Friday, July 31, 2009

New newsletter from Michigan Retirement Research Center

The Retirement Research Center at the University of Michigan has released its July Newsletter. Among the articles:

Director's Corner
In the steepest recession since the 1930s, the Nation's unemployment rate climbed to 9.5% in June...

For Your Information
Get Extra Help with Medicare Prescription Drug Costs

Surviving the Downturn
For American workers nearing retirement age, the economic downturn poses distinct challenges...

Did You Know?
You can order free copies of MRRC working papers online at the MRRC website...

Addressing the Retirement Saving Crisis
As millions of American families have witnessed their retirement savings vanish and their prospects for retirement become grimmer and grimmer, it is important to find ways to help people secure a comfortable retirement...

Protecting Confidentiality in the HRS
SSA's Office of Retirement and Disability Policy (ORDP) has released a Research and Statistics Note on Access Restrictions and Confidentiality Protections in the Health and Retirement Study (HRS)...

PSID Call for Papers: Research on the Connections between Health and SES Using PSID Data
The Panel Study of Income Dynamics (PSID), with support from the National Institute on Aging, announces a call for papers using PSID data to report on research on the connection between health and socioeconomic status (SES) within and across generations...

Preliminary Program: 2009 Retirement Research Consortium Annual Meeting
The annual meeting of the Retirement Research Consortium will be held at the National Press Club in Washington D.C. on August 10-11, 2009...

Bottom of Form

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Rising disability claims, unemployment could mean another hit to Social Security’s financing

The AP reports that Social Security Administration is being hit by a wave of claims for disability insurance benefit, up by 10 percent versus their projections from earlier this year. In addition to the administrative burden to the agency, which implies long waits for people appealing a rejected claim, higher numbers of DI beneficiaries will put more pressure on the program's financing, which already declined significantly in the most recent Trustees Report.

Moreover, unemployment has risen to levels far above those projected for 2009 even under the Trustees "high cost" estimates for this year, at around 9.7 percent versus a high cost estimate of 8.5 percent. This, too, will make for a hit to Social Security's short-term finances.

As a result, I wouldn't be surprised if next year's Trustees Report contained more bad news for the program, even if the economy starts to recover.

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Thursday, July 30, 2009

Allan Sloan: “The next great bailout: Social Security”

Allan Sloan writes for Fortune that after the financial crisis and health care reform, the next claim on your wallet may be Social Security reform:

This is a good time to discuss Social Security because the Obama folks say it's next on the agenda, after health care. No one at the White House, Treasury, or Social Security Administration would discuss specific Social Security proposals, however. It ought to tell you something that Peter Orszag, director of the White House Office of Management and Budget, is a noted Social Security scholar. He's co-author of an influential 2004 book, Saving Social Security: A Balanced Approach, that advocated substantial tax increases (and a few benefit trims) to preserve the program. Alas, he wouldn't tell me what he plans to propose this time around. "Health care first" was all he'd say.

Meanwhile in Congress, Rep. Steny Hoyer (D-Md.), the House majority leader, says he intends to deal with Social Security as soon as possible. But he also declined to be specific. "I've been more inclined toward a commission" than to introduce legislation, he said. That makes this a good time -- and maybe our last chance -- to have a rational conversation about Social Security. After proposals start getting leaked and the game-playing and finger-pointing start, it won't be possible.

Click here to read the full article.

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Upcoming event: The Case for Simplifying Social Security Benefits

I'll be speaking at 8:30 a.m. on Thursday, August 6th at AEI to the Savings and Retirement Forum on the case for simplifying the Social Security benefit formula. You will be mesmerized by the clarity of my insights, or at the least placated by free coffee and donuts. All are welcome. Click here for more info and to register.

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Wednesday, July 29, 2009

New paper: Distributional Effects of Raising the Social Security Taxable Maximum

My old co-worker at SSA's Office of Policy, Kevin Whitman, has an interesting new paper out looking at how increases in the Social Security "tax max" – currently $106,800 – would change the system's progressivity. He runs through a variety of measures and a number of different ways of lifting the cap. Here's the summary:

As of 2009, Social Security's Old-Age, Survivors, and Disability Insurance program limits the amount of annual earnings subject to taxation at $106,800, and this value generally increases annually based on changes in the national average wage index. This brief uses Modeling Income in the Near Term (MINT) projections to compare the distributional effects of four options for raising the maximum taxable earnings amount beyond its scheduled levels. Two of the options would raise this value so that it covers 90 percent of all covered earnings and two would remove the maximum completely. Within each set of options, the proposals are differentiated by whether the new taxable amounts are used in computing benefits. Most workers would not be affected by these proposals, but some higher earners would experience a substantial increase in taxes. Correspondingly, benefit increases are largely isolated to higher earners, although the return in benefits for taxes paid would also decline. Because the proposals are targeted toward high earners, Social Security's progressivity would increase.

Well worth checking out – read it here.

Hat tip to Bruce Webb at Angry Bear for pointing this out.

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Blahous & Nystrom push back on "The Myth of 2016,"

Recently, Barron's published a column titled "The Myth of 2016" arguing that Social Security is likely to remain solvent longer than most experts suppose. Now Chuck Blahous, a senior fellow at the Hudson Institute, and Scott Nystrom, editor of the Self Directed Investor, push back in Forbes magazine, arguing that things could easily turn out to be worse than forecast. They say:

"Doubters of the findings in the 2009 annual report on the status of Social Security and Medicare trust funds believe that the moment when Social Security goes broke might recede much farther into the distance if only the trustees would change some of their unnecessarily conservative assumptions on economic growth incorporated in their latest report. This is counterproductive folklore. It has set back efforts to repair the program's finances, and such delays have added enormously to the eventual cost of fixing the program."

Click here to read the whole article.

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Monday, July 27, 2009

Social Security Advisory Board: Draft Report on Social Security Statement Available

The Social Security Advisory Board has posted on its website a pre-publication version of the Board's report on the Social Security Statement, which provides annual estimates of retirement and disability benefits to working age Americans. The report runs through a large number of issues regarding the Statement, from the accuracy of its benefit projections to the Statement's content and the manner in which it is presented. From my quick read it seems to be a very good piece of work; congrats to the Board, their staff, and the many SSA folks who assisted them.

Last year I published this piece in the Christian Science Monitor regarding one particular issue I have with the Statement. It doesn't seem as if the Board has made any recommendations for addressing this, which I think is unfortunate.

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Thursday, July 23, 2009

Obama talks of Social Security reform commission

In an interview with the Washington Post editorial page editor Fred Hiatt, President Obama discussed his next steps on clsoig the fiscal gap once health care reform is addressed:

Hiatt: CBO and other economists say that, as you say, you can't solve the fiscal problem if you don't solve the health problem. But they also say that solving the health cost problem is not sufficient, that a big part of the issue is demographics and aging. And so -- and as you know, the 10-year budget shows the government raising 18 or 19 percent of [gross domestic product] in 2019, and spending 24 or 25 percent --

Obama: We have a structural gap that has to be closed.

Hiatt: So can I ask you how you think about the timing and politics of closing that structural gap?

Obama: What I think has to happen is if we can show that we have a disciplined health care reform package that is serious about cost savings and is deficit-neutral, you combine that with the pay-go rules that we have been promoting and I believe that we can get through Congress, and you are imposing some discipline on the appropriations process -- and I thought that the F-22 victory yesterday was a good example of us starting to change habits in Washington -- then I think we're in a position to be able to, either at the end of this year or early next year, start laying out a broader picture about how we are going to handle entitlements in a serious way.

It may start with Social Security because that's, frankly, the easier one. And I think that it's possible to also look at tax reform and think about are there ways that we can maybe even lower marginal rates but eliminate all the loopholes and have that a net revenue generator. I think there are going to be a bunch of things that we can take a look at, but I think health care reform combined with pay-go, combined with how we deal with appropriations bills over the next six months will help lay the foundation for us to be able to make some of these broader structural changes.

The challenge I've got, Fred, is that obviously -- our biggest problem right now in terms of short-term deficit is the recession. And nobody -- no economist I've talked to thinks that it would be wise for us to start early, start now, in reducing government outlays, when states are already cutting back drastically, and you'd have a hugely destimulative effect on the economy. But we have to begin to prepare on the midterm and the long term. And that's why I think health care reform is so important.

Hiatt: So but you'd start that in an election year and does that --

Obama: Well, probably what you end up having to do in terms of structural reforms realistically is you probably have to set up some sort of commission or mechanism that reports back with the prospect of maybe locking in a pledge for action, post election. I just think that's probably the most realistic thing that we can do.

And as I said before, the truth is you wouldn't want anything that would take effect until the economic recovery is much -- on much firmer footing anyway.

Hiatt: And you'd be willing to look at a commission -- I mean, beyond Social Security that sort of puts everything on the table?

Obama: Yes, I think everything is going to have to be on table. But here's my concern. If we are not able to get health care reform -- and, Fred, I just want to be frank with you at this point that this is why I think that if you're a deficit hawk like you, you should actually be -- you should be hard on sort of the product, but you should be encouraging on the process, because the fact of the matter is, is that if health care reform fails, there is no way that Congress is going to take up a serious effort to control health care inflation -- there's no way that we're going to pass the kinds of changes we've already talked about in Medicare, for example, in the absence of a more comprehensive reform package. And so what we're going to have is a situation in which it's just business as usual for, I think, the next four years at minimum, and maybe the next eight -- in which case, the problem is just going to keep on getting worse and worse.

Also see Reuters, "Obama: Social Security, Medicare reform on agenda."


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Tuesday, July 21, 2009

White House Fiscal Responsibility Summit Material on Social Security Reform

This is a bit out of date, but a friend points out that the White House released (to little fanfare, apparently) summaries of the discussion of various budget issues at their February Fiscal Responsibility Summit. The whole document is available here, but I've excerpted the Social Security portion below:

Summary of Social Security Session

Executive Summary

There was a consensus among several of the participants, including Senators Durbin and Graham and Representatives Hoyer and Boehner, that there was a moment of opportunity to make bipartisan headway on shoring up Social Security's long term finances.

Several concrete ideas were put on the table to shore up long-term solvency. While there was disagreement among participants on the merits of these specific ideas, several participants emphasized the importance of creating the political space necessary to consider these ideas in a good-faith process.

There was an emphasis on viewing Social Security reform through the larger prism of retirement security. Several participants expressed support for taking additional steps to encourage retirement savings outside of Social Security.

Participants stressed the importance of strengthening Social Security's provisions for the most vulnerable populations, including disabled Americans and elderly unmarried women. Given the economic downturn, some participants suggested that Social Security benefits may need to be increased for these and other groups to ensure the program continues to provide elderly and disabled Americans a base of support to live above the poverty line.


The session moderators were Chair of the National Economic Council, Lawrence Summers, and Counselor to the Treasury Secretary, Gene Sperling.

Members of Congress who attended: Senator Durbin, Representative Boehner, Representative Hoyer, Representative Cantor, Senator Klobuchar, Senator Graham, Representative Tanner, Representative Boyd, and Representative Grijalva.

The outside attendees were: Doug Elmendorf (CBO), David Walker (Peterson Institute), Pete Peterson (Peterson Institute), Heidi Hartmann, (Institute for Women's Policy Research), John Sweeney (AFL-CIO), Roger Ferguson (TIAA-CREF), Randi Weingarten (American Federation of Teachers), Barbara Kennellyi (National Committee to Preserve Social Security and Medicare), Marty Ford (Consortium for Citizens with Disabilities), Susan Eckerly (NFIB), Ed Coyle (Alliance 20 for Retired Americans), Kevin Hassett (American Enterprise Institute), Maya Rockeymoore (CBCF), Fernando Torres Gilii (UCLA), Don Danner (National Association of Independent Businesses), Laura Murphy (National Urban League), and Joe Salmonese (Human Rights Campaign).

Detailed Summary

Overarching Issue: Political context of Social Security reform this year?

Both Lawrence Summers and Gene Sperling emphasized that the goal of the session was not to achieve consensus on particular reforms, but to initiate a dialogue about how to approach the issue during the coming year. Both suggested that the public may be more receptive to the government making the hard decisions necessary to shore up Social Security's long-term finances in an environment where people are anxious about their private retirement savings and the value of their single largest asset—their house.

There was a consensus among several of the participants, including Senators Durbin and Graham and Representatives Hoyer and Boehner, that there was a moment of opportunity to make bipartisan headway on shoring up Social Security's long-term finances.

Senator Graham pledged his full support to the Obama Administration to make a Social Security reform push a success if the Administration was committed to the process. He asked everyone involved to work to ensure that "demagoguery does not succeed."

Representative Cantor suggested that part of a strategy around Social Security should be to send a clear signal to the millions of Americans who currently rely on the program's benefits that their benefits will be protected and that we will stand by them. If we deliver a firm commitment to those who really need support, and who rely on that support now, it could free up space to consider amendments to the program for today's current young workers.

Overarching Issue: Status of Social Security and the Need for Reform?

Lawrence Summers explained the Administration's view that the rising cost of health care is the single largest threat to our long-term fiscal health. He also explained that Social Security is our nation's most important government program, and crucial to our long-term fiscal health. Both Summers and Sperling stated that the Administration intends to move on health care reform before Social Security, but places a priority on creating a process to address Social Security.

Some participants emphasized the urgency of acting quickly on Social Security because of the looming fiscal challenges on the horizon. Pete Peterson presented the view that the Social Security system will begin running out of money in 2017, and that we cannot rely on the concept of a "Trust Fund" because the money has been spent.

Others disagreed with this view. Barbara Kennelly argued that health care was the single most important threat to our fiscal health and was a more urgent priority than Social Security reform. Others 21

pointed out that the Social Security system will continue to pay full benefits through 2041, and will continue paying more than 70 percent of benefits after that even if changes are not made.

Representative Hoyer emphasized that the economic crisis should compel everyone to look past their differences and work toward a near-term solution. The sooner we act, the easier it will be both politically and fiscally to get a satisfactory solution.

Representative Boyd made the point that all of the tools and ideas available need to be on the table in order to achieve bipartisan support for long lasting solvency changes to this critical program. He encouraged the President to continue to organize forums like this first Fiscal Summit in order to keep the dialogue open. Addressing the solvency of the Social Security program is vital to the long-term financial stability of the nation and its citizens.

Overarching Issue: Potential changes to Social Security?

Participants discussed challenges and options on both the revenue and benefit sides. Senator Durbin advocated for modest changes on both sides now, to avoid big burden-some changes down the road. He put forward one such suggestion on the revenue side: returning the maximum taxable income to a level that applies the current Social Security tax to 90 percent of all payroll earnings by modestly increasing the cap on income subject to Social Security taxes is one such proposal on the revenue side.

Lawrence Summers suggested that the downturn in the financial markets had diminished the appetite for Social Security privatization, and that there was a heightened sense that the government needs to take a core public responsibility for Social Security.

David Walker argued that an increase in the retirement age could be justified as part of a bipartisan reform to create certainty and security around the program. The reform could provide security to current retirees that their benefits are protected, and certainty to future generations that their defined benefit will be there. Thus, increasing the retirement age would encourage people to work longer but strengthen the safety net.

Others opposed changes to the retirement age, and noted that we need to be careful when drawing blanket assumptions about life expectancy because not all demographics are actually living longer. Moreover, still others pointed out that the increase in the full retirement age currently phasing in represents a substantial cut in benefits already and disproportionately affects those who must retire early.

Representative Boehner expressed openness to changes on the revenue and benefit sides. He said the government should consider cutting or eliminating Social Security benefits for older Americans with high retirement incomes. As he explained, "I don't have any problem looking people in the eye and saying, 'Thank you for your contributions, but for the good of the country, your benefits are gone.'" Boehner also supported pegging Social Security benefit increases to the Consumer Price Index rather than wage inflation.

Senator Graham supported a balanced approach of revenue and benefit changes. However, he cautioned against making changes that would undermine Social Security's broad appeal as a middle-class safety-net program.22

Participants also highlighted potential proposals to modify Social Security's benefit structure to increase the program's protection for certain vulnerable groups. Heidi Hartmann underscored that, in the current economic environment, poverty among Social Security recipients could increase and that support for unmarried women in the program should be reexamined, with a view to increasing the benefits available to them outside marriage.

John Sweeney agreed on the need for modest reforms to the program but opposed any changes that would jeopardize Social Security benefits.

Susan Eckerly suggested that the NFIB and small business owners are willing to consider modest changes to Social Security to strengthen the program over the long term. Among the changes she discussed were adjusting the income cap and amending benefits for higher income earners.

Marty Ford reinforced that one-third of current Social Security recipients are not retirees, including approximately eight million people with disabilities who are disabled workers, disabled widow(er)s, and disabled dependents of disabled, retired, or deceased workers. There are several reforms that would strengthen the program for this constituency, including changing income and asset tests to allow people with disabilities to save and work without risking losing their benefits. She also cautioned that any change to benefit formulas would affect all disabled beneficiaries and that the definition of disability should not be revised.

Overarching Issue: Social Security within the larger retirement security prism?

Several participants emphasized the importance of viewing the Social Security challenge within the larger prism of retirement security and savings.

Senator Klobuchar and Roger Ferguson advocated including efforts to help Americans save for retirement as part of a broader "Retirement Security" package that would also include changes to Social Security. Ferguson discussed steps to make savings more automatic, as well as to consider some form of guaranteed income for life.

Randi Weingarten highlighted the growing challenge for the baby boomer generation of facing higher costs to care for both their children (e.g., rising college costs) and their parents (e.g. long-term care) at the same time. A retirement savings framework going forward needs to take into account the new burdens facing these families.

Gene Sperling raised the idea of including some form of universal pension account that would encourage private retirement savings. These accounts would not be part of a Social Security reform plan itself, but could be part of a broader retirement savings package.

Fernando Torres Gil discussed what he viewed as a "redefinition" of what it means to retire among today's aging population. People are changing how they live in their old age, including working more and engaging in more lifelong education. This reality should inform our efforts at promoting retirement security.

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Comments on WSJ tax max story over at AEI Blog

I've written up a short comment on today's Wall Street Journal story on the Social Security payroll tax ceiling over at AEI's American blog.

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Monday, July 20, 2009

New papers from the Retirement Security Project

At last week's event on retirement security in Australia, which by the way was excellent, the Retirement Security Project released several new papers.

National Retirement Savings Systems in Australia, Chile, New Zealand and the United Kingdom: Lessons for the United States

click to download (464k)

Automatic Annuitization: New Behavioral Strategies for Expanding Lifetime Income

click to download (372k)

Pursuing Universal Retirement Security Through Automatic IRAs

click to download (2476k)

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New paper: Market Valuation of Accrued Social Security Benefits by John Geanakoplos, Stephen P. Zeldes

I've lately argued that obligations for state government pensions should be measured on a market basis, meaning the cost for financial market participants to take these obligations off your hands. This issue has also been explored with Social Security, which is a more complex issue, with varying results. A new paper from the NBER, Market Valuation of Accrued Social Security Benefits by John Geanakoplos and Stephen P. Zeldes argues:

One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach - the approach currently used by the Social Security Administration in generating its most widely cited numbers - ignores risk and instead simply discounts "expected" future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value.

Effectively, market valuation uses a discount rate that incorporates a risk premium. Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is "wage-indexed": future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits. We find that the difference between market valuation and "actuarial" valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits is only 4/5 of that implied by the actuarial approach. Ignoring cohorts over age 60 (for whom the valuations are the same), market value is only 70% as large as that implied by the actuarial approach.

As I've noted before, this is a developing approach to valuing Social Security obligations. Two other papers (here and here) attempt similar exercises but with differing results.


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Friday, July 17, 2009

Responses to Wall Street Journal article on state pensions

The Wall Street Journal
printed two letters in response to my article last week on accounting in state pension plans:

Andrew G. Biggs describes how the state of Montana is seeking to minimize the amount of its unfunded pension liability to be disclosed to the public ("Public Pensions Cook the Books," op-ed, July 6). He explains why state and local governments might wish to understate this figure, but says little as to why the various public employee unions -- ostensibly those which should be protecting the future pensions of their members -- aren't themselves insisting on a more honest and realistic calculation of this liability. I suggest there is a very practical reason for union acquiescence to an underestimation of the pension liabilities owed to their members: They have more to gain by maintaining the present system, as opposed to risking any changes to future benefits which might result from an honest accounting of the liabilities.

Generous retirement benefits for teachers and other public sector employees, we are told, compensate them for the relatively lower wages they receive on the job. Long ago, this was likely the case. Yet over time, as teaching and other public sector jobs have increasingly become unionized, that wage gap (to the extent it still exists at all) has been reduced. But the generous benefit structure, from pensions to fully subsidized health care to vacation allowances, has been safeguarded by the unions and the administrators (many of whom are themselves union members). In other words, the pension and benefit systems are at the core of how teaching and other public employee unions maintain themselves.

If the pension and benefit systems look more like the packages found in the private sector, it becomes harder to justify having a union. It seems that maintaining the system is the chief goal of public unions; paying for it is someone else's problem.

W. R. Nelson
Glenview, Ill.

Andrew Biggs's article reflects a misguided understanding of state and local pensions and government accounting, ignores salient facts and distorts key issues. He chastises government pensions for not using a corporate finance model that represents a settlement price, but fails to acknowledge that this is irrelevant to public pensions because they and their sponsoring entities are going concerns, not subject to takeover or going out of business.

Rather than accuse the National Association of State Retirement Administrators of "taking the low road," had Mr. Biggs read our resolution on the subject, he would know our opposition to so-called market-based techniques is logical and fact-based. Further, the application of these techniques to corporations has been a leading cause of pension abandonment due to the extreme volatility they cause in funding levels and required costs.

Mr. Biggs should also recognize that both actuarial and accounting standards support the use of the plan's long-term investment return assumption. This fact animated the state of Montana to insist on actuaries who would not espouse practices in conflict with the state's legal environment and actuarial and accounting standards. It is nonsensical to require state and local governments to calculate a settlement value for plans that are not going to terminate.

The Governmental Accounting Standards Board considered and rejected so-called "market-based" techniques in 1994 when it established standards for calculating and reporting public pension liabilities. GASB instead found that trend-based actuarial measures, consistent with public plans' long-term nature, are a better gauge of a plan's financial condition than the single-point, market-based measures promoted by Mr. Biggs, a group of financial economists and those with a financial interest in the outcome of this debate.

Terrance Slattery
National Association of State Retirement Administrators
Santa Fe, N.M.

With regard to Mr. Slattery's letter, let me make this comparison to give a rough idea of what I'm talking about:

Let's say that your pension plan owes $1,000,000 that it must pay 20 years from now. (This is a simplification of smaller cash payments over a longer period, but analytically that doesn't matter.) The question is, how much should you set aside today such that you can say you've "fully funded" that future obligation. Under the logic of state pensions, if you invest in stocks – with an average annual return of 10.7% per year – you only have to set aside $130,933. If that amount today earns 10.7% annually over the next 20 years, it will equal $1,000,000. 'Nuff said, right?

Not really, since stocks are risky. The standard deviation of stocks has been around 18.5% per year. So, using a simple Monte Carlo simulation, I create 1,000 possible outcomes for that investment. Now, the average end balance is right around $1,000,000 – but that average can be very misleading. In fact, in almost two-thirds of cases, the initial $130,933 investment fails to equal $1,000,000 at the end of 20 years. This makes a travesty of the claim that the plan is fully funded. Now, if the plan were empowered to reduce benefits if investment returns were too low, then I could understand where they were coming from. But state pension benefits are generally guaranteed by law – the government can't get out of paying them short of default. If it's certain the benefits must be paid, then you want to discount your future benefit obligations at an interest rate that reflects that certainty. That will require you to set aside more money today, which the plans obviously aren't keen on doing, but clearly makes the plans more fully funded.




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Tuesday, July 14, 2009

I will now only post about pets…

I have a couple posts over at AEI's blog comparing cost growth in veterinary care – about the closest thing we have to a free market in health care – to health care for humans (see here and here). It's gotten good play, including at Greg Mankiw, Arnold Kling, Megan McArgle, Tyler Cowen, Bryan Caplan, Matt Yglesias and Brad DeLong.

There's a little overinterpretation going on, which I should have hedged against with better warnings on data limitations – in particular, there's so little data on the size and composition of the pet population that working up a real "excess cost growth" number for Bowser & Co. is pretty tough. So all I've shown is dollar figures, which aren't optimal. The broader case, though, as the Consumer Reports quote illustrates, is that the same factors driving up health care for two-leggers – rising income and new technologies – are doing it for our furry friends as well.

In any case, given the good coverage I will now only blog on pet-related issues.

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Monday, July 13, 2009

Upcoming event: Australia and International Pension Reform: Lessons for the United States

On Thursday, July 16, 2009 at 10:00 a.m. the Retirement Security Project will host an event titled "Australia and International Pension Reform: Lessons for the United States" at the Brookings Institution, Saul/Zilkha Rooms, 1775 Massachusetts Ave, NW, Washington, DC. Some background:

Achieving financial security in retirement is an increasing challenge as more responsibility is placed on individuals to put aside enough money during their working lives to last through their non-working years.  Lessons from Australia's mandatory retirement savings system—the Superannuation Guarantee—continue to have a great deal of relevance to American policy-makers. 

On July 16, the Retirement Security Project and the Urban-Brookings Tax Policy Center will host Australian Assistant Treasurer Nick Sherry, an architect of the Superannuation Guarantee, who will discuss the system and recent changes to it.  Following the assistant treasurer's address, a panel of international experts will discuss the relevance of the Australian system to several key proposals in the United States and other countries. 

After each presentation, speakers will take audience questions.



William Gale

Vice President and Director, Economic Studies

The Brookings Institution

Keynote Address


The Honorable Nick Sherry

Assistant Treasurer

The Treasury, Australian Government

Panel Discussion

Moderator: David John

Principal, The Retirement Security Project

Senior Research Fellow, The Heritage Foundation

David Harris

Managing Director

Tor Financial

Dallas Salisbury

President and CEO

Employee Benefit Research Institute

J. Mark Iwry (invited)

Senior Adviser to the Secretary and Deputy Assistant Treasury Secretary for Retirement and Health Policy, United States Treasury Department

Click here to register.



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Friday, July 10, 2009

Cross posting from NASI blog

I left an extended comment to former SSA chief actuary Haeworth Robertson's post on the Social Security Trust Fund over at the National Academy of Social Insurance's blog.

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Thursday, July 9, 2009

Cross-country health care spending growth since 1990: how does the U.S. match up?

I have a new post at AEI's American blog today comparing health care cost increases in the U.S. to those in other countries since 1990. The conclusion: we're about average, and nations with more centralized health provision haven't been all that better at controlling costs over the last decade and a half than have we in the U.S. Here's the key chart:

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Sign up for NASI’s Social Security Academy

The National Academy of Social Insurance will be sponsoring a "Social Security Academy" for interns on Thursday, July 30, 2009 from 8:30am to 3:30pm. Among the topics are:

  • Why is Social Security Important?
  • Social Security: How Does it Work?
  • Social Security: How Big is the Financing Problem, and How Can We Pay for What We Want?
  • Unfiltered: Straight Talk on Social Security
  • Now What?: How Can I Use This Information and Experience

Here's a link to sign up. I've spoken at the Social Security Academy in the past and thought it was a good event and well worth taking part in. Both the participants and the speakers are top notch.

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Monday, July 6, 2009

New CBO numbers of aging versus health care cost growth

The CBO released new numbers dealing with the respective contributions to rising entitlement spending of population aging and rising per capita health care spending. As I noted previously, the analysis in CBO's new Long Term Budget Outlook support my previous arguments that over the next several decades, aging – not health care excess cost growth – will be the "real deficit threat."

These new data break out aging and ECG-related costs in different ways. The key issues here is that the effects of aging and ECG are multiplicative, not additive. In English, this means that the total cost increase for entitlements will be larger when the two are put together than the sum of when either is viewed separately. The interactions between aging and ECG were a key issue in my original critique of CBO's November 2007 article, in which interactions were attributed entirely to ECG.

I argued that the best way to present the interactions is to divide them proportionately between the two factors. This is the approach CBO took in their Long Term Budget Outlook. However, an equally valid approach is to two the interactions separately; that's what the new CBO numbers do.

In either case, the conclusions are the same: according to CBO's projections, aging will be the largest driver of entitlement costs – and thus of overall budget deficits – until 2055. After that, excess health care cost growth will be the main entitlement cost driver. Given the time frame, and given that we'll be broke due to aging-related cost increases long before 2055, I think focusing exclusively on ECG in the near term doesn't make that much sense.

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New article: Public Pensions Cook the Books

I have an article in today's Wall Street Journal looking at the way liabilities for state/local government pensions are calculated. I argue that if market valuation of these obligations were used, rather than current actuarial techniques that tend to understate costs, the true shortfall for state pension funds could be many times higher than currently reported.

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