their normal life expectancies. He's empowered to make choices — important in itself.

Many wage earners choose to retire at age 62 when they can receive reduced Social Security benefits, albeit for a longer time. For one making this choice at the end of 2008, the market-based system was an even better deal relative to Social Security.

For a single worker, the portfolio would have provided Social Security-equivalent benefits until age 115; if married and both living, until he reaches age 96, and she age 93.

There is no magic as to why the market-based system provides greater retirement income even after a low-probability market meltdown. Because Social Security is a tax-based structure, benefits can increase by no more than taxes increase, which historically has been 1.5% per annum in real terms.

Markets, even though they can be gut-wrenchingly volatile, have done better. Capturing this difference over a full working career is what provides the higher benefits.

Our nation faces many entitlement challenges, some of which may be addressed during President Obama's administration. Hopefully, he will be wise enough to understand the issues involved with Social Security reform. If so, he may accomplish what has eluded all other presidents.

If he is successful in reforming Social Security along market-based principles, his legacy will be extraordinary and unique. He will have understood that 2008's market collapse was a rare opportunity for reform, not an impediment.

The stakes are high. Wish our nation well.

Some thoughts: First, I broadly agree with Bill's points, as I've argued here and here. Neither Bill's exercise nor mine prove anything in an scientific way, but they do indicate that we shouldn't overstate the meaning of recent market events without actually running the long-term numbers. The historical premium paid to stocks over bonds was huge (and my guess is will continue to be strong in the future). Given that, it's pretty hard to produce a scenario where a long-term stock investor goes badly wrong. Second, Bill's exercise basically ignores what are called the "transition costs" associated with personal accounts; meaning, if I invest my Social Security taxes in the market, who's going to pay for current beneficiaries? For accounts to be a good deal while accounting for transition costs, the realized account return doesn't just have to exceed the return paid by Social Security – around 1.5% -- but the return paid on government bonds, which is around 3% above inflation. In my exercise accounts almost always met that goal, but it's definitely a higher bar and can't be done without taking some risk. And risk means, even over the long term, the chance of coming out with less.

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Monday, May 11, 2009

Obama Budget Office Says Aging, Not Health Care Inflation, Primary Entitlement Cost Driver Thru 2040s

As I've discussed here before, there's been some debate over the sources of future entitlement deficits: the traditional view has been that it's the aging population, which pushes more people onto the Social Security, Medicare and Medicaid rolls. A new view says the real culprit is rising per capita health care costs – called "excess cost growth" – which push up spending even if the population doesn't get older. Under the first view, the likely reform approaches are traditional ones like raising taxes, cutting benefits, increasing the retirement age or trying to pre-fund future benefits. Under the new view, only comprehensive health care reform – meaning, reform of private sector health provision in addition to government health plans – can stop rising prices.

(For background on these debates, see my longer paper here, a short article here, and a recent AEI forum here. All contain references to opposing points of view.)

The recent budget proposal from the Obama administration has an interesting chart on what's driving entitlement costs. It's on page 191 of the Analytical Perspectives (here's a link). The text accompanying the chart is pretty standard new view stuff, which is not surprising since Obama budget chief Peter Orszag is one of the most forceful proponents of the excess cost growth argument. Here's what it says:

Sources of Increased Spending for Medicare, Medicaid, and Social Security: The most important factor driving the long-run budget outlook is the excess growth of health care costs.

Population aging gets some verbiage in the next paragraph, but you don't get the sense it has the same importance.

Ok, but now take a look at the accompanying chart.

What the chart shows is that aging will be the largest driver of entitlement cost growth out through 2040 and likely beyond. You can judge for yourselves, but it seems to me that given what the chart shows the emphasis of the text could be at least somewhat different.

Over the next 30 years, population aging is our main entitlements problem and it makes sense to seek solutions that are based on the problem we have, not the problem we want to have. Without downplaying healthcare funding issues, which are significant today and will grow even more so in the future, I can't help but think that some on the left have latched onto this new view because it promotes a policy outcome they happen to favor: increased government control over private sector health care provision for working-age people. I suspect that many of these folks would favor more government control even if health care costs weren't rising.

Update: Welcome, Andrew Sullivan readers. This material can be a little dense as I've written it. Here's a link to another blog post that walks through the issues more clearly. I also wrote a full length paper for AEI on this topic, available here.

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Washington Post scolds Obama, praises Hoyer on Social Security

The Sunday Washington Post scolded President Obama for putting budget rhetoric over action, while praising House Majority Leader Steny Hoyer (D-MD) for daring to discuss Social Security reform:

"We can no longer afford to leave the hard choices for the next budget, the next administration or the next generation," declared President Barack Obama last week as he unveiled his budget. Well, yes, but that is exactly what he does. We just hope that it is only until the next budget rather than the next administration.

…That's one reason we were encouraged by a speech last week by House Majority Leader Steny H. Hoyer (D-Md.). On Social Security, the dreaded "third rail," he delivered a firm scolding to both parties: Democrats, for persistent demagoguery on the issue, and Republicans for refusing to countenance any mention of tax increases. He mentioned specific reforms such as cutting benefits, raising the retirement age and increasing taxes. That provides a far more helpful foundation for discussions than an insistence that only tax increases on the very rich are needed, as some members of his party suggest.

…Another local politician, Rep. Frank R. Wolf (R-Va.), has also pushed persistently for entitlement reform, championing a commission that would put all proposals on the table. In the Senate, Lindsey O. Graham (R-S.C.) has courageously tried to get Social Security reform moving while showing a willingness to talk about both spending and revenue options, which is refreshingly realistic from a conservative Republican. Congress is not exactly bursting with members who are willing to face up to the stark realities created by our unending appetite for borrowing to fund the budget; too many members fall back on "we don't have a problem" or "no new taxes." But if the president means what he says about not delaying the hard choices, there are a number of politicians who seem ready to join him.

Click here to read the whole editorial.


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Saturday, May 9, 2009

ABC’s Stossel: Elderly Rob Younger Generation

ABC's 20/20 ran a segment last night on the intergenerational burdens of funding Medicare (I was quoted briefly). Click here to check it out.

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Friday, May 8, 2009

Social Security Bulletin, Vol. 69 No. 1 released

The SSA released the latest issue of the Social Security Bulletin, which includes the following articles:

Earnings Sharing in Social Security: Projected Impacts of Alternative Proposals Using the MINT Model by Howard M. Iams, Gayle L. Reznik, and Christopher R. Tamborini

Earnings sharing is an alternate method of calculating Social Security retirement benefits whereby earnings are assumed to be shared by married couples. This article presents a microsimulation analysis to estimate the impact of three earnings sharing proposals on the aged population of married, divorced, and widowed men and women in 2030. The impact of earnings sharing differs by marital status and sex, as measured by the percentage change in benefits and by the percentage of beneficiaries with increased and reduced benefits.

Examining Social Security Benefits as a Retirement Resource for Near-Retirees, by Race and Ethnicity, Nativity, and Disability Status, by Benjamin Bridges and Sharmila Choudhury

This article examines the distribution of Social Security benefits among recent cohorts of near-retirees, by (1) race and ethnicity, (2) nativity, and (3) disability status. Actual earnings history data help produce more accurate measures of benefits. The authors find that substantial differences in earnings levels and/or mortality levels among these subgroups interact with Social Security program provisions to produce sizable differences in values of benefit measures, such as Social Security wealth and earnings replacement rates.

Elderly Poverty and Supplemental Security Income, by Joyce Nicholas and Michael Wiseman

Provided here are the absolute and relative poverty status of 2002 elderly Supplemental Security Income (SSI) recipients. Official poverty estimates are generated from the Current Population Survey's Annual Social and Economic Supplement (CPS/ASEC). The poverty study presented here differs from previous studies in that it is based on CPS/ASEC income and weight records conditionally adjusted by matching Social Security administrative data. This effort improves the coverage of SSI receipt and the accuracy of SSI estimates. The adjusted CPS/administrative matched data reveal lower 2002 poverty rates among elderly persons (with and without SSI payments) than those generated from the unadjusted CPS/ASEC data.

Uses of Administrative Data at the Social Security Administration, by Jennifer McNabb, David Timmons, Jae Song, and Carolyn Puckett

This article discusses the advantages and limitations of using administrative data for research, examines how linking administrative data to survey results can be used to evaluate and improve survey design, and discusses research studies and SSA statistical products and services that are based on administrative data.

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Event: What’s the News in the 2009 Social Security Trustees’ Report?

National Academy of Social Insurance

What's the News in the 2009 Social Security Trustees' Report?

Register Now – Space is Limited.

Friday, May 15, 2009

10:00 a.m. – 12:00 p.m.

B318 Rayburn House Office Building

What's New in 2009?

Stephen C. Goss, Chief Actuary, SSA

Henry Aaron, Bruce and Virginia MacLaury Senior Fellow, The Brookings Institution

Charles Blahous, Senior Fellow, The Hudson Institute

Virginia Reno, Vice President for Income Security, NASI

Margaret Simms (moderator), Senior Fellow, The Urban Institute

Each year the Social Security Trustees update the short-range (10 year) and long-range (75 year) projections for the Social Security trust funds to provide policymakers with the best information to assess Social Security's long-range finances.  The 2009 Trustees' report will reflect updates of data, assumptions and methods since last year.  The Social Security Chief Actuary will describe the results and three discussants will offer perspectives on how to frame future Social Security policy options in light of these projections.

 Click here to register.

Copies of NASI's new brief, Social Security Finances: Findings of the 2009 Trustees Report, will be available at the event.

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Thursday, May 7, 2009

Hoyer: Social Security reform could start this fall

In a speech Wednesday, House Majority Leader Steny Hoyer (D-MD) argued that Social Security reform should be a priority and said that the process of reaching consensus could begin this fall.

Given the gravity of our situation, we cannot afford to take any options off of the table, either on the spending or the revenue side. Of our entitlement programs, I believe we would have the easiest challenge in reforming Social Security. Here, the options are well and widely understood. We can bring in more revenues. We can restrain the growth of benefits, particularly for higher-income workers, while we strengthen the safety net for lower-income workers. And/or we can raise the retirement age, recognizing that our life expectancy is significantly higher today. What is missing here is not ideas—it is political will. The bipartisan trust we need for compromise has been sorely damaged. And both sides are guilty—Democrats for using Social Security as the "third rail" for political advantage, and Republicans for walking away from the table at the first mention of raising revenues. Neither side has been willing to put forward realistic, effective alternatives. Even if we are going to fix just Social Security, we need the kind of trust that existed between leaders like Ronald Reagan and Tip O'Neill when they reformed Social Security in 1983 and our tax code in 1986. And right now, we have a rare opportunity to build that trust. At the White House Fiscal Summit in February, we heard constructive comments on Social Security from leaders as diverse as John Boehner and Dick Durbin—and we saw that stakeholders from the AARP to the National Federation of Independent Businesses understand the need for compromise, as well. That is not to say that reforming Social Security should take priority over reforming healthcare—simply that we must, and should, deal with multiple challenges at once, and that the Republican interest in working constructively on Social Security gives us a real opening for progress, along with an immediate chance to take pressure off of the budget.

Hoyer also talked up the possibility of a reform commission:

The political challenges on Social Security, Medicare, and Medicaid are extraordinary. So I think it's very possible that finding a solution will demand an extraordinary process. Some Members of Congress, including Congressmen Cooper and Wolf, have called for a Fiscal Future Commission—composed of Members of Congress and the Administration, experts outside the government, and those who would be directly affected by entitlement reform—which would propose solutions and send them to Congress for a vote. I think they make a strong case. A Fiscal Future Commission would help protect that process from the political attacks that have derailed it in the past.

The Washington Post
reported on Hoyer's speech Wednesday morning and Roll Call and ABC's The Note also had coverage.

My thoughts: First, kudos to Rep. Hoyer for being willing to stick his neck out when so many would prefer he said nothing. Social Security is not as large a problem as Medicare, but it's huge compared to pretty much anything else. The idea that it's not worth addressing seems to me to be pretty silly and it's nice to see a leader who realizes that. Second, how should Republicans respond? There will be some temptation to do what Democrats did in 2005, which is simply to play politics and try to make some political hay out of the other party attempting to fix a tough problem. That would be a mistake. The system needs to be fixed as much today as it did in 2005, and while the policy outcome surely won't be as favorable to conservatives as it might have been in 2005, we have to accept that elections have repercussions. Moreover, Social Security politics won't get any easier for people on the right, as more and more Americans shift from the taxpayer class to the beneficiary class. This isn't to say that conservatives should roll over and play dead; they should stand up for limiting the size of the program, holding the line on taxes, and pushing individual control where possible. But they shouldn't insist on getting everything before coming to the table.

Read more!

Wednesday, May 6, 2009

New newsletter from Michigan Retirement Research Center

The Michigan Retirement Research Center has released its latest newsletter, which is available here. Here's a preview of the contents:


Director's Corner
This Newsletter features two separate write-ups of recent MRRC-sponsored events...

For Your Information
Myths and Misinformation About Social Security

MRRC Researcher Workshop
For the fifth consecutive year, MRRC hosted a researcher workshop in Ann Arbor...

New Book by MRRC Researcher
Overcoming the Saving Slump: How to Increase the Effectiveness of Financial Education and Saving Programs Edited by Annamaria Lusardi

Will There be a Social Security COLA in 2010?
In the midst of a slowing economy, Social Security recipients may not get a Cost-of-Living Adjustment (COLA) in 2010...

HRS Data Workshop
Researchers working with, or thinking of working with, Health and Retirement Study (HRS) data may be interested in attending the HRS Data Users' Workshop. June 8-12, 2009 at the Institute for Social Research in Ann Arbor...

Financial Literacy in Times of Turmoil and Retirement Insecurity
On March 20, the MRRC co-hosted the conference Financial Literacy in Times of Turmoil and Retirement Insecurity...

PSID Call for Proposals
Call for Proposals: Small Grants for Research Using PSID Data Panel Study of Income Dynamics...

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Tuesday, May 5, 2009

AARP: Social Security: 10 Facts that Matter

The AARP Public Policy Institute released a fact sheet by Selena Caldera titled "Social Security: 10 Facts That Matter." By and large it's fine, but one quick comment on a claim made in the paper.

"In 2007, Social Security kept nearly 35 percent of older Americans out of poverty." This poverty argument assumes that these retirees were forced to pay into Social Security while working but denied any benefits when they retired. In that case, yes, Social Security has a large impact on poverty. But if we were truly "without Social Security" that should also include the tax part. In that case, workers would presumably save a good portion of what they'd otherwise have put into Social Security and could use those funds in retirement. Social Security reduces poverty somewhat by forcing some people to save who otherwise wouldn't and by redistribution to folks who are so poor that they'd retire in poverty even if they had saved. But these reductions are nowhere near 35 percent.


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A Raise for Social Security Recipients

Cross posted from the new American Enterprise Institute blog

Robert Pear writes in the New York Times "Social Security Benefits Not Expected to Rise in '10" but draws an almost 180 degrees mistaken conclusion from it all. Pear and others are reporting alarm that no Social Security Cost of Living Adjustment (COLA) will be paid this year. In fact, the lack of a COLA implies a real increase in the buying power of Social Security benefits. Unfortunately, no one seems to know that.

Ordinarily, each January Social Security benefits for retirees, survivors, and the disabled are increased through a COLA to match rises in the Consumer Price Index (more precisely, a sub-measure called the Consumer Price Index for Urban Wage Earners and Clerical Workers, also called the CPI-W).

However, the Congressional Budget Office has projected that for 2010, 2011, and 2012 no COLAs will be payable. The reason is a year of high inflation—this past January's COLA was 5.8 percent, the highest since 1981—reflecting the run-up in energy prices last year. However, since that time energy prices and prices for many other goods have dropped. The CBO projects that the overall Consumer Price Index won't reach its 2009 level until 2012, meaning that a new COLA won't be payable until 2013.

Pear's article, and public reaction to COLAs in general, reflects a mistaken view that inflation adjustments for Social Security benefits are a "raise"—the higher the COLA, the happier people seem to be. A year with no COLA is treated as a year without Santa Claus. In Pear's article, for instance, AARP's David Certner says, "Most seniors have never been through a year in which there was no Social Security COLA." Of course, most seniors have never been through a year without inflation either. If you don't have the latter, you don't need the former.

But Pear's article misses an even larger point: Social Security COLAs can never be negative. That is, even if prices fall, Social Security benefits can never be reduced to match them. Logically this is what true inflation adjustment would do—COLAs are merely intended to match the change in prices to keep purchasing power the same, not to alter the real value of Social Security benefits. But people are extremely resistant to reductions in nominal income. Realizing that, Congress wrote the Social Security Act so that even if prices fall, benefits will remain the same.

When prices fall but Social Security benefits remain the same, that means the real purchasing power of benefits has risen—in other words, it's a raise. When people are complaining about not getting a COLA, they're actually getting a real increase in their benefits. In other years when the COLA is positive and they think they're getting a raise, they're actually not.

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Monday, May 4, 2009

Retirees who work must return $250 stimulus check

Donald Lambro reports for the Washington Times that

Seniors who also work and qualify for Mr. Obama's $400 Making Work Pay middle-class tax cuts may find themselves forced to give back some or all of the Social Security bonus come tax-filing time in 2010.

The basic story is that Obama's making work pay tax credit – which is, in effect, a cut in the employee share of the Social Security tax – benefit only those with earned income. Retirees squealed, as you'd expect, that they hadn't gotten their share of the stimulus loot and so a $250 check was added for everyone receiving Social Security benefits.

The hitch is that many people both work and receive benefits at the same time. Those folks probably expect that they'd get to keep both checks, which isn't unreasonable given that they fulfill the criteria for both. According to Lambro, that's not how it works.

Congressional and IRS officials say taxpayers cannot double-dip into both programs. If you are getting extra Social Security money and benefit from a lower withholding in your paycheck, the two will have to be reconciled when you file your 2009 tax returns next year.

While I'm not a huge fan of either the Making Work Pay credit or the $250 retiree checks, the administration should at least have been more forthcoming with details regarding how the program worked. According the SSA's Income of the Population Aged 55 and Over, 46% of beneficiaries aged 62-64 (1.13 million people) have earnings; 22% of beneficiaries aged 65 and older (5.4 million people) have earned income. These folks may not be too pleased come tax time.

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When does the Social Security surplus disappear, and who is it a “day of reckoning” for?

The Center on Budget and Policy Priorities released "Social Security Does Not Face a Near Term 'Reckoning'" by Paul Van de Water and Kathy Ruffing, which takes issue with claims that the recent decline in the Social Security surplus constitute a significant fiscal event.

The recession has affected the system's finances, and the next report of the Social Security Trustees — due in coming weeks — is expected to show some deterioration in the program's financial outlook. But Social Security faces no immediate threat. The program continues to run large surpluses and remains capable of paying scheduled benefits in full for the next three decades or so.

This is all true as far as it goes. The overall Social Security surplus – cash surpluses generated from payroll taxes and interest on the trust fund – remains significant in size. And because of that, there is no day of reckoning for Social Security, which can continue to pay full benefits.

But it is true because it is stated entirely from the point of view of Social Security as a free-standing program independent of the rest of the federal budget. From the point of view of the Social Security program in isolation, the cash surplus does not matter. But then, the total surplus – cash plus interest – doesn't matter either. The day of reckoning for Social Security itself occurs only when the trust fund reaches zero. That may be a few years earlier than previously projected – see my back of envelope calculations here – but is still a long way off.

But when commentators have discussed the Social Security surplus, it has almost always been in the context of flows of cash between Social Security and the rest of the federal budget. Why? When Social Security runs a surplus, those funds are available to the Treasury – although they are not counted as part of most-reported measures of the budget deficit and the national debt. This is what many people call the "raid" on Social Security. Although, under law, there's not much else Social Security could do with surplus money, there is reason to believe that these surpluses, and how they are accounted for in the budget, encourage the non-Social Security part of the budget to spend more or tax less than it otherwise would. When those surpluses end, this effective subsidy from Social Security to the rest of the budget ends and the Treasury must begin repaying what it borrowed. That's the day of reckoning commentators are referring to.

The authors acknowledge that:

Excluding interest, the OASDI surplus is indeed expected to slip to a slender $3 billion in 2010 before rebounding as the economy recovers. That matters to the Treasury; when Social Security generates less extra cash, the government has to tap the credit markets to borrow more (just as the Treasury must borrow more when income tax receipts sag in a recession). Economic recovery will bolster the program's finances, although the annual Social Security surplus will deteriorate again after 2015, as demographic pressures accelerate with the retirement of the baby boomers.

But this is precisely the point: in general, the Social Security surplus is discussed only with relation to its effect on the Treasury, and in that context the cash surplus is what matters. The total Social Security surplus is rarely discussed since it has no real meaning to anyone: no meaning to the Treasury, which cares only about how much it must repay and when, not whether that repayment is part of the interest or principal on the trust fund. And no real meaning to Social Security, which can continue to pay full scheduled benefits so long as a penny remains in the fund balance. Everyone who works on Social Security policy knows two dates: the date the cash surplus disappears (currently 2017 in the Trustees projections) and the date the trust fund balance reaches zero (2041). The date when the total surplus disappears (currently projected at 2027) is an afterthought in most reporting, and for good reason, I believe.

The key fact here is that the Treasury must begin repaying trust fund bonds when the cash surplus disappears, not when the total surplus disappears. That day of reckoning will put additional pressure on the federal budget in the near future.

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Sunday, May 3, 2009

Smith & Osario: Fix Social Security, Ease the Credit Crisis

On RealClearMarkets, the Competitive Enterprise Institute's Fred Smith and Ivan Osario write:

Remember the looming Social Security crisis? If you don't, you're not alone. The credit crisis and economic downturn have monopolized public attention to such an extent that the Social Security crisis that was at the center of the policy debate during President George W. Bush's second term now seems forgotten.

This is unfortunate, for not only has Social Security not been fixed, but reform, if done right by tapping into the power of the market, can help provide new capital, which American businesses now desperately need.

To see how this could be done, it's worth looking at the experience of Chile. Government officials in many other countries have looked at Chile's reform during the 1980s as a model. The United States should take a look, too.

My thoughts: While there's a lot to be learned from the Chilean experience, it's wise not to extend the comparisons too far, either positive or negative. The Chilean economy was helped by the establishment of private pension accounts because first, the government ran budget surpluses in order to fund the transition – this in face helped build capital – and second, the accounts helped modernize the Chilean financial sector.

But in the U.S., any transition to Social Security accounts would almost certainly be debt-financed – that's how the Bush plan was structured, and most (but not all) other plans involve some pretty significant borrowing. If you're borrowing from the private sector to establish private accounts, on net there's no new investment going on. Second, the U.S. financial sector is pretty well developed – perhaps too developed, some might argue! – so we wouldn't necessarily benefit to the same degree that Chile did.

Again, there is something to be learned from Chile, but there's no magic that can be imported to fix either our Social Security program or our broader economic problems.

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