Wednesday, September 30, 2009

New paper: Social Security's Unexpected Deficits Show Urgent Need for Reform

The Heritage Foundation's David C. John has a new web memo online regarding Social Security's slip into deficits for this year:

Starting this year, Social Security will spend more in benefits than it will receive from its payroll taxes. This is somewhat unexpected as just last year, the 2009 cash surplus was predicted to be about $80 billion. Even in May of this year, the program's actuaries predicted a roughly $19 billion surplus. However, they failed to allow for the full effects of the recession, and the soaring unemployment both reduced tax collections and increased the number of workers who were forced to take early retirement.

This is very bad news for taxpayers, but worse is yet to follow. The 2009 deficit of about $10 billion will be followed by a 2010 deficit of about $9 billion. If there is a strong recovery--which is questionable at best--the program could briefly return to surpluses. But by 2016, deficits will return and continue permanently. A far more likely scenario is that Social Security will run deficits from this point on.

The Reality of the Trust Fund

These deficits do not mean that benefits will be cut, but they do increase the burden on taxpayers to pay them. On top of the $1 trillion-plus deficit predicted for this year to pay for the Obama Administration's programs, taxpayers will have to find still more money to pay Social Security's deficits. It is true that a trust fund exists that has been funded by $2.4 trillion of Social Security surpluses since 1983, but there is no real money in that trust fund.

As the Office of Management and Budget said in 2000, "These balances are available to finance future benefit payments ... only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other expenditures."[1]

Congress has already spent every penny of that money, and all that is left are IOUs that must be repaid by the same taxpayers who paid the extra taxes in the first place. Taxpayers, not the trust fund, will end up covering Social Security's deficits.

Massive Deficits and an Even Worse Future

This May, Social Security predicted that it would first run deficits in 2016, and after that the picture was grim. After adjusting for inflation, annual deficits were predicted to reach $68.5 billion in 2020, $170.4 billion in 2030, and $293.6 billion in 2035. Now those deficits will come much sooner than expected.

In net present value terms, Social Security owes $7.7 trillion more in benefits than it will receive in taxes. This consists of $2.4 trillion to repay the special issue bonds in the trust fund and $5.3 trillion to pay benefits after the trust fund is exhausted in 2037. In other words, Congress would have to invest $7.7 trillion today in order to have enough money to pay all of Social Security's promised benefits between 2016 and 2083. This money would be in addition to what Social Security receives during those years from its payroll taxes.

According to the 2009 Trustees Report, Social Security is projected to owe $7.4 trillion after 2083, making a perpetual deficit of $15.1 trillion. Last year's number was $13.6 trillion. This means that Social Security's total deficit continues to grow well beyond the 75-year projection period. Therefore, any reform that just eliminates deficits over the 75-year window will not be sufficient to solve the program's problems.

Many opponents of reform claim that raising payroll taxes by about 2 percent (the average percentage difference between revenues and outlays over the 75-year period) would solve Social Security's problems. The reality, however, is that the program's future deficits are projected to be large and growing, so this tax increase would still leave a huge shortfall.

Short-Term Fixes

There are three ways to fix Social Security:

  1. Reduce benefits,
  2. Increase retirement savings, and
  3. Raise taxes.

The first two will take years to have a real effect. Accounts of any size need to grow for about 20-25 years before they are large enough to pay much in the way of retirement benefits. Moreover, benefit changes are politically feasible only if current retirees and those close to retirement are not affected, which means that it would be several years before benefit changes start to take effect.

On the other hand, some prefer tax increases because they would immediately pump money into Social Security. But that band-aid would just delay the start of real long-term reform and make it much more likely that Congress would keep taking the easy way out by raising taxes.

Fix Social Security Now or Face the Consequences

Social Security's future has arrived early. After years of talk about how well-funded the program is, the reality is that never-ending deficits will eat up money that could be used for other programs or tax cuts. Despite reassuring words that these deficits are temporary, the reality is much worse. These deficits are likely to be permanent, and the only way out of this cash crunch is to fix the program.

David C. John is Senior Research Fellow in Retirement Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


[1]Office of Management and Budget, Budget of the United States Government, Fiscal Year 2000:
Analytical Perspectives (Washington, D.C.: U.S. Government Printing Office, 1999), p. 335.

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Tuesday, September 29, 2009

The Today Show Discusses Social Security Reform

Money Magazine writer Janice Revell discusses Social Security reform on the Today Show. Here's the clip, much of which is quite good, but there are a couple items on Social Security reform I think are worth fact-checking.

Revell first says, "The truth of the matter is the Social Security system is not going broke, it is in far better shape, really, than you probably expect … I think what makes it safe, if you look at the actual numbers if the government did absolutely nothing and said you're on your own people for the next 30 years there would be enough money in the system to pay full benefits. Even after that, there would be enough money for decade and decades to pay very high benefits."

In a sense she's clearly correct: the program is current solvent through the late 2030s and will be able to pay around three-quarters of promised benefits thereafter. But the problem of paying for Social Security – which is a problem for the government, and therefore a problem for you and me – begins in just a few years. And that burden will be large: by 2025 Social Security will run a deficit equal to around 1 percent of GDP; the deficits will continue and increase in perpetuity thereafter. This means that, in addition to tackling the even larger cost of fixing Medicare, the government will need to dedicate an extra 5 percent of its resources to Social Security. Entire cabinet departments don't take up that much money, so unless we want to raise taxes even more we'll need to make some changes.

Revelle then says that there is plenty of time for the government to get on top of the problem and that reform will probably constitute some minor increase in payroll taxes and some taxation (meaning, presumably, reduction) of benefits. Let's think about this:

If we wanted to fix Social Security permanently today by raising taxes, we'd need to increase the payroll tax rate from 12.4 percent to around 15.8 percent, a 27 percent increase in what is already the largest tax paid by most workers. Again, that's the amount if we acted today and if we wanted with reasonable certainty not to have to raise taxes again in the future. If we put reform off, as Congress has a tendency to do, then the costs get even bigger.

It's all in the eye of the beholder, but the numbers seem a bit more sobering than Ms. Revelle's description of them should warrant.

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Hoyer skeptical of calls for ad hoc COLA payments

Sept. 29, 2009 – 12:56 p.m.

Idea of $250 Payment to Seniors Gains No Traction With Hoyer

By David Clarke, CQ Staff

House Majority Leader Steny H. Hoyer on Tuesday declined to throw his support behind providing senior citizens with a one-time payment of $250 to make up for the expected lack of a cost-of-living boost for Social Security recipients next year.

Senior citizen groups and many members of Congress want some action taken and have been advocating that Social Security recipients receive a $250 check, as would be the case under legislation (S 1685, HR 3597) introduced by Sen. Bernard Sanders, I-Vt., and Rep. Peter A. DeFazio, D-Ore. They argue that while inflation in general may not be on the rise — thus making a monthly cost-of-living adjustment (COLA) unlikely in 2010 — medical expenses and some other bills for seniors are increasing.

Hoyer, D-Md., did not explicitly say he is against providing such a payment, but he made the case to reporters that Congress has already taken action this year to help seniors.

As part of the economic stimulus bill () enacted in February, seniors received a one-time payment of $250, and last week the House passed a bill, 406-18, to prevent any senior from having their Medicare Part B premium, which covers physician services and outpatient care, increased next year.

"Frankly the Congress has taken very substantial action in consideration of the needs of our seniors," Hoyer said.

He also pointed out that Social Security recipients received a 5.8 percent cost of living adjustment this year, which is the largest since 1982.

But members of Congress do not like to disappoint seniors, who are active politically. And Democrats are especially attuned to the issue now as they work on a health care overhaul that has some seniors concerned about its impact on their benefits.

Consequently, Hoyer could be a lonely voice of protest against a Social Security boost, as he was last week when he was one of 18 members to vote against the Part B bill (HR 3631).

Hoyer argued 73 percent of seniors are already protected from such premium increases under law when they are not scheduled to get a boost in their Social Security payments and that Congress had to start making tough decisions given the state of the government's budget.

"I don't know how many of you go to sleep at night worried about whether Ross Perot can pay his premium, but this will freeze Ross Perot's basic premium from going up. I think that as well-meaning as this legislation is, it is not about poor seniors," Hoyer said on the House floor last week.

The National Committee to Preserve Social Security and Medicare, a group that advocates for seniors, is holding an event on Capitol Hill Wednesday to try to build support for a one-time payment for seniors.

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Tuesday, October 6, 2009

Noon–1:30 p.m. ET

To attend in Washington, D.C., RSVP at,

or call (202) 261-5709.

If you're not in Washington, D.C., or can't leave your computer, listen to the audio webcast by registering at


  • Len Burman, Daniel Patrick Moynihan Professor of Public Affairs, Syracuse University; former director, Tax Policy Center, Urban Institute
  • Mike Mussa, senior fellow, Peter G. Peterson Institute of International Economics
  • Norman Ornstein, resident scholar, American Enterprise Institute
  • Rudolph Penner, Institute fellow, Urban Institute; former director, Congressional Budget Office
  • Robert Reischauer, president, Urban Institute; former director, Congressional Budget Office (moderator)

The Congressional Budget Office's most recent long-term budget outlook declared that "current policies are unsustainable." Translation, according to tax scholar Len Burman: if we don't change course, we're doomed. America will celebrate its tricentennial with IOUs 6.5 times its total economic output if current policies continue, CBO says, and that is under implausibly optimistic assumptions about the economy.

Join the conversation as a panel of experts considers

  • Is it truly possible the public debt will explode and the nation be reduced to insolvency?
  • What does the debt cancer portend for today's children, tomorrow's seniors, and everyone else?
  • What assumptions -- about interest rates, financial markets, foreign investments, recovery from the latest recession -- are behind CBO's projections? How realistic are the assumptions?
  • What must happen for Americans, Congress, and the White House to take the painful steps necessary to forestall a financial catastrophe?
  • What can we learn from the experiences of other debt-ridden nations?

At the Urban Institute

2100 M Street N.W., 5th Floor, Washington, D.C.

Lunch will be provided at 11:45 a.m. The forum begins promptly at noon.

Webcast note:

You will need to register for the webcast on the same computer you will use to listen. You can register anytime up to and during the event. To access the webcast, you can go to the same link where you registered,


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Monday, September 28, 2009

New paper: Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile

This paper from Alexandra Cox Edwards and Estelle James just popped up on my SSRN email. Titled "Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile" it looks at how the shift from a traditional DB pension to a DC system of personal accounts has influenced incentives to delay retirement.

Here's the abstract to the Edwards/James paper:

Recent research has argued that incentives stemming from social security systems influence the worker's decision to retire. The experience of Chile, which radically changed its system in 1981, offers an opportunity to test this hypothesis. The new system tightened access to early pensions, replaced an actuarially unfair defined benefit plan with an actuarially fair defined contribution plan, exempted pensioners from the pension payroll tax and allowed widows to keep their own pension in addition to their survivor's benefit. Although the old system is being phased out, since 1981 the two systems have co-existed. Using probit analysis of the behavior of a retrospective sample of new and old system affiliates, we estimate the impact of the new social security rules on the probability of dropping out of the labor force, for older workers. We find large effects. Age of pensioning has been postponed. Labor force participation is much higher among affiliates of the new system compared with the old, especially for pensioners and women. This is not simply due to selection: Aggregate participation rates have increased as the new system's share of total affiliates has risen.

As I and my co-authors showed in this paper, incentives to remain in the workforce under the U.S. Social Security program are quite poor. The typical person who chooses to work and pay Social Security taxes an additional year receives only around 2.5 cents in additional lifetime benefits for each dollar of additional taxes they pay. If we wish people to delay retirement we need to give them reasonable incentives to do so.

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Social Security job opening at Congressional Research Service


Washington DC

Domestic Social Policy Division

Two Public Policy Analysts

($86,927 - $113,007)

The Congressional Research Service (CRS), Domestic Social Policy Division is seeking two analysts for its Income Security Section. CRS works exclusively for the United States Congress, providing policy and legal analysis to committees and Members of both the House and Senate, regardless of party affiliation.



The analyst will focus on issues such as:

- Employment trends for persons with disabilities and mechanisms to support people with moderate to severe

functional limitations

- The interrelationships between federal programs and private mechanisms to improve the income security of

persons with disabilities

- The role of the federal and state governments and the private sector in the delivery, quality assurance, and

financing of services (long-term care, income security, health, etc.) for persons with disabilities

- Understanding and reconciling different definitions of disability that are utilized in research as compared to

programmatic definitions



The analyst will work on issues related to programs for providing income security for:

- The aged (e.g. Social Security retirement and disability benefits)

- Disabled, (e.g. Supplemental Security Income (SSI))

- Unemployed (e.g. Unemployment Insurance (UI) benefits)

SALARY: Both positions are being offered at the GS-13 level $86,927 - $113,007.


APPLICATION PROCEDURE: Applications must be submitted by October 26, 2009. For more information and to apply online please visit:

If you are unable to apply online, please call: Tel: 202.707.5627 to request an applicant job kit.

CRS is the public policy research arm of the United States Congress and is fully committed to workforce diversity.

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Sunday, September 27, 2009

The best way to pay for Social Security?

It's good to be optimistic about our ability to solve big problems -- goodness knows the power of positive thinking is about the only power we're showing these days. And financial analyst
Eric Schurenberg, writing at, is pretty confident.

Schurenberg's source material is updated estimates from Social Security's actuaries of the financial effects of various reform provisions, summarized in a new paper from the Employee Benefit Research Institute.

Schurenberg says "The new EBRI research shows that it won't really cause a huge amount of pain. We just have to get to it." For instance,

"One way to fully fund Social Security is to apply payroll tax to all wages. At the moment, taxes cease after your income hits $106,800. That covers the 2% gap with 0.19% of national payroll left over to have a party to celebrate." The problem is with that of this option imposes an additional 12.4% fewer tax on all earnings, with no additional benefits paid in return. This would push top marginal tax rates well past 50%. Usually, tax exiles flee to places like the Cayman Islands or Monte Carlo; in this world, people could flee to Sweden to find lower taxes.

But Schurenberg is also big on cutting benefits: "My favorite tactic is to tinker with the complicated formula Social Security uses to calculate benefits in such a way that future benefits rise at the rate of inflation rather than the rate of wage growth, as it does now. The adjustment is invisible because it still creates benefits that are nominally higher year after year, and the pain is gradual because it phases in slowly. And it's more than good enough: it adds up over time to 2.3% of the national payroll."

The problem here is that price indexing, while keeping real benefits constant, implies lower benefits relative to pre-retirement earnings – that is, a lower "replacement rate" – and relative to taxes paid. This doesn't mean that more seniors will be thrown into poverty, but they'll also surely notice what's going on and many won't be happy.

The key conclusion is that while fixing Social Security is easy on paper, the size of the shortfall means there will be significant pain no matter which route we choose.


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Tuesday, September 22, 2009

WSJ: Social Security Choice: Benefit Cuts Or Tax Hikes

No, I haven't recovered from shoulder surgery. In fact, my shoulder hurts more now than it did before. However, I have gotten some fancy new dictation software which allows me to write just by talking into a microphone. Very cool.

In any case, Andrea Coombes writes in today's Wall Street Journal about what Social Security reform might look like, including some quotes from yours truly. For what it's worth, my prognosis of the chances of receiving full promised benefits -- which I thought were pretty low -- was focused on younger and higher income individuals. I expect that current and near retirees and low earners will receive their full scheduled benefits under pretty much any flavor of reform.

Social Security provides a majority of the retirement income for about two-thirds of Americans over age 65, but if you're in your mid-50s or younger, it's time to make alternate arrangements.

The program's dismal outlook has long been known, but the recent economic crisis further scarred the program's finances, bringing closer the day of reckoning when receipts no longer cover benefit payouts.

That's bad news for anyone in their mid-50s or younger, because proposals that aim to put the system on sound financial footing almost invariably protect current beneficiaries and people near retirement age, but everyone else can expect either benefit cuts or tax hikes or possibly a bit of both.

Currently, the program's annual costs will exceed revenue in 2016. Then, that shortfall is covered by the system's trust fund through 2037 - four years earlier than expected a year ago. (One reason: lower payroll-tax revenue thanks to the steeply higher unemployment rate.) At that point, payroll-tax revenues still cover about 75% of benefit payouts through 2083. So, keep in mind, even if nothing is done, it's not as though benefits are eliminated, even over the next few decades.

Of course, some people might respond: What trust fund? It's essentially an accounting placeholder - a note detailing what the government owes itself. There's no cash pile waiting to be paid out to needy retirees.

Some people have said that, given the weight of its other financial obligations, the federal government will be forced to renege on its Social Security obligations. But experts, both liberal and conservative, say that scenario is highly unlikely.

"Some people say the government will default on the trust fund and won't pay. That won't happen," said Andrew Biggs, a resident scholar at the Washington-based American Enterprise Institute and a former deputy commissioner for policy at the Social Security Administration.

"If they don't want to repay it, [the government can] simply cut Social Security benefits, raise the retirement age, raise taxes ... it's all under the control of the government basically," he said. Still, he said, "it may not be paid back on time in the sense that we'll pay promised benefits through 2037 - my sense is we'll cut benefits way before the trust fund runs out."

Others said the government's promise to Social Security recipients is likelier than other vows to be kept. "The problem is really the government as a whole is in a deficit position. That doesn't mean they won't meet that particular commitment but the question of how we're going to meet all of our commitments fiscally is kind of up in the air," said Eric Toder, an institute fellow at the Urban Institute in Washington. "I don't think that's one they're likely to default on."

Still, people paying into the system now are highly likely to get less than is being promised currently.

"The chance that people won't receive their full promised benefits is actually quite high," Biggs said. "How big those benefit cuts will be and who they might affect is an open question." Still, "most of the reforms out there wouldn't touch people who are 55 and over and they also wouldn't affect low-income people."

Some say benefit cuts are less likely than raising payroll taxes to bridge the system's shortfall.

Given the recent hit to people's retirement plans, there's "increasing recognition how important Social Security is, and how it serves as a backbone for most people's retirement income," said Alicia Munnell, director of Boston College's Center for Retirement Research. "I'd be surprised if there was any major cutting in the proposals to fix the system."

Already, some beneficiaries get less than they were originally promised.

For one, the "normal" retirement age - when you're eligible for full benefits rather than the reduced payout for early retirees - is inching higher, thanks to a 1983 law aimed at dealing with the looming funding shortfall. Workers born before 1938 collect full benefits at age 65; for people born later, the age for full benefits is slowly being raised to age 67. (For anyone born in 1960 or later, the full retirement age is 67.)

Over a lifetime, that means lower benefits, but given our longer life spans, it's hard to argue with that change. When Social Security began in 1935, the average American's life expectancy was about 60. Now it's 77.7, according to the Centers for Disease Control.

Then there's Medicare, the rising costs of which are taking a bigger bite of overall payments. Medicare and Medicaid combined will total almost 10% of GDP in 2040, up from 4.2% in 2008, while Social Security's share will rise to 6.2%, up from 4.3% now, according to the Government Accountability Office, the investigative arm of Congress. Medicare's funds are expected to be exhausted in 2017, two years earlier than expected last year.

And Medicare beneficiaries take some of the hit of those rising costs in their Social Security checks. Generally, Medicare Part B premiums (for doctors' services) are deducted from Social Security checks. Since 2000, the average annual hike for the Part B premium has been 9.8%, versus the average 2.7% for Social Security's annual cost-of-living increase, according to a report Munnell co-authored in October.

While there's a "hold harmless" law that prevents most beneficiaries' Social Security checks from actually decreasing due to steeper Medicare premiums, those health costs still eat up a portion of the Social Security cost-of-living increase.

"The increase in Medicare premiums offsets some of the cost-of-living adjustment on the net benefit," Munnell said. Assume a monthly benefit of $1,000 and a premium of $100, for a total check of $900. Social Security COLA increases alone would bring the original $1,000 benefit to $1,027, but the larger Medicare premium hike slashes the amount to about $917, a 1.9% increase from $900, rather than the full 2.7% average COLA hike.

And next year, because of rising Medicare costs, some Social Security beneficiaries actually may get smaller checks. Here's why: The current low inflation rate, based on the consumer price index, means there will be no Social Security cost-of-living adjustment in 2010 and 2011. But Medicare premiums will rise. As a result, the higher earners who are not covered under the "hold harmless" provision - about 5% of Medicare Part B beneficiaries who earn an adjusted gross income higher than $85,000 for singles and $170,000 for couples - will face a benefit cut.

And there's a third way benefit cuts are marching higher: the tax on benefits. If your "combined income" (adjusted gross income plus one-half of Social Security benefits plus nontaxable interest income) exceeds $25,000 for singles and $32,000 for married couples, you pay tax on up to 85% of benefits. Those income thresholds are not indexed to wages or inflation, Munnell said.

Right now about 30% of recipients pay tax on their benefits. That will rise to 42% in 2020 and 52% in 2030, according to Munnell's projections. "As the whole level of wages rises, more and more people will become subject to taxes. That's been happening gradually over time," she said.

All told, by 2030 the average worker who claims at age 65 will get benefits that replace just 30% of earnings - down from 41% now - thanks to the higher normal retirement age, higher Medicare premiums, and bigger pool of benefits subject to taxes, according to a Center for Retirement Research report in 2007.

Separately, some retirees volunteer for their own benefit cut: Most people take their benefits at the first opportune moment - age 62 - despite the fact that waiting for your full retirement age or beyond substantially increases your monthly benefit (of course, to enjoy a higher total benefit amount you have to live a certain number of years).

"We hear stories that people are claiming early because they're worried that if [the system is] fixed they might get lower benefits," Munnell said. "It's like take your money and run, which is silly, because every proposal I've seen doesn't change benefits for those who are 55 or older."

Protecting the near-retirees is why young people should consider praying that Congress deals with the issue sooner rather than later. "The problem is that the boomers have already reached 62 now and every passing month more and more people are entering the golden period" - that is, the age where any proposal to fix Social Security protects people, said Barbara Bovbjerg, director of education, workforce and income security issues at the U.S. Government Accountability Office, the investigative arm of Congress.

"As a boomer I can say this: There are 80 million of us - we should do something with Social Security that makes boomers part of the solution, not part of the problem," she said. "Because once the boomers [retire], you have many fewer options. You want to try to get those changes made while there are still boomers in the workforce."

A variety of solutions have been proposed. They range from "simple yet harsh" - cutting benefits across the board - to the complex, such as raising the amount of income subject to the Social Security payroll tax. That's complex because then you must decide whether the higher-income earners hit by this change should also receive higher benefits as a result.

"If you don't [increase their benefit], you sort of break this link between contributions and benefits, and you irritate high-income people whose support of the program is really essential," Munnell said. But if you do tie higher benefits to higher taxes, you don't get much money out of raising taxes, she said.

Another idea: Raise the retirement age again. That, too, has its complications.

"I'm all for people staying in the labor force longer," Munnell said, "but if you just keep increasing the retirement age and leave early retirement benefits available at age 62 what you have is a situation where people who can't find jobs or have some physical disability and have to claim benefits at 62 just keep getting lower and lower amounts."

So will teenagers today receive benefits decades from now? Most policy experts agree the answer is yes. "Social Security with 99% probability will be there" for future retirees, said Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based nonprofit group. "I plan on getting Social Security and I'm fully confident that my 11-month-old niece will get Social Security - and every member of the family in between," he said.

Others agreed. "Even in the worst case it's not that there's gong to be no benefits, it's just they'd be a good deal lower," Toder said. "The bigger problem for [an] 18-year-old is looking at the totality of the budget picture. That's going to be very bad and affect everything the federal government does or can do. And there doesn't seem to be much political ability to fix it, at least in the short run."

If Medicare and Social Security aren't cut back or new revenue sources found, Toder said, "there's not going to be money for the federal government to do anything else but pay money to retirees - and that's an impossible situation."

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Monday, September 21, 2009

Thinking About Health-Care Profitability

I have a short piece up over at National Review Online:

The Obama administration and the congressional Democratic leadership have made a tactical decision to demonize health-insurance profits as part of their drive to promote health-care reform. Specifically, they are using this tactic to sell a "public option," through which the government would provide health insurance directly to the public. The attack plays to Americans' distrust of insurance companies. It is also untrue.

In a recent press conference, President Obama said, "There have been reports just over the last couple of days of insurance companies making record profits, right now. At a time when everybody's getting hammered, they're making record profits, and premiums are going up." Likewise, President Obama told Congress that insurers cherry-pick the healthiest (and thus lowest-cost) individuals while dropping coverage for those who become sick. "Insurance executives don't do this because they are bad people," the president explained. "They do it because it's profitable." Summing up, House Speaker Nancy Pelosi simply says of insurance companies, "They are the villains in this."

If so, they're not very competent villains. Despite all the hype, the health-insurance industry's profit margins remain modest. On average, health insurers deliver a profit of less than 4 cents for each dollar of sales.

Health insurance's profit margin is lower than that of the soft-drink industry, which competes ferociously through advertising. It is lower than that of the fast-food industry, which lures customers with dollar menus and supersized meals. It is far lower than that of the beer industry, with its profit margin of 18 percent. And it's not just foodstuffs that earn higher profits than health insurance: Some 85 industries have higher profit margins.

Democrats point out that insurers' profits approached $13 billion last year. "I mean, they are making so much money it is just ridiculous," said Sen. Jay Rockefeller (D., W. Va.). But Rockefeller, who owes his own substantial fortune and — let's face it — his seat in Congress to his great-grandfather, the oil magnate John D. Rockefeller, should know that any large industry will generate significant profits simply by virtue of its size, even if its profit margin is small. Yet the margin is what matters. Large industries divide profit among millions of investors, each of whom is seeking a decent return on his money. 

The problem with health care isn't excessive profits; it's excessive costs. The U.S. health system encourages overconsumption, with some experts estimating that up to 30 percent of health spending is wasted. But the question of profits remains important for two reasons.

First, you can often judge politicians' intentions on issues you don't understand — which, for most of us, includes the vast majority of health-care policy — by their truthfulness on issues you do understand. If their strategy is based on a claim that is so easily disproved, what will they do in areas you can't check? Second, the profit margins in private health insurance should give us pause regarding the public option, which would ostensibly be run as a non-profit.

Assuming that the only difference between the public option and private insurance is the need to deliver a profit, the public option would cost only about 4 percent less than private-sector coverage. And even this is an overstatement. Private health insurers produce a profit to pay the return demanded by their investors. The public option, instead of having investors, would receive its capital from the government. Those funds will be borrowed, of course, and the taxpayer must pay interest. When interest costs are included, the total costs of the public option are about the same as those of private insurance.

While demonizing health-insurance profits is a central part of the Democratic leadership's strategy, it is a red herring: health insurance is no more profitable than dozens of other industry sectors. And it's the free market that keeps it so. That's something to be remembered as the health debate progresses.

Andrew Biggs is a resident scholar at the American Enterprise Institute.

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Saturday, September 19, 2009

Slow blogging

I've just had shoulder surgery and my left-handed hunt & peck typing isn't great, so posting may be slow for the next few days. Back soon, though. Read more!

Wednesday, September 16, 2009

The Hill: Democrats pushing for ad hoc Social Security COLA

The Hill
reports on activities on, well, the Hill:

Lawmakers are calling for an increase to Social Security payments that would cost the government billions of dollars.

The congressional push comes after the Social Security Administration reportedly indicated there will be no inflationary adjustment to Social Security benefits next year. It would be the first time since 1975 that Social Security benefits would not be subject to a cost-of-living-adjustment (COLA).

Rep. Carolyn McCarthy (D-N.Y.) introduced legislation this week that would provide seniors and others who receive Social Security payments a one-time $150 payment to make up for the loss of the COLA. The bill has 14 Democratic cosponsors.

Social Security's annual increases are based on inflation, which was negligible this year due to the recession. Seniors received a 5.8 percent increase in January based on 2008 economic data. Even though inflation has been low, McCarthy noted in a release that Medicare costs are projected to jump by 9 percent in 2010. She added that the lack of a COLA would affect over 50 million individuals who receive Social Security checks.

It is unclear how much the legislation would cost; the Congressional Budget Office has not released a score of the measure. However, if 50 million Americans received checks of $150, the cost to the federal government would be $7.5 billion.

"I have been hearing from many seniors in my district who are concerned," McCarthy said. "Seniors rely on these payments and with the increasing costs of healthcare, coupled with hits to their investments, America's seniors are being shortchanged. This bill will help provide some relief."

AARP has not formally endorsed the bill, but it has called on Congress to address the economic hardship many senior citizens are experiencing.

McCarthy's legislation has been referred to the Ways and Means Committee, which wants to tackle the matter. A Ways and Means panel spokesman said, "Committee members are concerned about the issues surrounding the COLA and will be working in the coming weeks to address them. This legislation will certainly be one approach under review."

A Senate companion measure has not been introduced, but Sen. Bernard Sanders (I-Vt.) announced last month he plans to draft legislation authorizing a one-time payment similar to McCarthy's bill. "It would simply be unacceptable for seniors on fixed incomes to not receive additional income in the coming year, something that hasn't happened in over three decades," Sanders said in a statement.

One quick thought:

Rep. McCarthy justifies the ad hoc payment by saying that Medicare costs are scheduled to rise by 9 percent this year. However, the costs she's referring to are Medicare Part B premiums, from which 95 percent of existing retirees will be exempt from paying the increase due to there being no COLA in 2010. So that doesn't seem the strongest argument to me.

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Tuesday, September 15, 2009

Allan Sloan’s Q&A on Social Security reform

In the Washington Post, Allan Sloan answers reader questions regarding Social Security and Social Security reform:

Social Security: The Readers Speak

By Allan Sloan
Tuesday, September 15, 2009

I was snowed under by e-mail from readers of the Social Security article I wrote last month, which appeared online just as I was starting my vacation and in print a few days later. I didn't have access to reader e-mail at the beach, and I've just now caught up with all my Social Security mail. I would like to share some of that correspondence with you.

Before we get to specific letters, I'd like to answer three questions asked by many writers. They involve illegal immigrants, Social Security bookkeeping -- and my picture.

-- Immigrants first. Social Security has big problems, which was the point of my article, and readers wanted to know how much of that is attributable to illegal residents' getting benefits.

The answer is, little or nothing. Here's why. If you're an illegal resident and get a legitimate Social Security number, and work long enough to qualify for benefits, you can collect if you move outside the United States. (However, you can't collect if you stay here, under Social Security rules.) But paying those benefits -- which illegal immigrants have earned by paying Social Security taxes, along with their employers -- is the same as paying a legal resident who has similar payment history. Social Security is an earned benefit -- it's not like Medicaid or welfare -- and those who have paid into the system, whether or not they're here legally, have earned it.

Note from Andrew: I believe that based on the Social Security Protection Act passed in 2004, illegals with Social Security numbers issued after 2004 will not be able to collect benefits if they return home. Also, while Allan is correct that Social Security benefits are earned through taxes paid while working, it's not the case that payments to illegal immigrants now living aborad will have no effect on the program's financing. My guess is that the vast majority of these former-illegals will have had below-average earnings (particularly if they only worked in the U.S. part of their careers, since Social Security averages your earnings over 35 years even if you've lived here for less) and so will benefit from the program's progressivity – that is, they'll get more out than they paid in. This isn't a huge issue in the big picture, but it also doesn't seem like something an underfunded program should be doing in the first place.

If you're an illegal immigrant with a phony Social Security number, you're helping Social Security, because you and your employer pay into the system but you don't get any benefits from it. The money is credited to a "no-match" account at the Social Security Administration.

And please, don't deluge me with mail about illegal workers. I'm not taking a position on the broader issue of immigration, I'm simply answering a legitimate question about its impact on Social Security, which seems to be negligible.

-- Now for bookkeeping. Many people suggested that the federal income taxes that higher-income recipients pay on their Social Security benefits should be credited to the Social Security trust fund. In fact, they already are.

-- And, finally, the picture that ran with the article shows my real Social Security card, but not my real Social Security number. It's a null number that Social Security gave me to use. It's not my real signature, either. Fortune's photo wizards deleted the signature I scrawled when I was 16 and substituted "Allan H. Sloan" written by one of my associates, whose handwriting is better than mine was or ever will be.

Now, to a few readers' letters, edited for brevity and clarity. I have not verified my correspondents' names or identities, which is why I'm using only initials of the names they signed with.

I was a bit disappointed that it wasn't until your 12th paragraph that you finally called Social Security what it really is -- an intergenerational social-insurance plan. Too many Americans think that it is their retirement or their pension plan. Social Security was not meant to be someone's source of income in retirement, yet seven decades later more than half of retired Americans are essentially wards of the state, relying on the government for the majority of their income. In my book that's a program failure, not a program success.

-- M.M.

AS: An interesting point of view. Thanks for sharing it.

I don't understand the difference between my buying a Treasury security and the Social Security Administration buying one. Aren't they both IOUs?

-- J.S.

AS: Yes. However, owning a Treasury represents savings for you, but not for the Social Security trust fund. That's because having one arm of the government (Social Security) owning IOUs from another arm of the government (the Treasury) doesn't help the government as a whole cover the cash shortfall that will start when Social Security takes in less cash than it spends. The government will have to borrow the money to pay off the trust-fund securities so Social Security can pay benefits. It's the same amount it would borrow if there were no trust fund.

I enjoyed your article except when I got to your proposal of raising the retirement age to 70. I retired early this year at age 64, and let me tell you, there is no way I could have hung on to age 70 doing my job well, and I'm not a manual laborer. There is something about mid- and late 60s that makes it very difficult to continue working mentally and physically. The body starts breaking down and the mind slows down. Maybe you are an exception.

-- S.H.

AS: Would that I were -- at 64, I'm definitely getting creaky. But we have to do some painful things to make Social Security financially secure, and raising the retirement age for white-collar workers is one of them.

Nothing short of economic collapse will educate these congressional fools and the ignorant American "sheeple" who elected them.

-- T.M.

Knowing the politicians here in Washington and their penchant for demagoguery on the issue (especially liberal Democrats), I doubt anything will be done anytime soon.

-- D.E.

AS: I hope you're both wrong. Then again -- shhh, don't tell anyone! -- most veteran journalists like me are romantics at heart, and think that if we help people understand what's really going on, the world can be made better.

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Kevin Drum Gets His History Wrong on Social Security Compromise

Cross posted from AEI's Enterprise Blog:

Kevin Drum, blogging at Mother Jones, argues that Ron Brownstein's comparison of the current healthcare reform impasse to the fight over Social Security reform in 2005 is misguided. Kevin said:

Maybe I'm remembering things through partisan-colored glasses, but my recollection is that there are some pretty significant differences here. George Bush never sought out any compromise at all. He insisted on a pure, budget-busting carve-out privatization scheme and never gave Democrats so much as a chance to make a deal. But what if he'd made it clear that he was open to compromise? Say, part carve-out, part add-on, and with a modest collection of benefit cuts and tax increases to go along with it? I suspect a lot of Dems would have been open to something like that, but Bush never gave them a chance.

This isn't how I remember things and I was pretty closely involved (this is what it got me, for what it's worth). What Drum presents is a caricature of the Bush administration's positions, one that is, no doubt, widely believed on the left, but a caricature nonetheless.

Consider some Social Security compromises made by President Bush:

1.    "Progressive price indexing," which would balance Social Security's finances by reducing benefits for middle and higher earners while leaving exempt low earners (those below the 30th percentile of the earnings distribution). Low earners could stay in the current system, with no personal accounts if they chose, and receive everything that was promised. By contrast, Bush's 2001 reform commission recommended "full" price indexing, which would have reduced benefits across the board.

2.    Progressive personal accounts: Accounts were (if I remember right) equal to 4 percent of earnings, up to a $1,000 max. So low earners could invest a larger share of their earnings, if they chose, and (in expectation at least) would receive larger proportional gains. Most conservatives would have favored a flat account structure where everyone invested the same percentage.

3.    Open to raising tax max: In the spring of 2005 Bush shifted direction on taxes: previously the administration had opposed raising either the rate or the cap, but in 2005 it refused to rule out raising the payroll tax ceiling. As the New York Times put it at the time:

"In what appeared to be an effort to show Democrats that he is serious about bipartisan compromise, Mr. Bush, responding to questions from a group of regional newspaper reporters, did not rule out raising or eliminating the cap on earnings that are subject to the payroll tax that pays for Social Security benefits."

This made it pretty clear that the administration would have accepted a tax max increase as part of a deal. And note, this was in February of 2005, when the process started, not a last-minute concession when the game was already finished.

In sum, the Bush administration said it would fix Social Security by cutting benefits for high earners and potentially by raising taxes on high earners. For the so-called party of the rich, that seems like a fair bit of compromise.

Likewise, would the White House have accepted a mix of carve-out/add-on personal accounts, as Kevin says they should have proposed? I have no doubt—as in, zero doubt—that it would have.

In short, the Bush administration was open to exactly the type of compromise Kevin says they should have been. So why no deal? For one reason and one reason only: the Democratic leadership refused to even discuss reform until carve-out accounts were taken off the table. Now, maybe they thought this was a good political strategy and good policy, just as many conservatives think we should oppose healthcare reform unless the public option is taken off the table. But make no mistake that it was the Democratic leadership's position which precluded any deal on Social Security, not the Bush administration's.

Megan McArdle also weighs in with other examples of how the Bush administration was open to compromise.

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Friday, September 11, 2009

CBO: Baby Boom Stock Decline Unlikely

The Congressional Budget Office released a new paper titled "Will the Demand for Assets Fall When the Baby Boomers Retire?" which looks at how the retirement of the large Baby Boom generation will affect prices of stocks and bonds. CBO summarizes the paper:

Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance consumption in retirement; they assert that the sell-off could cause a dramatic decline in prices. An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely.

Why not?

First, retirees generally are cautious about selling assets to finance consumption, thinking that they might need those assets as they face uncertainty: They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated. Second, rather than spend all of their assets, retirees might intentionally retain some to make bequests. Third, wealth in the United States is highly concentrated: About one-third of the nation's financial assets is held by the wealthiest 1 percent of the U.S. population. The wealthiest people do not spend down significant portions of their assets to finance consumption during retirement; in most cases, they die leaving bequests.

The whole paper is worth a read. The GAO came to similar conclusions in their own paper on the subject.

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SSA Actuaries Update Estimates of Solvency Provisions

Want to know how much of the Social Security deficit would be fixed by increasing the retirement age? Raising taxes? Cutting benefits? Check out this page constructed by SSA's Office of the Chief Actuary, which provides details on a wide variety of ways to address Social Security solvency.

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AARP’s Non-Response to Blahous COLA Op-Ed

The AARP responded to Chuck Blahous's recent Washington Post op-ed through a letter to the editor, reprinted below. Following, I'll make a few comments.

A Hit in Seniors' Pocketbooks


Wednesday, September 2, 2009

Chuck Blahous's framing of the COLA conversation was a few ticks off the mark ["What Drop in Benefits?," op-ed, Aug. 24]. It is not a flap or a controversy. It is simply an unprecedented event in the history of Social Security cost-of-living adjustments.

The fact is that 2010 will mark the first year since COLA increases became indexed in 1975 that there will be no increase. For millions of older Americans, this means that Social Security checks will be smaller for the first time, since Medicare Part D premium increases are not "held harmless" and will be deducted from the checks. That amounts to bad news in the mail every month.

What's more, health-care costs -- not just insurance premiums but also co-pays and prescription drug costs -- continue to outpace inflation, rising at a clip of 8 percent a year. Fully 30 percent of the average Medicare beneficiary's income goes to health care. This plus a lighter Social Security check will undoubtedly squeeze older Americans.

The bigger picture is that retirees who worked and saved a lifetime are staring at a triple setback: asset losses, diminished home values and rising health-care costs. This is why AARP has reached out to Congress to explore possible solutions to the economic hardship seniors face.


Legal Counsel & Legislative Policy Director



Several thoughts:

First, as AARP is surely aware, the average increase in Medicare Part D premiums will be only $2 per month. Second, while health care costs have continued to rise, other prices fell. Even using the CPI-E, which attempts to better track purchases made by the elderly, there would have been no COLA next year. Third, I'm not sure of the source of the claim that Medicare beneficiaries spend 30 percent of their incomes on health care, but in the CPI-E only around 11 percent of spending is dedicated to medical care. There may be an explanation for the discrepancy that I'm not aware of. And fourth, while many retirees did lose money on their investments, asset ownership tends to be highly concentrated at the top of the income scale. Low earners own few stocks and bonds and so were largely unaffected by the decline in stock prices.

In short, AARP's response was largely non-responsive to Blahous's points: Did prices fall? Yes. Would a zero COLA imply a real increase in the buying power of Social Security benefits? Yes. Would the Medicare Part B hold-harmless provision benefit most retirees? Yes. The scale of these points far outweighs those that AARP makes in response.

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Two ad hoc COLA bills proposed

Two pieces of legislation have been proposed to make one-time payments to compensate for the lack of a Social Security COLA net year.

The first bill, the Emergency Senior Citizens Relief Act, is sponsored by Sen. Bernie Sanders in the Senate and Reps. Peter DeFazio and Maurice Hinchey in the House. It would make a one-time $250 payment to all Social Security beneficiaries, railroad retirees, SSI beneficiaries and adults receiving veteran benefits. The sponsors would finance this payment by applying the 12.4 percent Social Security payroll to individuals earnings between $250,000 and $359,000 in 2010.

While this is presumably not a big concern to the bill's sponsors, their plan would raise the marginal tax rate paid by affected individuals from 33 percent under current law to around 45 percent. On top of this, affected individuals would pay the Medicare payroll tax of 2.9 percent and state income taxes, which average around 6 percent. While I expect the country will be out of recession in 2010, it still seems unwise to have a large number of people paying total marginal tax rates approaching 52 percent of their income.

The second bill is sponsored by Carolyn McCarthy and would make a $150 payment to each Social Security beneficiary. Given the smaller payment and more limited universe of recipients the costs of the McCarthy bill would be smaller. However, no funding stream is specified for the payments. One thought: in justification of her bill, Rep. McCarthy cites rising Medicare premiums: "Medicare Part B costs, for example, have gone up by an average of 7.8 percent over the last five years and are projected to rise in 2010 by as much as 9 percent." But as I discussed here, for the vast majority of seniors Part B premiums can't go up in a year without a COLA.

A broader thought that applies to both bills: this year Social Security paid a larger COLA than inflation subsequently justified. Even if no COLA will be paid next year, seniors will actually come out ahead. That is to say, the buying power of their benefits did not go down. To fix this non-problem, the Members of Congress above propose a one-time COLA payment of $150-$250 next year. The following year, of course, this payment will cease and the buying power of Social Security benefits will go down. How will we fix that problem?

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Thursday, September 10, 2009

New SSA paper: “Unfunded Obligation and Transition Cost for the OASDI Program”

Social Security's Office of the Chief Actuary has released an update on their paper "Unfunded Obligation and Transition Cost for the OASDI Program." This paper expands on some of the measures included in the annual Trustees Report while providing additional information that's not in the Report.

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Wednesday, September 9, 2009

New at AEI blog: Would Auto-enrollment 401(k)s Fix the Retirement Security Problem?

Over at AEI's Enterprise blog I look at what some of my recent work may have to say about plans for automatically enrolling workers in 401(k) plans.

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Sunday, September 6, 2009

Comparing today’s health care reform to yesterday’s Social Security reform

The New York Times' Dick Stevenson, who if I remember right used to be their main Social Security reporter, looks at similarities between President Obama's push for health care reform to President Bush's 2005 push for Social Security reform, in particular personal accounts. Stevenson argues that Bush's personal accounts lied out of most Americans' ideological comfort zone and says that prospects for Obama's health reform depend on whether Americans feel the same about the public option and other ideas Obama has put forward.

I'm not sure I agree with Stevenson: at the time, we paid a bigger political price for benefit cuts, which were part of a plan to restore Social Security to solvency and would be needed regardless of whether reform included personal accounts. Moreover, support for accounts didn't change that much over the course of the debate: going into it, a bit over half of Americans supported accounts, in the midst of reform a bit less than half did, and today I believe it's gone back up to a little over half again, depending on how the question is asked. Cutting benefits, by contrast, isn't popular, although I believe (from a June 2005 New York Times poll) that 'progressive indexing' was about the most popular way to do it. Raising the payroll tax ceiling was more popular, but would solve less of the shortfall.

Similarly, while many on the center/right are worried about excessive government control over health care markets, which includes the so-called public option, what may be the killer for Obama's health proposal is simply seniors upset about their Medicare benefits being cut. Obama might have been able to overcome the more generalized unease of the center/right but tacking on seniors angry about potential benefit cuts could be the killer.

In both the case of Social Security reform and health care reform, what the press thinks is the biggest issue – personal accounts and the public option – may turn out to be less important for the plans' political success than more mundane dollars-and-cents issues of taxes and benefits.

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Saturday, September 5, 2009

Two views on budget deficits

The Wall Street Journal this morning covers the efforts of David Walker, former Comptroller General and current president of the Peter G. Peterson foundation, to rein in both short and long-term deficits.

On the other hand, Conor Clarke writes at that it's not a big deal to hand over big debts to our kids and grandkids since they'll be better off than present generations in any case.

To come to any kind of conclusion on this type of question you need two things: first, some idea on how big the effects of low saving and high debt will be on future Americans; and second, your own judgments on how to value your kids' and grandkids' well-being relative to your own.

Regarding the first question, the steady state level of economic output per worker (which we'll call here y) depends on the saving rate (s), the rate at which existing capital depreciates (δ, or delta), the rate of population growth (n) and the capital share of output (α, or alpha) which is usually around 1/3rd, with the rest flowing to labor.



Let's start by assuming a saving rate of 15 percent of output, with a depreciation rate of 4 percent, population growth of 1 percent and a capital share of 1/3rd, or 0.33. That gives us a value of 1.7, which by itself isn't all that meaningful. But now let's lower the saving rate to 5 percent. That reduces output per capita to only 1, which is about a 35 percent reduction. Even if saving drops by 5 percentage points output per worker declines by around 17 percent. Clearly, the saving rate can have a pretty big effect on the future standard of living.

Now, Conor's point is that in addition to the effects of saving we have the effects of technological growth, which can grow the economy even if saving is low. Roughly speaking, saving equals more tools while technology equals better tools; think of lots of pick axes versus one steam shovel. If technology improves at a rate of 1 percent per year, then people fifty years from now will have incomes two-thirds higher than today.

Conor assumes that the saving rate is unrelated to the rate of technological growth, which is true in a traditional Solow economic growth model though not necessarily so in the so-called "new growth theory." While this is far from settled ground, there's a plausible story to link saving and technological innovation: investment can fund physical capital or it can fund research and development; presumably, if lower saving reduces investment then it will have an effect on both ends. So I wouldn't be a sanguine as Conor about where we'll end up in a low saving economy a couple decades hence.

My own value judgment is that we should treat future generations more or less the same way that past generations treated us. Prior generations passed on to us a large stock of capital that's helped generate high incomes for today's Americans. It seems a bit churlish to say we're simply going to spend that down for our own benefit rather than keep the cycle going. But again, that's a value judgment.

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Thursday, September 3, 2009

Jed Graham: The Right Health Care Fix Could Help Save Social Security

Investors Business Daily's Jed Graham argues that health reform that makes employer-provided health care taxable could improve Social Security's finances by broadening the program's tax base. In addition, making health coverage taxable would remove a distortion in the tax code that encourages wasteful spending. Click here to read Jed's piece at the RGE Monitor.

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New CBO Social Security projections: Deficits in 2010-11, permanent deficits by 2016

The Congressional Budget Office has produced updated projections for the Social Security program. The short story is that their projections of short-term cash flows have worsened somewhat. In March, CBO projected that Social Security would remain in positive cash flow through the end of 2016, then begin running deficits. The current projections show deficits for the years 2010 and 2011, then a return to surpluses in 2012 through 2015, and then deficits beginning in 2016.

CBO also projects that no COLAs will be paid for the years 2010 and 2012. In their March baseline they'd projected no COLA for 2012 as well, so there's a small change there.

Click here for a table on the OASI program, here for details on the DI program, and here for a table on system-wide financing.

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Las Vegas Review Journal: It's not called a "Cost of Living Increase." It's called a "Cost of Living Adjustment."

The Las Vegas Review Journal
weighs in on the COLA debate:

It's not called a "Cost of Living Increase." It's called a "Cost of Living Adjustment." So when inflation leads to increases in the cost of living -- which is most of the time -- seniors on Social Security and others who expect government "COLAs" get annual raises.

And when economic hard times lead to falling home prices and a falling cost of living, the "adjustment" clause means taxpayers get a break -- the cost of living "adjustment" means we actually get to send the recipients a smaller check, right?

Uh ... wrong. Actually, the Social Security law says the "COLA" ratchet works in only one direction. The payments can't be reduced. So even though a more accurate assessment of this year's cost of living might lead to smaller Social Security checks being mailed out in 2010 -- for the first time in living memory -- in fact the federal government has announced that (barring some political meddling this month) they will simply stay the same next year.

This isn't a bad deal for the recipients. But that hasn't stopped many from complaining.

A few points raised in the editorial are worth some comment:

First is the question of the whether the CPI-W (where W denotes urban workers) is a decent measure of inflation for seniors. The Journal says: "Seniors complain that more affordable home computers and other electronic gear and even lower energy bills are all very nice, but hardly compensate for increasing medical costs (rising faster than inflation) for those who spend a disproportionate amount of their income on health care." This is a legitimate point, but even if we measured inflation using the CPI-E, which reweights the CPI to match the purchasing habits of seniors, inflation would have been negative last year and no COLA would be paid this year. Moreover, both the CPI-W and the CPI-E are widely believed to overstate inflation because they don't account for how individuals alter their purchases as prices change. An alternate measure, the chained C-CPI-U, does adjust for a changing market basket and shows generally lower inflation (by around 0.3 percentage points). It's likely that a true inflation measure for seniors wouldn't be that much different from the CPI-W currently used for calculating COLAs.

Second, the editors say: "Many will see their monthly federal stipends actually drop, as premiums for the Medicare prescription drug program, which often are deducted from Social Security payments, are scheduled to go up." This is true for Medicare Part D premiums, which will rise by an average of $2 per month next year. But Medicare Part B premiums, which are much larger, cannot rise in a year without a COLA. This will save the typical retiree almost $100 next year. So on net, retirees are around $75 better off on the Medicare front.

Finally, the editors ask: "But if the cost of living is actually down, why did President Obama announce this week that federal employees won't get a 2.4 cost-of-living raise this year -- they'll have to "settle" for a 2 percent raise?" Here I have to make an at least half defense for the President. Wages generally rise at a rate higher than inflation to account for rising productivity. Average wages rise around 1 percent a year above the inflation rate. Now, is a 2 percent increase in a year in which inflation was negative justifiable? Well, if the productivity of the federal workforce rose really fast I guess it is, but count me skeptical on that.

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Wednesday, September 2, 2009

Did Social Security lower suicide rates?

In a generally silly article claiming – no kidding – that Republicans want to kill people, Slate's Jacob Weisberg claims that Social Security reduced the suicide rate for retirees. Unlike some of this other claims (which NRO's Ramesh Ponnuru deconstructs here), this one isn't totally made up: Weisberg cites an NBER paper by David Cutler and Ellen Meara on the overall decline in U.S. mortality through the 20th century. Cutler and Meara say:

Since 1930, suicide rates among the elderly have fallen by 56 percent, while rates among teens have tripled. The decline in suicide among the elderly is coincident with the large absolute increase in income for the elderly stemming and pre-Social Security social programs and the phase-in of the Social Security system. Following the introduction of formal Social Security benefits, benefits rose rapidly over the period from 1950 until 1970, with a particularly rapid rise in the late 1960s. During these same time periods, suicide rates among the elderly fell most rapidly.

Sounds reasonable – I wouldn't dispute the possibility that giving early retirees massive transfers of money would improve their mood. But does it hold up? Cutler and Meara don't run any statistical tests themselves; they draw their conclusions entirely from their Figure 14.

Suicide rates for people aged 65 and over do decline significantly from 1935, when Social Security began, to today. But note a couple things:

  • From 1930 through 1940, a period when Social Security had not begun paying benefits yet, seniors' suicide rates declined at a rate faster than they did afterwards. Moreover, this was a period in which seniors' incomes were depressed, which formed part of the justification for the Social Security program. If so, shouldn't suicide rates have increased during the Great Depression?
  • Suicide rates for Americans aged 65 and over closely track those for individuals aged 55-64 and 45-54. These folks weren't receiving Social Security benefits, so pretty clearly something else was going on. These three age groups move closely together throughout the period, while those of individuals aged 15-24 and 25-34, which were generally rising, also track each other.
  • Beginning in 1980, seniors' suicide rates jump up. One explanation is that this was the beginning of a period of retrenchment for Social Security benefits, although even retirees in the 1980s got a pretty good deal from the system. However, this was also a period when Medicare benefits ramped up. Shouldn't we have seen a similar effect there? Or may all those seniors just hated Reagan and couldn't go on.

Cutler and Meara's data doesn't appear to be available online so it's not possible to do any formal analysis. (If anyone has the data, please send it!) I would personally be pretty surprised, though, if the Social Security/suicide conclusion held up under stress.

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