Wednesday, December 29, 2010

New article: The Right Way to Balance the Budget

I have a piece co-authored with AEI's Kevin Hassett and Matt Jensen in the Wall Street Journal today. The article is based on a working paper we've written that looks at how other OECD countries have sought to close their fiscal gaps and which approaches have and haven't tended to succeed.

The Right Way to Balance the Budget: The experience of 21 countries over 37 years yields a simple truth: Cutting spending works, and raising taxes doesn't.


The federal debt is at its highest level since the aftermath of World War II—and it's projected to rise further. Simply stabilizing debt levels would require an immediate and permanent 23% increase in all federal tax revenues or equivalent cuts in government expenditures, according to Congressional Budget Office forecasts. What's clear is that to avoid a crisis, the federal government must undergo a significant retrenchment, or fiscal consolidation. The question is whether to do so by raising taxes or reducing government spending.

Rumors have it that President Obama will propose steps to address growing deficits in his next State of the Union address. The natural impulse of a conciliator might be to split the difference: reduce the deficit with equal parts spending cuts and tax increases. But history suggests that such an approach would be a recipe for failure.

In new research that builds on the pioneering work of Harvard economists Alberto Alesina and Silvia Ardagna, we analyzed the history of fiscal consolidations in 21 countries of the Organization for Economic Cooperation and Development over 37 years. Some of those nations repaired their fiscal problems; many did not. Our goal was to establish a detailed recipe for success. If the United States were to copy past consolidations that succeeded, what would it do?

This is an important question, because failed consolidations are more the rule than the exception. To be blunt, countries in fiscal trouble generally get there by making years of concessions to their left wing, and their fiscal consolidations tend to make too many as well. As a result, successful consolidations are rare: In only around one-fifth of cases do countries reduce their debt-to-GDP ratios by the relatively modest sum of 4.5 percentage points three years following the beginning of a consolidation. Finland from 1996 to 1998 and the United Kingdom in 1997 are two examples of successful consolidations.

The data also clearly indicate that successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. On average, the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts.

By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts. While tax increases play little role in successful efforts to balance budgets, there are some cases where governments reduced spending by more than was needed to lower the budget deficit, and then went on to cut taxes. Finland's consolidation in the late 1990s consisted of 108% spending cuts, accompanied by modest tax cuts.

Consistent with other studies, we found that successful consolidations focused on reducing social transfers, which in the American context means entitlements, and also on cuts to the size and pay of the government work force. A 1996 International Monetary Fund study concluded that "fiscal consolidation that concentrates on the expenditure side, and especially on transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation." For example, in the U.K's 1997 consolidation, cuts to transfers made up 32% of expenditure cuts, and cuts to government wages made up 21%.

Likewise, a 1996 research paper by Columbia University economist Roberto Perotti concluded that "the more persistent adjustments are the ones that reduce the deficit mainly by cutting two specific types of outlays: social expenditure and the wage component of government consumption. Adjustments that do not last, by contrast, rely primarily on labor-tax increases and on capital-spending cuts."

The numbers are striking. Our research shows that the typical successful consolidation allocates 38% of the spending cuts to entitlements and 25% to reductions in government salaries. The residual comes from areas such as subsidies, infrastructure and defense.

Why is reducing entitlements and government pay so important? One explanation is that lower social transfers spur people to work and save. Reducing the government work force shifts resources to the more productive private sector.

Another reason is credibility. Governments that take on entrenched, politically sensitive spending show citizens and financial markets they are serious about fiscal responsibility.

While tax hikes slow revenue growth, policies that credibly reduce government spending in the long run boost economic growth by more than their simple effects on deficits might imply. Any attempt to address the federal government's budget shortfall that relies on less than 85% spending cuts runs too large a risk of failure. The experience of so many other countries shows that it's crucial for the U.S. to get this right.

Mr. Biggs is a resident scholar, Mr. Hassett is the director of economic policy studies, and Mr. Jensen is a research assistant at the American Enterprise Institute.

Read more!

Tuesday, December 21, 2010

CAP’s Social Security Hits and Misses

From AEI's Enterprise Blog

The Center for American Progress has released a Social Security reform plan authored by senior fellow Christian Weller. The plan, outlined in a paper titled "Building It Up, Not Tearing It Down: A Progressive Approach to Strengthening Social Security," is a solid and well-thought-out contribution to the Social Security reform debate. It is encouraging that while so many people sit on the sidelines and criticize without offering their own alternatives, others from both ends of the political spectrum are willing to put their ideas on the table.

CAP's plan includes a large number of modest benefit increases—many of which I could support—including stronger protections against poverty for low earners; increased benefits for survivors and the very old; streamlined divorcee benefits; and benefits for caregivers. The plan addresses solvency through a smaller number of larger changes, such as progressive benefit reductions for high earners (those in the top 30 percent of the lifetime earnings distribution, though lower earners could be affected if they collect auxiliary benefits based on a high-earning spouse); eliminating the current $106,800 cap on the employer side of the payroll tax; reducing annual Cost of Living Adjustments by around 0.3 percentage points; and investing around 25 percent of the Social Security trust fund in stocks.

Overall, it's not a badly constructed plan given the priorities of the designers. That said, two factors stand out as being behind-the-times in terms of Social Security reform plans coming from either side of the aisle.

The first is the plan's reliance on the equity premium—that is, the higher average returns produced by stocks over bonds—to keep Social Security solvent. In general, the Congressional Budget Office has not "credited" Social Security plans that include stocks with higher returns. CBO argues that higher stock returns are merely a return for higher risk, so crediting stock returns without accounting for stocks' greater risk would be misleading. As CBO put it here:

Although the government can reallocate the risk of stock holdings, it cannot eliminate it. If the government buys stock from private investors, it merely shifts risk from those investors to taxpayers and program beneficiaries. If stock prices drop, the government and the public in general have suffered the loss. Risk is not reduced simply because the government can borrow to avoid raising taxes or cutting spending in the current period. Government borrowing is a decision to tax or cut spending in the future rather than a means of avoiding taxation or spending cuts altogether. Nor is risk diminished by the government's ability to indefinitely hold a stock whose price has declined. A drop in the price of a stock is not a temporary aberration; it reflects the market's judgment that the value of the stock has declined permanently. An investment in private securities is no less risky when it is made by the government than when it is made by a mutual fund. Therefore, risk is costly to both the government and individuals.

For that reason, CBO risk-adjusts equity returns back to the government bond interest rate. This is particularly important in the CAP plan, since nearly one-quarter of the reduction in the 75-year funding shortfall derives from assuming higher returns on trust fund investments. If CBO follows the practice it used in scoring personal account plans, CAP's proposal would fall well short of 75-year solvency. Ironically, CAP categorizes trust fund investment as "Upgrading the structure to align with modern economic insights," just as budget scoring and financial theory have turned against equity-heavy portfolios.

Second, the CAP plan ignores a trend in Social Security reform over the past 15 years to aim not merely for solvency over 75 years, but so-called "sustainable solvency," which ensures that the program isn't running large annual deficits as it approaches the 75-year mark. The 1983 reforms, for instance, were solvent for 75 years but not sustainably solvent, with the result that current workers face large benefit cuts if and when the trust fund runs out. CAP doesn't estimate the annual cash flows for its proposal, but I estimate that in its 75th year the CAP plan would run a deficit of around 2.2 percent of payroll, versus a deficit of around 4.3 percent of payroll under current law. CAP's plan would reduce those annual deficits, but not nearly as much as most other Social Security reform proposals.

This means that within a decade or two, policy makers and the public would again face the need to fix the program, just as doing so becomes more difficult. There is nothing wrong with future generations revisiting Social Security policy—indeed, they should revisit it to keep the program current with economic realities and public goals—but there is no reason to force future citizens to revisit Social Security reform from the position of mounting deficits. I suspect that if we saw the annual cash flows of the plan it would look like more of a holding action on Social Security finances – at least relative to most other plans – and less like a permanent solution. While a permanent solution isn't necessary, it is necessary to acknowledge how much of the problem a plan truly solves when policymakers and the public are weighing the costs and benefits of alternative approaches.

Read more!

Jed Graham on Domenici-Rivlin and Bowles-Simpson

Over at Investors Business Daily's blog, Jed Graham – the author of the recent book "A Well-Tailored Safety Net" – offers a number of critiques of the Social Security reforms proposed by the two recent debt commissions. Understandably, Graham feels his own approach, termed "Old Age Risk Sharing", would do better. In a number of ways he's right.

Graham argues that the Domenici-Rivlin plan relies too heavily on new revenues, which – given the general scarcity of cash and the abundance of programs looking to get their hands on it – seems right to me.

Graham argues that Social Security doesn't offer a significant bequest opportunity to those who die young (although, to be fair, it also offers survivors benefits that can be very valuable).

Graham also argues that the Bowles-Simpson plan goes too far in reducing annual COLA payments, which has the result of reducing benefits most for the oldest retirees. I basically agree here: substantively, if your goal is to maintain the purchasing power of benefits I think what you'd need is essentially a chain-weighted version of the CPI-E, which tracks purchases by the elderly. This would produce annual COLAs around 0.1 percentage point lower than current COLAs calculated using the CPI-W, versus the Bowles-Simpson proposal which would cut COLAs by around 0.3 percentage points per year.

Moreover, I also think a case can be made for COLAs that are higher than inflation. The reason is that most of retirees' non-Social Security retirement income isn't inflation-adjusted, so a rising Social Security payment would help keep total purchasing power of retirement income constant over time. My pet idea here is to increase benefits along with wage growth rather than prices (nominal wage growth should of course be measured using a proper CPI; the current CPI-W almost certainly overstates the true rate of inflation). To keep lifetime benefits constant you would need to lower initial benefits, which would have the added advantage of encouraging people to retire later. Moreover, having COLAs pegged to wages would help insulate Social Security's finances against changing economic conditions over the long term, reducing uncertainty for policymakers and helping ensure that long-term reforms "stick." As part of broader reforms to maintain solvency you would reduce benefits for high earners, so the end result might not be too different from Graham's idea.

Read more!

Tuesday, December 14, 2010

New paper: Should the Retirement Age Be Increased?

"Social Security Reform: Should the Retirement Age Be Increased?", by Benjamin A. Templin, Thomas Jefferson School of Law. December 5, 2010

Thomas Jefferson School of Law Research Paper No. 1720402

In 2010, increasing the retirement age became a focal point of Social Security reform proposals. In a controversial move, President Obama's bipartisan National Commission on Fiscal Responsibility and Reform recommended increasing the full retirement age from 67 to 69 and the age at which benefits could first be claimed from 62 to 64. Both ages would be indexed to increases in longevity so further increases would be possible.

This paper is a comprehensive analysis of the issues surrounding the retirement age provisions in the Social Security Act. The paper considers the four statutory age-related factors affecting benefits - the full retirement age (FRA), the early eligibility age (EEA), the retirement earnings test and the delayed retirement credit. The principal arguments - both for and against an increase - are analyzed to the degree to which each achieves the goals of the Social Security Act. The paper reviews the literature on relevant issues including longevity rates, poverty rates, capacity to work among the elderly, labor force participation among older workers, deficit reduction, and retirement income.

The paper concludes that while most American workers have the capacity to absorb the impact of an increase in the full retirement age, the principal benefit of a deficit reduction could be achieved through alternative reforms, such an increase in the cap on taxable income, a change in COLA calculations and diversification of the Trust Fund.

The paper does, however, endorse an increase in the early eligibility age from 62 to 64. While this reform would not seriously improve the long-term deficit, it would likely keep workers in the labor force longer and increase general tax revenues. Keeping workers in the labor force is a principal goal of the Social Security system; yet contains many disincentives to delay retirement. Behavioral economics helps inform the importance of this measure given that people sacrifice long term economic goals for short-term gains. Raising the early eligibility age by two years will make it necessary for most workers to stay in the labor force longer; thereby increasing their potential benefits and increasing their eventual retirement income.

In order to soften the impact on workers engaged in psychically demanding labor, this paper agrees with the National Commission on Fiscal Responsibility and Reform recommendation to establish a hardship exception to an increase in the EEA for workers who don't qualify for disability but lack the physical capacity to work past 62.

Finally, the paper recommends a series of additional reforms to provide incentives to stay in the labor force. These include eliminating the retirement earnings test, increasing the delayed retirement credit and reducing payroll taxes for older

Read more!

Monday, December 13, 2010

Kuttner on the Coming Social Security Cave-In

Over at the Huffington Post, Robert Kuttner writes that the Obama administration is on the verge of giving in to Republican demands to gut Social Security:

If you think the Democratic base is mad at Obama now for making a craven deal with Republicans that continues tax breaks for the richest Americans and adds new ones for their heirs through a big cut in the estate tax, just wait a few weeks until Obama caves on Social Security.

How will this occur? The deficit commission appointed by the President has called for an increase in the retirement age, as well as other cuts in benefits over time. And the deal that Obama made with the Republicans just gave deficit hawks new ammunition by increasing the projected deficit by nearly $900 billion over a decade. Social Security will be in the cross-hairs.

Read it all to get the full flavor.

If by gut you mean agree to any sort of benefit reductions or increases in the retirement age, my guess is that the Obama administration – which should and does want a deal on Social Security – might agree.

But current proposals seem to fall well short of that: the deficit commission's plans wouldn't include personal accounts, which by itself can be considered a victory for the left; would increase payroll taxes on high earners, another thing the right won't be happy about; would focus benefit cuts on high earners; and would provide exemptions for low earners from the retirement age increase. In the context of the overall federal budget shortfall, which can't realistically be resolved on the revenue side, this isn't a terrible deal for the left. But I wouldn't expect the squawking to stop anytime soon.

Read more!

Sunday, December 12, 2010

Video: Talkiing retirement age on Fox

This is a few weeks old but I just was sent the video today.

Read more!

Friday, December 10, 2010

Social Security Doesn’t Contribute to the Deficit? That Was Then…

President Obama and congressional Republicans have agreed on a tax deal that includes a one-year reduction of the 12.4 percent Social Security payroll tax by 2 percentage points. This would increase take-home pay for a typical $40,000 per year worker by around $800, with maximum savings for an earner at the $106,800 tax cap of $2,136.

The intent of the move is to spur consumption by putting more money in workers' pockets, thereby boosting the economy. I'm skeptical of how well this will work—a lot of that money is going to be saved, used to pay credit card bills, etc., but that's not the major issue here.

The question is how should the payroll tax holiday make us think about Social Security? Interestingly, there seems to be some consensus from the left and right on this issue. Chuck Blahous, former policy aide in the Bush administration, writes at e21 that the payroll tax cut implies "a double-dose of new government debt, via a proposed accounting maneuver to disguise the effects of the agreement's payroll tax cut provision." Likewise, Nancy Altman, Co-director of Social Security Works, writes at the Huffington Post that "the innocent-sounding payroll tax holiday … will lead inexorably to killing Social Security." I more or less agree with both of them, although the horse pretty much left the barn on Social Security's accounting, oh, around 25 years ago, when Social Security surpluses started being used to subsidize the rest of the budget.

However, one thing that the payroll tax holiday does clarify is the Left's claim that Social Security is "self-financing" and "doesn't contribute a dime to the deficit." That was their argument for keeping Social Security off the fiscal commission's chopping block: if the program doesn't contribute to the federal deficit, then there's no justification for reducing Social Security as part of a deficit reduction package.

Well, that was then. Today, if we're funding a $120 billion payroll tax cut using general tax revenues—borrowed general tax revenues, remember—then Social Security is no longer self-financing and, yes, it does contribute to the deficit.

Of course, one could argue that Social Security has been adding to the deficit ever since the stimulus bill, which included President Obama's "Making Work Pay" tax credit. This tax credit was explicitly a refund of part of the Social Security payroll tax, financed with other tax revenues. The $116 billion 10-year cost of the payroll tax cut is effectively added to the deficit and the debt, although it remains to be seen if the credit will survive.

A talking point is a terrible thing to waste, which makes me suspect the Left will continue to claim that Social Security doesn't add a dime to the deficit. But if the payroll tax holiday is passed, its untruth should be clear to all.

Read more!

Thursday, December 9, 2010

Agenda for December 13-14, 2010 Technical Panel Meeting

2011 Technical Panel on Assumptions and Methods

Meeting Agenda

December 13-14, 2010

The meetings will be held in the offices of the Social Security Advisory Board:

400 Virginia Avenue SW, Suite 625, Washington, DC 20024

Monday, December 13, 2010

10:45-12:15 Short range assumptions and methods

Presenters: Office of the Chief Actuary

Disability and retirement over the short-range

Reconciling short and long-range methods and assumptions: beneficiary and benefit projections

12:15-1:00 Lunch

1:00-2:00 "Mortality at Older Ages: Why Has the US Fallen Behind Our Peers?"

Presenter: Dr. Samuel Preston, University of Pennsylvania

2:00-2:45 Mortality assumptions and methods

Presenter: by John Bongaarts, Panel member

2:45-3:00 Break

3:00-4:00 Discussion of mortality projections

4:00-5:00 Panel wrap-up

Tuesday, December 14, 2010

10:00-11:30 Long-range Economic assumptions and methods

    Presentation by Andrew Samwick, Panel member

11:30-12:30 Short range economic assumptions and methods

Presenters: Office of the Chief Actuary



Read more!

Social Security shuts down “restart” option

USA Today reports that the Social Security Administration has issued a regulation that effectively limits the option to "restart" Social Security benefits, which has increasingly been taken advantage of by financially-savvy retirees. The restart option allowed retirees to withdraw their application for benefits, repay the benefits they had received, the restart at a higher benefit level.

This strategy had two main advantages:

  • First, the repayment of benefits included no interest, making those benefits effectively an interest-free loan. For instance, a person who had claimed benefits $15,000 in annual benefits from age 62 through 70 could make around $15,000 on the deal, assuming a 3 percent interest rate.
  • Second, individuals who worried about dying before claiming benefits could claim at 62, then restart at later ages. This would give seniors the best of both worlds.

The regulation limits restarts to once in a lifetime and the restart must take place within 12 months of initial benefit claiming. Given these restrictions the strategy probably doesn't make much financial sense anymore, given the general hassle of visiting an SS office and running through the paperwork.

But it could allow someone who claimed at an early age then immediately decided to defer retirement another shot at doing so. There wouldn't be a direct financial benefit, but by delaying retirement the individual would assure themselves an higher benefit later in life and increased survivors' benefits for their spouse.

Read more!

Video of Chuck Blahous Social Security book event

On Monday the Heritage Foundation held an event based on the release of Chuck Blahous's excellence new book, Social Security: The Unfinished Work, available from fine booksellers everywhere (here's a link to Amazon).

You can watch the video of the event online here or over at Heritage's website.
Read more!

Wednesday, December 8, 2010

Raising the retirement age: pro and con

The Heritage Foundation's David John and the Center on Economic and Policy Research's Mark Weisbrot give the pros and cons of raising Social Security's retirement age at the Atlanta Journal Constitution. Click here to read.

Read more!

Tuesday, December 7, 2010

Jason Fichtner on Artificially Sweetened COLAs

The Mercatus Institute's Jason Fichtner – the former number 2 at Social Security – has a new policy brief on the social security COLA. Here's the background:

For the second year in a row, Social Security recipients will not receive a cost-of-living adjustment (COLA) increase to their monthly benefits. Social Security benefits only rise when prices go up; in years with low price inflation, they remain steady. And although low price inflation benefits all consumers, Congress has proposed to give every Social Security beneficiary a $250 check, which could cost taxpayers $15 billion.

While it might sound reasonable or fair to give seniors a boost during tough economic times, giving in to such demands would be misguided and undermine the very reason for tying cost-of-living adjustments to the Consumer Price Index (CPI) in the first place—to prevent yearly interest-group lobbying for higher benefit increases and, as the name implies, only provide an adjustment when there's an actual CPI-measured increase in the cost of living. Providing a COLA or one-time payment beyond what is warranted by an increase in the CPI would actually increase "real" benefits, artificially sweetening the COLA.

Check it out here.

Read more!

Wednesday, December 1, 2010

C-SPAN Video of AEI Event on the 112th Congress and the Economy

Here's a link to the panel I was on; sadly it's not embeddable. Also check out the first panel on how the health bill is being implemented; very interesting stuff that I hadn't know much about before.

Read more!

Allan Sloan’s Social Security Claims Are Turkey

Over at AEI's Enterprise Blog

Read more!

Monday, November 22, 2010

Dean Baker: No compromise on Social Security

Obviously not my cup of tea, but Dean makes the case about as well as it can be.

Me, I just think that if you've got a big problem that needs fixing and you can reach some agreement on fixing it, you might as well go ahead. It's not like we've got a shortage of problems to solve, such that if we fix Social Security we'll run out of things to do. Read more!

Arnold Kling on "Political Morality and the SS Trust Fund"

Political Morality and the SS Trust Fund, Arnold Kling | EconLog | Library of Economics and Liberty

Worth checking out. Read more!

Tuesday, November 16, 2010

Retirement ages around the world

U.S. News's Emily Brandon has a nice story looking at pension retirement ages in different countries and pressures to increase them. A good read.

Read more!

Monday, November 15, 2010

Reining in rising disability costs

My contribution to the New York Times "Room for Debate" on balancing the federal budget.

P.S. The title – "The Disability Insurance Monster" – wasn't mine.

Read more!

Peter Orszag on Commission Social Security Plans

Former Obama budget chief Peter Orszag writes in the New York Times today in qualified support of the Social Security reform proposals from the fiscal commission's two co-chairs, Erskine Bowles and Alan Simpson. The whole piece is worth reading for his description of the plan components, but I thought a couple parts were worth focusing on. First, he says,

the plan would not create private accounts within Social Security — the most controversial issue that came up when reform was last debated in 2005. Why not lock in a reform when private accounts are off the table? (Note to progressives: the Social Security plan put forward by Paul Ryan of Wisconsin, the expected new chairman of the House Budget Committee, does include private accounts.)

In recent years, most liberals have made the fight against personal accounts a central one. If the Simpson-Bowles proposal serves as a starting point for Congressional negotiations, it seems they've won that fight. If it was as important as they argue – I'm not sure it was – then they should pocket this gain and start moving ahead.

Second, Orszag says,

The main flaw in the proposed Social Security plan is that it relies too little on revenue increases and too much on future benefit reductions. A reasonable objective would be a 50-50 balance between changes in benefits and changes in revenues. But the way to bring reform into better proportion is to adjust the components of this proposal, not to fundamentally remodel it.

I can certainly understand an inclination to spit the difference. But I wonder in the context of the larger budget picture whether this makes the most sense. It seems to me that we should cut outlays in places where cuts are most effective, saving tax increases for where they're needed the most. Reducing Social Security retirement benefits will encourage middle and high earners to work more and save more, which is good for the economy and the budget. Increasing taxes will tend to make them work less and save less. So I think a benefit cut-heavy approach to Social Security reform makes sense. Once you get to Medicare, however, it's tougher for people to save on their own to make up for reduced benefits. Plus, the overall Medicare shortfall is larger. If you're going to raise taxes, Medicare seems the better place to do it. So even if you might want the overall budget shortfall split in a 50-50 way, I think there's a good case for tilting Social Security more toward the benefit end.

Read more!

Friday, November 12, 2010

New papers from the Social Science Research Network


"How Sensitive are Subjective Retirement Expectations to Increases in the Statutory Retirement Age? The German Case" 

MEA Discussion Paper No. 207-10

MICHELA COPPOLA, University of Mannheim - Mannheim Research Institute for the Economics of Aging (MEA)
CHRISTINA B. WILKE, University of Mannheim - Mannheim Research Institute for the Economics of Aging (MEA)

Population Aging poses an evident threat to the financial sustainability of pension systems based on a "pay-as-you-go" (PAYG) scheme. To cope with this threat, pension systems have undergone numerous reforms in many countries in order to keep people longer at work. One crucial element of these reforms typically is an increase in the statutory retirement age at which workers are legally allowed to retire. Two questions still remain unanswered: Will people really work longer? Who is more likely to retire before the new legal retirement age?

In this paper, we focus on subjective retirement expectations, analysing if and to what extent they are affected by such a policy change. We consider the legislative reform introduced in Germany in 2007, which gradually will increase the statutory retirement age (SRA) from 65 to 67 years. Using the SAVE survey, a representative panel of German households, we estimate the increase of the individuals' expected retirement age (ERA) as an effect of the reform.

Our results show that less productive workers living in relatively wealthier households are more likely to plan an early retirement. The introduction of the reform seems to motivate better educated workers to remain longer in the labour force although it does not seem to completely succeed in keeping women longer in the labour force: especially among the younger cohorts, whose SRA will be 67 years, women are still more likely than men to plan an early retirement. In terms of the magnitude of the effect, we find that the reform shifted the expectations of the younger cohorts by almost two years – if these expectations will be realized, this reform would have been quite successful.

"Geography of Savings in the German Occupational Pension System" 

CSABA BURGER, University of Oxford - Saint Peter's College Oxford

Relationships between individual traits and savings decisions vary geographically. Understanding the structure of such relationships is interesting in general, but it is particularly important in the case of the Germany, where the pension reform of 2001 significantly decreased the level of public pensions, and subsidized voluntary funded pension plans were created to so that individuals can save for themselves. This paper analyses the regional structure of individual savings decisions in the case of occupational pensions using a unique, commercial data-set containing the records of more than 286 thousand pension plan contracts signed between 2002 and 2009 across the regions of Germany. The analysis provides a framework for applying different geographical location definitions in explaining financial behaviour. The differences in the relationship between metropolitan/non-metropolitan, East-West and North and South are explained with the different contexts. Implications are drawn on the relationships among human behaviour, geography and context.

"The Case for Security Plus Annuities" 

PAMELA J. PERUN, Aspen Institute - Initiative on Financial Security

As Americans live longer and increasingly rely on 401(k) plan savings as a prominent source of income in retirement, they will need to find ways to convert their savings into income that lasts a lifetime. Because the financial situations and goals of American savers are diverse, they will need a variety of products and services to secure their income.

One future solution, if policy makers are successful, is to enable more savers to buy annuities and other lifetime income products through their 401(k) plans. Alternatively, savers, especially savers with large account balances, could be encouraged to purchase some of the longevity-protected products and services available through private insurance companies.

Another promising solution that could become operational quickly is a proposal called "Security Plus Annuities." Developed by the Aspen Institute Initiative on Financial Security (Aspen IFS), the proposal partners private industry with the Social Security Administration to offer low-cost, inflation-protected, "starter" life annuities.

"Peter Thullen and Mathematics at the Beginning of Social Security in Colombia (Peter Thullen Y Las Matemáticas En Los Inicios Del Seguro Social En Colombia)" 

Documentos de Matemática y Estadística, No. 1, 2010

FABIO ORTIZ, Universidad Externado de Colombia

We explore some aspects of one part of the history of actuarial mathematics in Colombia with the contributions of the German mathematician Peter Thullen to the formation of the social security system in Colombia. We treat aspects of his going into exile from Europe to Ecuador and then to Colombia and his return to Europe stressing the relations with different episodes in the history of the development of Colombian mathematics.

"Social Security Spouse and Survivor Benefits 101: Practical Primer Part II (Or Another Reason to Put a Ring on It)" 

American Bar Association – Section of Taxation, News Quarterly, Vol. 30, No. 1, Fall 2010

FRANCINE J. LIPMAN, Chapman University - School of Law
JAMES E. WILLIAMSON, San Diego State University - College of Business Administration

As the country and courts continue to debate the importance of marriage in a variety of contexts, when determining Social Security benefits it is clear that marriage matters. Marriage matters for Social Security benefits planning because of meaningful spouse and survivor benefits. Given the broad and deep devastation of a record recession on retirement and saving accounts, including the continuing demise of defined benefit plans with joint and survivor benefits protection, Social Security benefits, generally, and spouse and survivor benefits, specifically, have become and will continue to be a more significant percentage of retirees' income. As a result of the interplay between recently phased in changes under 1983 legislation and amendments under the Senior Citizens' Freedom to Work Act of 2000, it is critical that Social Security benefits timing analysis becomes a more important part of many retirement plans. In this article, we describe how to use these changes to devise strategies to maximize Social Security spouse and survivor benefits.

Read more!

Wednesday, November 10, 2010

New issue brief from NASI

Targeted Improvements, 75-Year Financing Plan Would Strengthen Social Security for the Long Run 

For Immediate Release: November 10, 2010

A long-range financing plan for Social Security with targeted improvements in benefits is an affordable approach to Social Security reform that would have broad support from the American people, according to a new brief released by the National Academy of Social Insurance (NASI) on Wednesday at an event on Capitol Hill.

Such an approach would secure Social Security for the future, provide peace of mind to workers and young Americans that they can count on the program, and demonstrate that Washington is listening to what the public wants, according to the new policy paper, Strengthening Social Security for the Long Run. Read more from the press release…

Read more!

Articles in Social Security Bulletin, Vol. 70 No. 4

Social Security Bulletin, Vol. 70 No. 4

The Role of Behavioral Economics and Behavioral Decision Making in Americans' Retirement Savings Decisions by Melissa A. Z. Knoll

This article outlines findings from the judgment and decision making (JDM) and behavioral-economics literatures that highlight the many behavioral impediments to saving that individuals may encounter on their way to financial security. It discusses how behavioral and psychological issues, such as self-control, emotions, and choice architecture can help policymakers understand which factors, aside from purely economic ones, may affect individuals' savings behavior.

Expanding Access to Health Care for Social Security Disability Insurance Beneficiaries: Early Findings from the Accelerated Benefits Demonstration by Robert R. Weathers II, Chris Silanskis, Michelle Stegman, John Jones, and Susan Kalasunas

The Accelerated Benefits (AB) demonstration project provides health benefits to Social Security Disability Insurance beneficiaries who have no health insurance during the 24-month period most beneficiaries are required to wait before Medicare benefits begin. This article describes the project and presents baseline survey results on health insurance coverage among newly entitled beneficiaries and the characteristics of those without coverage. A 6-month follow-up survey provides information on the effects of the AB health benefits package on health care utilization and on reducing unmet medical needs. The article also reports the costs of providing the health benefits package during the 24-month Medicare waiting period.

The Decision to Exclude Agricultural and Domestic Workers from the 1935 Social Security Act by Larry DeWitt

The Social Security Act of 1935 excluded from coverage about half the workers in the American economy. Among the excluded groups were agricultural and domestic workers. Some scholars have attributed this exclusion to racial bias against African Americans. In this article, the author examines the evidence of the origins of the coverage exclusions in 1935 and concludes that this particular provision had nothing to do with race.

Retiring in Debt? An Update on the 2007 Near-Retiree Cohort by Chris E. Anguelov and Christopher R. Tamborini

This research note uses 2007 Survey of Consumer Finances (SCF) data to update work reported in an earlier article, "Retiring in Debt? Differences between the 1995 and 2004 Near-Retiree Cohorts." The analysis documents whether there have been changes in the debt holdings of near-retirees in 2007, a point in time reflecting the start of the recent financial and economic crisis, relative to 2004. Results show that near-retirees' debt levels in 2007 were modestly higher than in 2004, overall and across a number of subgroups. The results do not capture the full impact of the financial crisis, which manifested at the end of 2007 and in 2008.

Introduction and Overview of the 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance

The Board of Trustees reports each year on the current and projected financial condition of the Social Security program, which is financed through two separate trust funds: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. The introduction and overview presented here is excerpted from the 2010 annual report, which is the 70th such report. The full report is available at

Several features from our Web site are also reprinted in the Bulletin each quarter. These include

Note: The findings and conclusions presented in the Bulletin are those of the authors and do not necessarily represent the views of the Social Security Administration.

Read more!

Tuesday, November 9, 2010

Should we raise the early retirement age?

I have a piece in today's Los Angeles Times that says yes…

Read more!

New paper: “How Do Responses to the Downturn Vary by Household Characteristics?”

The Center for Retirement Research at Boston College has released a new Issue in Brief: "How Do Responses to the Downturn Vary by Household Characteristics?" by Norma B. Coe and Kelly Haverstick.

The brief's key findings are:

  • Half of respondents to a 2009 CRR survey planned to respond to the downturn by working longer, saving more, or both.
  • Their choice was influenced by different factors:
    • "Work longer" was favored by those with large losses or a greater dependence on assets, less time to recover, and high anxiety;
    • "Save more" was favored by those with higher incomes, higher expectations for stock returns, and greater job security;
    • "Work longer and save more" predictably reflected a blend of these responses plus lower contribution rates.

The brief is available here.

Read more!

Monday, November 8, 2010

Upcoming event: “Social Security’s projected shortfall and why Congress should act soon to fix it”

The Pew Economic Policy Group cordially invites you to attend a discussion on

Social Security's projected shortfall and why Congress should act soon to fix it

  • Charles Blahous, public trustee for Social Security and Medicare and former economic advisor to President George W. Bush
  • Robert Greenstein, executive director of the Center on Budget and Policy Priorities

will discuss their new paper,
Social Security Shortfall Warrants Action Soon,

and answer questions about the reality and scope of Social Security's projected shortfall.

The authors also will explain why action soon would allow for more balanced policies and contribute modestly to long-run deficit reduction.

The discussion will be moderated by Scott S. Greenberger, senior officer for the Pew Fiscal Analysis Initiative.

November 9, 2010

2:00pm to 3:00pm

Location: Senate Russell Office Building, Room 485

(Visitors entrance at the corner of C Street NE and Delaware Street NE)

Refreshments will be served

To RSVP, please email by November 5, 2010

For more information, please contact Evgeni Dobrev at 202.540.6389 or

For media inquiries, please contact Samantha Lasky at 202.540.6390 or

Read more!

Why are liberals so down on Social Security reform?

Writing online for the New York Times, former Obama administration budget director Peter Orszag suggests that better prospects for Social Security reform might be the "silver lining" around an otherwise bleak election outcome for Democrats. The reason, Orszag points out, is well known to anyone on the right who's worked on Social Security reform: most liberals really don't have much interest in fixing the program. If pushed they'd favor raising taxes, particularly on high earners, but in general Social Security reform just isn't high on their policy agenda.

Orszag is legitimately puzzled by this:

The left, though, seems adamantly opposed to restoring actuarial balance to Social Security now. I have trouble understanding this reluctance for several reasons: the key issue progressives had been concerned about—individual accounts within Social Security—has been definitively won in their favor (for now); they have a president from their party in office, which will not always be the case; acting now would allow changes to take effect more gradually, cushioning the blow; and establishing some credibility on out-year fiscal problems by enacting Social Security reform could open up (admittedly limited) running room to pass necessary additional stimulus legislation in the short run.

This unwillingness to act manifests itself in claims that Social Security's actuaries (and the Congressional Budget Office) are overly pessimistic—or worse, deliberately underestimating the system's financial health; that benefit cuts from insolvency wouldn't be so bad, even if they would be far larger than the cuts involved with a gradual restoration of the plan to financial health; and so on. Most of these arguments don't hold much water and are transparent attempts to make the issue go away.

But why? That's the question that puzzles Orszag and I admit the answer isn't clear. But here are some possibilities:

  1. The natural desire to procrastinate: liberals are human, too (really!) and, like everyone else, often put off difficult tasks in favor of ones that capture their imagination, such as healthcare reform. The idea of fixing the entitlement you have before starting a new one often goes against human nature, at least on the left.
  2. Reform won't be pretty: Most liberals would prefer to fix Social Security by eliminating the $107,000 payroll tax ceiling, which would apply the 12.4 percent tax to all earned income. But doing so would tack an additional 10 points onto marginal tax rates. Combined with increases in federal income tax rates and state taxes, the top marginal tax rate would approach 60 percent. That's unlikely to pass, meaning that liberals would have to start considering things they really don't want to think about: benefit cuts, raising the retirement age, and raising taxes on lower earners.
  3. Time is on their side: If we knew the share of the Social Security deficit that must be filled with higher taxes, it would make sense to apply those tax increases immediately. Spreading a tax increase (or benefit cut) over as many people as possible lowers the necessary increase on each person. But delaying reform puts more people into the system, after which point their benefits are effectively sacrosanct, and tilts the political calculus toward tax increases and away from benefit cuts. It's like the conservative "starve the beast" strategy in reverse.

Orszag closes on the following note:

Given the left's strident opposition to any serious discussion of Social Security reform, the issue will provide a key early indicator of the administration's response to the election results.

He's certainly right, but, having heard some of the administration's pre-election rhetoric on Social Security, I'm not confident they'll come down on the right side.

Read more!

Early retirement accounts as a fix for Social Security?

National Review's Reihan Salam has some nice things to say about my recent Enterprise Blog post on Social Security personal accounts, which shows that raw comparisons of the benefits paid by accounts to those paid by Social Security can be misleading. Given that, deciding whether to fight for personal accounts as part of Social Security reform—versus, say, focusing on holding the line on taxes while encouraging more outside retirement saving—is a choice conservatives need to wrestle with. I appreciate Reihan's comments (and return the favor—loved your book!).

Reihan then raises the suggestion of "early retirement accounts," an option I hadn't considered in a while. This idea, proposed a few years back by Phil Longman of the New America Foundation, is similar to ordinary personal account plans, but with a twist. In most account plans, the account would pay for part of your total Social Security benefit throughout your retirement. For instance, you might retire at 67 and each year thereafter half your total benefit would come from your account while the other half would come from the traditional program. The twist with early retirement accounts is that the account would pay your full benefit for the first few years of retirement—say, from 67 through 72—and then you'd receive your full benefit from the current program.

The advantage of this approach is that it would tend to encourage later retirement, since people with defined contribution accounts generally work longer than those with traditional defined benefit pensions. It would also ensure a safety net of government-provided benefits later in life, addressing a concern raised by opponents of personal accounts.

The problem with the idea, I think, is that the numbers don't really add up. According to Longman, "The Social Security Administration's Office of Policy estimates that the savings from this extension in the retirement age would not only cover the full cost of the early retirement accounts, but would also make the system solvent in the long term." I was at the SSA at the time and remember the plan (one person inside the agency was a strong supporter of it) but I don't think those estimates are right. And the fact that they're not right shows how difficult it is to solve the Social Security problem.

Using the Policy Simulation Group's Social Security models, I simulated a shift in the normal retirement age to 72 and the early retirement age to 68, taking full effect around 40 years from now. The idea is that individuals who held early retirement accounts their full lives would be subject to the full retirement age increase, while for older folks it would be phased in. Without including the accounts, the plan fixes around three-quarters of Social Security's long-term deficit. If you include the accounts, then most likely the plan would increase the deficit relative to current law.

Now, you can always tweak the parameters to make things fit, so the fact that the numbers don't add up isn't a big deal by itself. But it's the fact that you'd have to really tweak the parameters—say, shift the retirement age to 80 or so—that shows the scale of the Social Security shortfall. It might be smaller than Medicare, but it's bigger than pretty much any other problem the government needs to fix. I don't think early retirement accounts would be politically salable post-tweaking.

An alternate solution would be to build more savings outside of Social Security, say, by automatically enrolling all Americans in 401(k) plans. If everyone saved enough to cover their needs for a few extra years of early retirement, we could shift the retirement age back without making enormous cuts in monthly benefits. My recent AEI paper on increasing the early retirement age of 62 hits on some similar points.

All that said, both Reihan and Phil Longman deserve credit for thinking outside the box on Social Security reform. That's probably the only way we're going to get the program fixed.

Read more!

Friday, November 5, 2010

NPR: How much would raising the retirement age save?

National Public Radio's Marketplace discusses plans to raise the Social Security retirement age, with comments from me and Jeff Brown of the University of Illinois.

Read more!

Arnold Kling calls Graham’s “A Well-Tailored Safety Net” a “Must read”

Some good discussion of "Old age risk sharing" here.

Read more!

Thursday, November 4, 2010

New papers from the NBER

Financial Literacy, Schooling, and Wealth Accumulation by Jere R. Behrman, Olivia S. Mitchell, Cindy Soo, David Bravo  -  #16452 (AG)


Financial literacy and schooling attainment have been linked to household wealth accumulation. Yet prior findings may be biased due to noisy measures of financial literacy and schooling, as well as unobserved factors such as ability, intelligence, and motivation that could enhance financial literacy and schooling but also directly affect wealth accumulation.  We use a new household dataset and an instrumental variables approach to isolate the causal effects of financial literacy and schooling on wealth accumulation.  While financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, our approach reveals even stronger and larger effects of financial literacy on wealth.  Estimated impacts are substantial enough to suggest that investments in financial literacy could have large positive effects on household wealth accumulation.

Policy Options for State Pension Systems and Their Impact on Plan Liabilities by Joshua Rauh, Robert Novy-Marx  -  #16453 (PE)


We calculate the present value of state pension liabilities under existing policies, and separately under policy changes that would affect pension payouts including cost of living adjustments (COLAs), retirement ages, and buyout schedules for early retirement. Liabilities if plans were frozen as of June 2009 would be $3.2 trillion if capitalized using taxable municipal curves, which credit states for a possibility of default in the same states of the world as general obligation debt, and $4.4 trillion using the Treasury curve.  Under the typical actuarial method of recognizing future service and wage increases, liabilities are $3.6 trillion and $5.2 trillion using municipal curves and Treasury curves respectively. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion under Treasury rates.  A one percentage point reduction in COLAs would reduce total liabilities by 9‐11%, implementing actuarially fair early retirement could reduce them by 2‐5%, and raising the retirement age by one year would reduce them by 2‐4%.  Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets under Treasury discounting.  This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans.

Public Pension Funding in Practice by Alicia H. Munnell, Jean-Pierre Aubry, Laura Quinby  -  #16442 (AG PE POL)


Public pension funding has recently become a front-burner policy issue in the wake of the financial crisis and given the pending retirement of large numbers of baby boomers.  This paper examines the current funding of state and local pensions using a sample of 126 plans, estimating an aggregate funded ratio in 2009 of 78 percent. Projections for 2010-2013 suggest that some continued deterioration is likely.  Funded status can vary significantly among plans, so the paper explores the influence of four types of factors: funding discipline, plan governance, plan characteristics, and the fiscal situation of the state.  Judging the adequacy of funding requires more than just a snapshot of assets and liabilities, so the paper examines how well plans are meeting their Annual Required Contribution and what factors influence whether they make them.  The paper also addresses the controversy over what discount rate to use for valuing liabilities, concluding that using a riskless rate of return could help improve funding discipline but would need to be implemented in a manageable way.  Finally, the paper assesses whether plans face a near-term liquidity crisis and finds that most have assets on hand to cover benefits over the next 15-20 years.  The bottom line is that, like private investors, public plans have been hit hard by the financial crisis and their full recovery is dependent on the rebound of the economy and the stock market.


Read more!

Reactions to my early retirement age paper

Over at AEI's Enterprise Blog

Read more!

Savings and retirement forum event: “Healthy Life Expectancy”

Event: Nov. 9 — "Healthy Life Expectancy"

On Tuesday, November 9, 2010, the Savings and Retirement Forum will be held at the American Action Forum, 1401 New York Avenue NW, Washington, DC 20005 [Directions to AAF], at 8:30 a.m.

Seth Richards-Shubik, Ph.D., will present "Healthy Life Expectancy by Education: Estimates and Implications for Retirement Age Policy." His research focuses on two themes within health economics. One area is network effects in health behaviors and medical decision-making, with related work on broader informational issues such as advertising. The other area is health disparities in the U.S., which includes work on the determinants of educational differences in mortality and the role of medical innovation in the growth of the racial gap in infant mortality.

If you plan on coming please RSVP. Coffee, juice, and pastries will be served. Please feel free to pass this along to others who you feel might be interested in attending.

The purpose of the Forum is to bring together academics, interested industry professionals, policy wonks, and government staffers who work on issues related to Social Security, pensions, savings, and general retirement issues for a monthly seminar and an annual half-day conference. More information is available at

Read more!

Wednesday, November 3, 2010

New paper: “The Case for Raising Social Security's Early Retirement Age”

I have a new paper in AEI's Retirement Policy Outlook series titled "The Case for Raising Social Security's Early Retirement Age."

In this Outlook, I use a detailed microsimulation model of the population to estimate the effects of increasing the Social Security Earliest Eligibility Age (EEA) from sixty-two to sixty-five on Social Security's finances, retirement income, and the economy. Increasing the EEA would extend the solvency of the Social Security trust fund by about five years, increase total annual retirement income as of age seventy for affected individuals by around 16 percent, and increase gross domestic product (GDP) by around 5 percent. Raising the EEA may be one of the most effective options available for improving retirement-income security and would improve the federal budget in one year nearly as much as the recent health reform bill was projected to do over ten years.

You can read it online here.

Read more!

The transition costs of personal accounts

Bill Shipman and Peter Ferrara write in the Wall Street Journal that "private Social Security accounts are still a good idea." It's not a view I particularly disagree with, especially given that I have written an article called "Still a Good Idea" that makes some of the same points as the Shipman-Ferrara op-ed.

At the same time, though, I think one reason Social Security reform didn't fare well when President Bush attempted it in 2005 was that his supporters entered the debate with unrealistic expectations of what personal accounts can do. I discussed this issue in a recent article in National Review, but the Shipman-Ferrara piece offers another opportunity to hash out these questions.

Shipman and Ferrara provide a good example:

Suppose a senior citizen—let's call him "Joe the Plumber"—who retired at the end of 2009, at age 66, had been able to set up a personal account when he entered the work force in 1965, at the age of 21. Suppose that, paying into his personal account what he and his employer would have paid into Social Security, Joe was foolish enough to invest his entire portfolio in the stock market for all 45 years of his working career. How would he have fared in the recent financial crisis?

The answer, Shipman and Ferrara write, is that despite the ups and downs of the stock market, personal accounts "would still pay them about 75% more than Social Security would have."

To understand what's missing in this example, however, consider that it's mathematically and logically equivalent to the statement, "If we eliminated Social Security benefits for current retirees we could give working-age Americans a big tax cut, which they could spend or save as they wished."

In other words, the Shipman-Ferrara example ignores the fact that once individuals divert their payroll taxes to personal accounts, where they could indeed earn higher returns on their money, they leave a gap in Social Security's finances that would need to be made up.

How big a gap? Social Security's actuaries calculate that the value of Social Security benefits that have been earned but not yet paid out is around $20.2 trillion. If paid off over the next 100 years—roughly the period over which accrued benefits must be paid out—these liabilities are worth around 6.6 percent of payroll or 2.2 percent of gross domestic product. So, if we allowed workers to divert their 12.4 percent payroll tax to personal accounts, we could ensure that current benefits continue to flow by levying an additional 6.6 percent tax on their earnings, for which no additional benefits would be paid.

Obviously, once you factor this additional "transition cost" into the equation, much of the increased return that individuals would receive through personal accounts goes away. As an approximation, if the 6.6 percent "transition tax" were paid out of the current payroll tax, leaving only 5.8 percent of wages to invest, benefits for the new retiree in 2009 wouldn't exceed current law by 75 percent but fall short by around 18 percent. Likewise, if you deduct a little more to cover disability insurance, shortfall would increase. While we can quibble about the details, the point is that transition costs aren't ancillary to the personal accounts debate; in truth, we can say that transition costs are the personal accounts debate, since without transition costs we don't see the "transition benefits" of higher returns and higher retirement benefits in later years.

The rest of the increased return on personal accounts disappears if you adjust for the cost of market risk. Stocks have higher returns than bonds, but only as a compensation for higher risk. While stocks pay good returns most of the time, these returns aren't guaranteed—and investors are willing to give up a lot of upside to protect against potential downside.

I've supported personal accounts in the past and I have no problem with them today, but I also argued in National Review (and a follow-up blog post) that conservatives need to make some cost-benefit calculations regarding what policies to propose. Competing with personal accounts is the desire to hold the line against tax increases for Social Security. I don't think it's likely that Social Security reform with personal accounts and without tax increases is likely to pass. Even President Bush all but said he would increase the "cap" on Social Security taxes as a way to get his personal accounts plan passed. My judgment is that it's both easier and more important from a policy perspective to hold the line on Social Security tax increases than to introduce personal accounts to the program. It would be nice to have both, but I suspect conservatives are going to have to make a choice.

Read more!

NASI event: “Strengthening Social Security for the Long Run: Insights from 1983”

Strengthening Social Security for the Long Run: Insights from 1983

 Register Now – Space is Limited

Wednesday, November 10, 2010

10:00 – 11:30 am

B-318 Rayburn House Office Building

In policy discussions about the long-term financing of Social Security, reforms enacted in 1983 are often held up as a model of balanced political compromise. But that is not exactly what happened. Only the short-term reforms, aimed at getting the program safely through the 1980s, contained a mix of changes that affected Social Security contributors and beneficiaries more or less evenly. The piece Congress added to address the remaining long-term shortfall was not a compromise. It was solely a benefit cut that is still being phased in today.

As the president's fiscal commission nears its reporting deadline, the National Academy of Social Insurance (NASI) is releasing a new policy brief, Strengthening Social Security for the Long Run.

Moderator:   Lisa Mensah, NASI Chair and Executive Director of the Aspen Institute Initiative on Financial Security

Speakers:      Janice Gregory, NASI President and Social Security Subcommittee staff, 1983

                       Virginia Reno, NASI VP for Income Security and Greenspan Commission staff

Discussant:   Wendell Primus, Policy advisor to House Speaker Nancy Pelosi and chief economist for the Committee on Ways and Means, 1983

·         What happened in 1983?

·         Why the growing concern about the inadequacy of Social Security going forward?

·         Can we afford Social Security in the future? What do Americans say they want? 

·         How might we improve benefit adequacy at an affordable cost?

·         How might we design a 75-year financing plan? 

 Click here to register.

NASI's new brief, Strengthening Social Security for the Long Run, will be available as will copies of Bob Ball's memoir, The Greenspan Commission: What Really Happened, edited by Tom Bethell.

Read more!

Monday, November 1, 2010

Are seniors being cheated?

Over at AEI's Enterprise Blog…

Read more!

Agenda for November 5 Technical Panel Meeting

The Social Security Advisory Board's Technical Panel on Assumptions and Methods will meet on November 5; the agenda is printed below. The presentation of uncertainty in the Trustees Report is of great importance, as I argued in this post.

2011 Technical Panel on Assumptions and Methods

Meeting Agenda

November 5, 2010

The meetings will be held in the offices of the Social Security Advisory Board:

400 Virginia Avenue SW, Suite 625, Washington, DC 20001

Friday November 5: 9:30am-5:00pm

9:30-10:00 Panel business

10:00-10:45 Presenting uncertainty about Social Security projections in the annual Trustees Report

Presenter: John Sabelhaus, Panel member

10:45-11:00 Break

11:00-12:00 Discussion of presenting uncertainty

12:00-1:00 Lunch

1:00-2:30 Fertility assumptions and methods

Presenter: S. Philip Morgan, Panel member

2:30-3:00 Break

3:00-5:00 Actuarial metrics in the Trustees Report

Presenter: Tim Marnell, Panel member



Read more!

Tuesday, October 26, 2010

New CRR fact sheet: “The NRRI and Annuities”

The Center for Retirement Research at Boston College has released a new Fact Sheet:

"The NRRI and Annuities"

The Fact Sheet's
key findings are:

  • The NRRI assumes that households buy an annuity at retirement.
  • The NRRI (the percent of households 'at risk' in retirement) increases from 51 percent to
    • 53 percent if households withdraw 4 percent per year; or
    • 60 percent if households live off their interest.
  • Not annuitizing hurts high-income households the most, because they rely more on their nest eggs in retirement.
  • While few buy annuities today, annuities could improve retirement security for future retirees.

The Fact Sheet is available here.


Read more!

Academy of Actuaries says: Raise the Social Security Retirement Age

Actuaries to Fiscal Commission: Increase the Retirement Age for Social Security

WASHINGTON – 25 Oct. 2010 – The American Academy of Actuaries is urging the National Commission on Fiscal Responsibility and Reform to address the financial condition of Social Security and to restore actuarial balance to the program by including an increase in the retirement age in its final recommendations. The actuaries said that increasing life expectancy has led to an expansion of lifetime benefits and system costs, but that an increase in the retirement age would help curb this cost growth.

"Longevity has increased and continues to increase meaning retirees will be spending more time collecting benefits in the system than prior generations," wrote Tom Terry, chairperson of the American Academy of Actuaries Public Interest Committee.  "Increasing the retirement age can contribute significantly to stemming this trend and make the program solvent and sustainable."

The actuaries said that workers could still retire with approximately the same degree of retirement security, if a change in the retirement age causes workers to delay retirement. They recommend that an increase in the retirement age be phased in gradually over an extended time frame to accommodate the changes in retirement behavior that would be necessary to make the policy successful. The actuaries acknowledged that there is potential for certain populations to be adversely affected, but that changes to Social Security can be coupled with other policy options to address these concerns.

The complete letter from the American Academy of Actuaries Public Interest Committee to the fiscal commission is available at:

The actuaries have been advocating for increasing the retirement age since August 2008, when it released its first position statement on behalf of the U.S. actuarial profession. The statement is available at:

Read more!

CBO releases new Social Security projections

The Congressional Budget Office has released new projections for the Social Security program's long-term finances. Here's how CBO summarizes the current situation:

In calendar year 2010, Social Security's outlays will exceed tax revenues (that is, the trust funds' receipts excluding interest) for the first time since the enactment of the Social Security Amendments of 1983. Over the next few years, the Congressional Budget Office (CBO) projects, the program's tax revenues will be approximately equal to its outlays. However, as more of the baby-boom generation (that is, people born between 1946 and 1964) enters retirement, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. Starting in 2016, CBO projects, outlays as scheduled under current law will regularly exceed tax revenues.

Looking at the longer term, here's a chart showing possible paths for Social Security's net cash flow – that is, its tax income minus the benefits the program owes. The middle line is CBO's "best guess," while the upper and lower lines represents what CBO thinks could happen in the 10th and 90th percentiles of a distribution of possible outcomes. In other words, there's around a 10 percent chance that Social Security's cash flows could be better than the upper line and a 10 percent chance they'll be worse than the lower line. (For what it's worth, this approach is FAR better than the "low cost" and "high cost" scenarios used by SSA, since it assigns a probability to different outcomes rather than rather arbitrarily calling them "low" and "high.")

So while there's around a 10 percent chance that long-term deficits won't be so bad, there's also a 10 percent chance they'll be really bad – think 2.5 percent of GDP as of 2050. Most people would want to insure against the really bad outcomes by fixing the program today. If we end up with a really good outcome we can give everyone a tax cut or a benefit increase, which is better than having to give everyone a sudden tax increase or benefit cut if things turn out badly.

Read more!

Monday, October 25, 2010

Coons and O'Donnell Debate Social Security

From the Wall Street Journal, Delaware Senate Candidates Chris Coons and Christine O'Donnell talk Social Security reform:

Read more!

Friday, October 15, 2010

Video: Former CBO director Rudy Penner explains Social Security COLAs

From the Urban Institute, Rudy Penner explains why we won't be seeing a Social Security Cost of Living Adjustment this year.

Read more!

Thursday, October 14, 2010

The Economist: “A gold-plated burden”

The Economist has a nice write-up of the problems facing public sector pensions and how their fishy accounting plays into things, including a few quotes from me and a link to some of my work with Eileen Norcross of the Mercatus Center at George Mason. It's a good summary of the accounting debate and how it affects how we view pension funding levels. Check it out here.

Read more!

Now THAT'S what I call taking Social Security reform "off the table"

I usually kind of like Russ Feingold. He's about a dozen notches to the left of me, but seems like an honest guy and doesn't pretend he's something he isn't (until recently, being a Senator from Wisconsin allowed you that luxury).

But today he's down in the polls relative to his challenger, businessman Ron Johnson, and Feingold's new ad on Social Security reform goes just a little bit over the top.

So you'd really take everything off the table? Given that the system is going insolvent -- just in time for the retirements of people like, say, me? -- doesn't rejecting everything seem a bit extreme? Probably, but that's what happens in the end of a campaign when someone is far behind.

But Feingold's opponant Johnson isn't pulling any punches either. His own ad doesn't back down at all from his claim that Social Security is a "ponzi scheme." Check him out.

Say what you will about either of these guys, these are both pretty good ads. Sure beats the usual "Congressman [insert name] voted with [disliked party leader] 96% of the time..."
Read more!

Bloomberg poll on Social Security/Medicare reform options

Hot Air points to a new Bloomberg poll regarding the budget deficit, highlighting several results that seem to indicate that – despite everything Americans have been through regarding the economy and financial markets – that they want "privatization" of Social Security and Medicare to be "on the table." For instance, Bloomberg says:

Almost three in five say privatization of the Medicare program, with assistance for low-income seniors, should be considered when lawmakers discuss how to close the budget gap. A majority, though, oppose raising the age at which people can start receiving Medicare benefits. Americans are narrowly against lawmakers considering Social Security privatization as a means to reduce the deficit. Forty-eight percent say that should be off the table versus 44 percent who want the possibility looked at. Almost three in four favor lawmakers studying removal of the Social Security tax cap so wages over $107,000 a year are taxable.

Some caveats. First, as Hot Air points out, the most popular option is to have someone else pay for it all, through an increase in the maximum taxable wage for Social Security. But since that won't be enough to fix the whole problem and comes with some pretty negative side effects, it's worth considering other options. But second, "privatization" of Social Security won't fix the program's funding gap. It might better help us build assets to pay for future benefits and it would allow low-earners to better diversify their retirement savings, but the underlying funding gap for Social Security is the same whether you have personal accounts or not. "Privatization" of Medicare – if it means shifting to a premium support model in which the government supplements the purchase of private health insurance -- has more potential because it would shift incentives to increase cost-effectiveness and, in any case, the government could place a limit on the growth of the supplements it pays.

And third, the poll's options – "strongly considered," "considered" and "off the table" – may not be the optimal ones for getting at these choices. But it is fair to say that if someone says a given option should be strongly considered or considered that it's at least "on the table."

Better measurement of public opinion would be really helpful in figuring out how to fix the entitlement funding gap. The government and the budget don't really "care" how these programs are balanced so long as it's done. But individuals care a lot about whether to pay higher taxes, receive lower benefits, or work longer. The more we know about what they want, the better we can tailor reform plans to meet their needs.

Read more!

Talking about public sector pensions

Over at The Atlantic, I'm interviewed regarding public sector pension financing. The short story:

What's the problem with these state and local pension programs?

There are two problems. First, they're underfunded. They only have about 75% of the money needed to pay liabilities. They need more money from either employee contributions or general taxes [employer contributions].

Second, states' accounting standards are inappropriate. They assume they can earn high returns on stocks and private equity investment without market risk. If the risky assets fail, the taxpayers have to pay the difference.

Read more!

Retirees won’t get a Cost of Living Adjustment this year. Should they?

On Friday, the Social Security Administration is likely to announce the Cost of Living Adjustment (COLA) that will be paid in 2011. It is almost sure to be zero. As no COLA was paid in 2010, this will be the second year in a row without an inflation adjustment.

From August 2009 through August 2010, the most recent data we have available, the Consumer Price Index for Urban Workers (the CPI-W) rose by 1.4 percent. Social Security uses the CPI-W to calculate COLAs, so how can there be no COLA scheduled for next year?

The reason is that in the prior year—August 2008 through August 2009—the CPI dropped by 2 percent. But since the Social Security law doesn't allow for a negative COLA, beneficiaries simply received a zero COLA for 2010. In effect, this means that the purchasing power of their benefits rose by around 2 percent. To make up for that, Social Security will continue to pay zero COLAs until the CPI catches up to its previous level. Overall, retirees aren't really being hurt, even if it looks bad.

Moreover, there is some good news for retirees: for around 90 percent of beneficiaries, Medicare Part B premiums do not increase in a year in which no COLA is paid. Since no COLA was paid in 2010, the scheduled increase in monthly premiums from $96.40 to $110.50 wasn't applied. This saves the typical retiree around $169 per year. In 2011, Part B premiums were scheduled to rise to $120.10 per month, but with no COLA paid that increase also will be averted. That will save retirees an additional $115 per year. Put together, next year's Part B premiums will be almost $285 lower due to the lack of COLAs being paid. 

For more on the Social Security COLA, see my New York Times
piece from earlier this year, co-authored with Alicia Munnell of Boston College, and my Retirement Policy Outlook.

Read more!

New papers from the Social Science Research Network


"Individuals' Uncertainty about Future Social Security Benefits and Portfolio Choice" 

RAND Working Paper Series WR- 782

ADELINE DELAVANDE, New University of Lisbon - Faculdade de Economia Email:
SUSANN ROHWEDDER, The RAND Corporation Email:

Little is known about the degree to which individuals are uncertain about their future Social Security benefits, how this varies within the U.S. population, and whether this uncertainty influences financial decisions related to retirement planning. To illuminate these issues, the authors present empirical evidence from the Health and Retirement Study Internet Survey and document systematic variation in respondents' uncertainty about their future Social Security benefits by individual characteristics. They find that respondents with higher levels of uncertainty about future benefits hold a smaller share of their wealth in stocks.

"Retirement Income Adequacy for Today's Workers: How Certain, How Much Will it Cost, and How Does Eligibility for Participation in a Defined Contribution Plan Help?" 

EBRI Notes, Vol. 31, No. 9, September 2010

JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science

The concept of retirement income adequacy for today's workers has been gaining increased interest in recent months with the prospects of lower investment yields as well as the limited employment options for Baby Boomers wanting to work past retirement. Earlier this year, EBRI updated its Retirement Security Projection Model® (RSPM) to show how the EBRI Retirement Readiness Ratings™ (measuring the percentage of households that are likely to have sufficient money in retirement to pay for basic expenses plus uninsured health care costs) have changed in the last seven years. The good news is that the portion of Boomers and Gen Xers "at risk" of having inadequate retirement income has actually decreased during that time, even after factoring in the recent decline in the financial markets and housing values. Early Boomers (those born between 1948 and 1954) had an "at risk" rating of 59 percent in 2003; however, by 2010 that number had dropped to 47 percent. The "at risk" ratings for Late Boomers (those born between 1955 and 1964) decreased from 55 to 44 percent, while those for Gen Xers (those born between 1965 and 1974) decreased from 57 to 45 percent. Unfortunately, that still leaves nearly one-half of the households in these age cohorts "at risk" of having inadequate retirement income, and the likelihood that the Early Boomers will run short of money within the first 10 years of retirement is as high as 41 percent for those in the lowest (preretirement) income quartile.

This paper builds on EBRI's Retirement Security Projection Model® (RSPM) to determine how much households need to save each year until retirement to maintain a probability level they will be able to afford simulated retirement expenses for the remainder of the lifetime of the family unit. The objective of this paper is to focus on the importance of future eligibility for a defined contribution plan, whether or not the employee actually chooses to participate. The RSPM model shows that eligibility for a defined contribution (primarily 401(k)) retirement plan has a significant positive impact on reducing the additional compensation most families need to achieve the desired level of retirement income adequacy. This finding has major implications for any policies that would decrease the percentage of workers eligible to participate in defined contribution retirement plans. Furthermore, it is clear from the results presented in the paper that the relative impact of future eligibility in a defined contribution plan will depend on several factors: the workers' ages; their relative income level; the probability of retirement income adequacy they desire; whether the appropriate target is the median additional percentage of compensation or one large enough that 3 out of 4 workers would have sufficient retirement income.

The PDF for the above title, published in the September 2010 issue of EBRI Notes, also contains the fulltext of another September 2010 EBRI Notes article abstracted on SSRN: "2010 Health Confidence Survey: Health Reform Does Not Increase Confidence in the Health Care System."

"When the State Mirrors the Family: The Design of Pension Systems" 

CESifo Working Paper Series No. 3191

VINCENZO GALASSO, University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Email:
PAOLA PROFETA, Bocconi University, CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Email:

This paper studies the transmission mechanism from family culture to economic institutions, by analyzing the impact of the within family organization on the original design of the public pension systems. We build a simple OLG model with families featuring either weak or strong internal ties. When pensions systems are initially introduced, in society with strong ties they replicate the tight link between generations by providing earnings related benefits; whereas in societies with weak family ties they only act as a safety net. To test this transition mechanism, we consider Todd (1982) historical classification of family types across countries. We find that in societies dominated by absolute nuclear families (i.e., weak family ties), pension systems act as a flat safety net entailing a large within-cohort redistribution, and viceversa in societies characterized by stronger family ties where pension systems are more generous. This link between the type of families and the design of pension systems is robust to testing for alternative explanations, such as legal origin, religion, urbanization and democratization of the country at the time of their introduction. Interestingly, historical family types matter for explaining the design of the pension systems, which represents a persistent feature, but not their size, which have largely changed over time.

"Insult to Injury: Disability, Earnings, and Divorce" 

PERRY SINGLETON, Syracuse University - Department of Economics Email:

This study examines the effect of work-limiting disabilities on the likelihood of divorce. Theoretically, the effect depends on the disability hazard at the time of onset and the impact of disability on marital value. The theory therefore implies, based on a set of empirically supported premises, that the effect of disability on divorce should decrease with age, increase with education, and increase with disability severity. Data from the Survey of Income and Program Participation support these predictions. The effect of a work-preventing disability is greatest among young, educated males, increasing the divorce hazard by 13.3 percentage points.

"Protecting the Social and Economic Interests of Persons Who Lose Their Employment in Kenya" 

STEPHEN THUKU MBAARO, affiliation not provided to SSRN Email:

Social security has been defined as the protection which society provides for its members through a series of public measures against the economic and social distress that otherwise would be caused by stoppage, or substantial reduction of earnings resulting from sickness, maternity, employment injury, unemployment, invalidity, old age and death the provision of medical care and the provision of subsidies for families with children.1 It is the process through which the Social and Economic rights are continually assured of a population amidst a variety of situations some of which are unforeseen and unpredictable such as loss of employment or in any of the ways herein above mentioned. This paper explores some of the mechanisms that Kenya has put in place to see to it that her workers are somehow cushioned from the social shock that follows loss of jobs and also suggests ways in which the existing systems can be improved.

"Fertility Impact of Social Transfers in Sub-Saharan Africa – What About Pensions?" 

GÖRAN HOLMQVIST, affiliation not provided to SSRN Email:

The potential link between child-related cash transfers and increased fertility is often raised an issue of concern when debating their use. Old-age pension is a form of cash transfer where theory would suggest the opposite impact, i.e. pensions equal decreasing fertility. A handful of Sub-Saharan African countries have introduced non-contributory social pensions that cover the great majority of the older population. It makes them into a distinct group in relation to the rest of the region where public old-age security arrangements, if existing at all, are largely reserved for the formal sector. This paper attempts to trace any impact these high-coverage pension schemes may have had on fertility. Findings suggest that there has been such an impact, in the range of 0,5 to 1,5 children less per woman depending on model specification.

Read more!