Today's event at the Cato Institute discussing Jagadeesh Gokhale's new book, Social Security: A Fresh Look at Policy Alternatives It should be interesting, especially for those of a slightly wonky inclination. (You know who you are.)
(University of Chicago Press, 2010), will be broadcast online today beginning at noon. I'll be one of the discussants; the other is Eugene Steuerle of the Urban Institute.
Thursday, May 27, 2010
Watch Cato Institute Social Security event online
Rep. Anthony Weiner on Social Security “Hype”
From AEI's Enterprise Blog Rep. Anthony Weiner (D-New York)—a guy I usually find refreshing, in that he's liberal and doesn't particularly try to hide it—writes an op-ed in Politico that argues against what he calls "hype" regarding Social Security's financing problems. His comments reflect concern among many on the left that President Obama's deficit commission may choose to concentrate on Social Security in its efforts to bring some stability to the federal government's long-term finances. Weiner has one strong point: that Social Security's funding shortfalls aren't the primary cause of long-term federal deficits and so the program itself shouldn't be expected to solve them, particularly if doing so puts at risk the safety net the program provides to the poor, the disabled, and to survivors. I agree with Weiner there. At the same time, though, Weiner makes a number of dubious assertions about the program and its financing that, if accepted at face value, would lead a reader to understate the program's problems and misunderstand the pros and cons of potential solutions. I suspect that Weiner may understate the program's financing problems when he says that Short-term projections of Social Security are also inherently flawed. That's because Social Security is funded through a payroll tax. It brings less money in during recessions—particularly one as pronounced as this current economic crisis. Once the economy begins to recover and people get back to work, revenues are sure to rebound. Then we can put money back into the trust fund surplus—ensuring that Social Security will be there for generations to come. Does Weiner think that the Congressional Budget Office and Social Security's actuaries don't account for this? They project that, while the program is in deficit today, it will return to small surpluses in several years as the economy recovers, then fall back into deficits as baby boomer retirements drive up benefit costs. I can think of some reasons why these projections might actually be optimistic, but it's hard to call them "inherently flawed." Weiner also says that Concerns that the baby boomer generation would push us off a demographic cliff have also been overstated. It is true that when the baby boomers retire, each Social Security beneficiary will be supported by fewer workers than the previous generation. But this doesn't mean the system will go bankrupt. There will still be more than one worker to each beneficiary, and projected earnings are expected to be far higher in the decades to come. Why it matters that the worker-to-beneficiary ratio will remain over one is a mystery to me. Even the projected decline from 3.3 workers per beneficiary to 2-to-1 implies a huge increase in program costs, as the same benefits will be borne by 2 workers instead of by 3.3 workers. And while, as Weiner points out, those future workers will have higher wages, they will be obligated to fund higher benefits as well. Finally, Weiner says, "A recent poll found that 77 percent of voters say cutting the growth in Social Security spending should not be the focus of how government approaches deficits." But the very same poll found that a majority of Americans oppose reducing the growth of Medicare benefits as well. And we know that the vast majority of future federal deficits are driven by rising costs for Social Security and Medicare. Unless we're willing to raise taxes to far higher levels than previous Americans have tolerated or to eliminate vast swaths of non-entitlement spending—neither of which Americans seem poised to support—I'm not sure I would take this poll result as definitive. Social Security is not the sole cause, or even the largest driver, of future federal deficits. But Social Security remains the largest non-defense federal spending program and its costs are projected to rise from a pre-recession level of 11.3 percent of wages to 15.9 percent in 2025, a 41 percent increase. Coupled with financial strains from rising costs in other programs, it makes sense to take Social Security's problems more seriously than it seems Rep. Weiner does.
Wednesday, May 26, 2010
Audio available for Urban Institute Social Security reform event
Securing Social Security: Does It Need to Be Fixed Now? Wednesday, May 19, 8:30–10:00 a.m. 106 Dirksen Senate Office Building, Panelists: Moderator: Among the questions to be addressed: Are projections showing that Social Security revenues will soon fall short of benefit payments reasonable and certain? What are the implications of using general revenues to pay benefits? What is Social Security's role in the broader budget deficit debate? Is there a politically viable way to achieve long-term solvency? Is Social Security reform critical now?
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Constitution Avenue and First Street, NE
Washington, DC
Tuesday, May 25, 2010
New issue brief: “A New Social Security ‘Notch’? Bad News for People Born in 1947”
The Center for Retirement Research at Boston College has released a new Issue in Brief: "A New Social Security 'Notch'? Bad News for People Born in 1947" by Andrew G. Biggs. The brief's key findings are: The brief is available here. Last year I wrote on this subject in Forbes, available here. The CRR issue brief goes into much greater detail.
Friday, May 21, 2010
Who’s Right on Social Security COLAs?
U.S. News and World Report's Luke Mullins asks, "Are Seniors Getting Shafted on Social Security?" – in particular with regard to the size of annual Cost of Living Adjustments (COLAs). It's a good article that I think reviews both sides of the CPI/COLA argument pretty well. I will say this, though: I think that CPI skeptics (in this case, me) try to give a somewhat more rigorous treatment of the issue than do those who are arguing that seniors, well, are getting the shaft by not receiving higher COLA payments. Here's the section of the article highlighting my take on things: Andrew Biggs, a resident scholar at the American Enterprise Institute, argues that while CPI-W fails to appropriately capture seniors' rising healthcare expenses, it includes an additional error that works in their favor. When the price of apples goes up but the price of oranges goes down, he explains, consumers tend to buy fewer apples and more oranges. But because the CPI-W assumes that people buy the same number of apples even as prices rise, the index overstates inflation. "These groups and members of Congress are focusing on one error while ignoring the other one," Biggs says. Ok, and here are two quotes from advocates of higher COLA payments: "Try telling a senior that the cost of living hasn't gone up,' [New York Democratic Rep. Elliot] Engel says. and "We can't let our citizens not be taken care of. Otherwise, that is the beginning of the end for our country," [National Committee to Preserve Social Security and Medicare President Barbara] Kennelly says. I'm not say they don't have some facts on their side – after all, I acknowledged that the CPI-W used in calculating COLAs doesn't fully capture rising health care costs for seniors. What's a little wearying is that there isn't that much attempt on the other side to really even use facts. If our only measure of whether the cost of living has gone up is to ask seniors, can't we just shut down the Bureau of Labor Statistics and save a lot of cash?
Padded public pensions in New York State
The New York Times' Mary Walsh and Amy Schoenfeld have a good story on some very young retirees in New York State getting some very high public pensions. In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year. Worth checking out. Also worth looking at is the database they have assembled of retired New York State public employees receiving pensions in excess of $100,000. A quick look found my high school football coach, pulling in $103,000 per year. That said, he actually produced the goods – not many teachers deliver the equivalent of multiple unbeaten seasons.
Thursday, May 20, 2010
The right way to fix Social Security (according to the Seattle Times)
The Seattle Times "Social Security needs to be fixed. This has been common knowledge for 15 years, and nothing has been done about it, even though the longer the delay the bigger the fix has to be. The time for delay is over. Congress needs to reach a bipartisan agreement, and do it. "Much time was wasted a decade ago on the Republican proposals for private accounts. This page never supported those proposals. They would work very neatly for some people, but they pushed too much risk on individual workers — and the purpose of Social Security is to insure against risk. "With the Democrats in charge, more attention has been paid to remove the $106,800 cap on taxable income and subject all wages to the employee-employer 12.4 percent flat tax. The trouble is that there is a reason for the cap. Taxable income is capped because the benefit is capped. Social Security is insurance — a way for workers to provide for themselves — and removing the cap makes it too much like welfare. "These two approaches are partisan. They wrench Social Security rightward or leftward. There is no need to do this, nor do most Americans want it. "Congress should split the difference between paying out less and paying in more. First, let the cap on taxable income rise faster, without removing it. Second, increase benefits slower over time. Neither of these changes need be hugely noticeable if done now. "The 12.4 percent combined rate on wages should not be raised. This is already a heavy tax on the creation of jobs. And the retirement age, now 66 and creeping up to 67 for full benefits, should not be raised any higher. Sixty-seven is already too high for ironworkers, carpenters, miners, loggers, fishermen and countless other careers that call on bodies and hands. "Splitting the difference on the tax cap and benefit increases saves Social Security without turning it into anything more than it already is, which is social insurance to provide a partial income in retirement. For a full income, Americans need to save and invest for themselves."
editorializes today regarding Social Security reform. I don't agree with them regarding the retirement age – Americans worked longer in the past, when more jobs were physically taxing, than they do today. But it seems like a good-faith effort to listen to all sides.
New papers from the Social Science Research Network
SOCIAL SECURITY, PENSIONS & RETIREMENT INCOME eJOURNAL "Retirement Annuity and Employment-Based Pension Income, Among Individuals Age 50 and Over: 2008" EBRI Notes, Vol. 31, No. 5, May 2010 KENNETH J. MCDONNELL, Employee Benefit Research Institute (EBRI) This paper looks at one slice of the income pie of the older population: retirement annuities and employment-based defined benefit (DB) pensions. It analyzes the population age 50 and over in order to take into account the prevalence of early retirement options available to individuals beginning at age 50. Recent data from the March 2009 Current Population Survey, conducted by the U.S. Census Bureau, confirm earlier findings that gender, marital status, age, education, and other demographic variables have a significant impact on the likelihood of a worker receiving a retirement annuity and/or employment-based pension income in retirement. There may also be a strong correlation between these same variables and the amount of pension income received from private and/or public-sector employment-based retirement plans. For example, in 2008, 27.7 percent of men age 50 and older with a graduate-level education received an annuity and/or pension income, compared with 19.3 percent of men without a high school diploma – a differential of 8.4 percentage points (see Figure 1). While notable, this differential in receipt of an annuity and/or pension income pales in comparison with the differential in the amounts these men received: In 2008, men with graduate-level degrees received 4.2 times the median annuity and/or pension income that was received by men without a high school diploma (calculated from Figure 1). Figure 1 also shows how age, education, marital status, and income are related to annuity and/or pension recipiency and to the amounts males received in 2008; Figure 2 shows the same data for females. "Shaping Private Pensions: Analyzing the Link Between Social Security and Retirement Adequacy" IRENE MUSSIO, Towers Watson Public pension schemes are most often discussed from a social welfare and public policy point of view. Nevertheless, the design of public pensions should also be taken into close consideration by companies planning and designing private pension plans for their employees. Social security and private pensions are both very important parts of retirement resources for the vast majority of the population and the adequacy of these resources thus depends not only on the generosity of social security but also on the financial commitment employers choose to make to private arrangements. "Public Sector Pensions: Rationale and International Experiences" Pension Corporation Research, June 2009 FRANK EICH, Pension Corporation This paper is about public sector pensions, an issue that has become increasingly contentious in a number of countries in recent years, including in the United Kingdom. In the UK the public debate has focused on the perceived generosity of these pensions, which, it is often claimed, contrasts with the pension promises made in the private sector. This paper does not attempt to answer whether public sector pension promises are relatively generous in the UK or elsewhere but instead aims to provide the bigger picture against which a discussion of public sector pension provision could be held. "The Shrinking Tax Preference for Pension Savings: An Analysis of Income Tax Changes, 1985-2007" GARY BURTLESS, Brookings Institution, Boston College - Retirement Research Center The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.
Email: MCDONNELL@EBRI.ORG
Current trends show that future retirees may not have a steady income stream in retirement. Fewer employees are participating in a DB plan, which, in the past, almost always paid benefits in the form of an annuity upon retirement. In today's work place, an increasing number of DB plans are offering a lump-sum distribution option at retirement. Also, increasing numbers of employees are participating in a defined contribution (DC) plan, primarily a 401(k) plan. This trend has had a positive impact, in that many workers who previously had no retirement plan at all now at least have access to a tax-favored plan. However, DC plans are far less likely to offer an annuity option to retirees than are DB plans.
The PDF for the above title, published in the May 2010 issue of EBRI Notes, also contains the full text of another May 2010 EBRI Notes article abstracted on SSRN: "Total Individual Account Retirement Plan Assets, by Demographics, 2007, With Market Adjustments to March 2010."
Email: irene.mussio@watsonwyatt.com
NATALIA GARABATO, Towers Watson
Email: natalia.garabato@watsonwyatt.com
In this sense, private pensions come to complement social security benefits and, in many cases, they are either explicitly or implicitly integrated with public provision. In many countries, private pension designers consider projected social security benefits and contributions when defining their overall benefit strategy. It is vital, nevertheless, that more employers take into account the specificities of first pillar pensions in each country so as to develop benefit packages that complement social security benefits effectively.
Accordingly, in the following paper we will examine and analyze social security systems across eight developed nations (Canada, France, Germany, Italy, Japan, Netherlands, UK and US). We have based our comparison on three key aspects: the generosity of state benefits; whether the focus rests on the insurance or redistributive role of social security; and the long term sustainability of public pensions. We will show that the way in which these aspects are defined and interact have different implications in terms of how companies plan and design the retirement benefits offered to employees.
Email: eich@pensioncorporation.com
The origin of today's public sector pensions can be traced back at least to Ancient Rome, which offered pensions to its military personnel. Pensions to public sector workers can also be traced back several centuries even though their provision remained on an ad-hoc basis for longer, while universal pension provision for all is a creation of the modern welfare state. The issue of public sector pensions is intrinsically linked to the role of the state in society. Beyond the provision of pure public goods such as defence, the role of the state varies widely across countries, for example in the provision (and funding) of health or long-term care. The role of the state has also changed over time, for example in the telecommunications sector, reflecting technological progress and ideological changes.
In most countries working for the state comes with a number of privileges (e.g. job security) but also with certain responsibilities (e.g. relinquishing the right to strike). An international comparison reveals that in a number of countries the state is also a special employer in the sense that it offers more generous pensions than the private sector. This is, however, not the case in all countries. The paper argues that the government might pursue a number of objectives going beyond poverty alleviation by offering more generous pensions but also stresses that more generally the objectives of efficiency, equity and sustainability remain desirable even in the context of public sector pensions.
Email: GBURTLESS@BROOK.EDU
ERIC J. TODER, Urban Institute
Email: etoder@urban.org
Wednesday, May 19, 2010
Who’s to blame for the public pensions crisis?
University of Illinois economist Jeffrey Brown writes that a little blame falls on everyone. Well worth checking out, including his responses to comments.
Tuesday, May 18, 2010
Charlie Crist: No False Solution Left Unproposed
I've criticized Florida Governor and now-Independent U.S. Senate candidate Charlie Crist for claiming that Social Security can be fixed not with tough choices like tax increases or benefit cuts but—wait for it!—by cutting "waste and fraud." The problem is that Social Security doesn't have a ton of either, and certainly not $15 trillion worth of it. But now the governor has a new solution: legalization of illegal immigrants. USA Today reports that Newly independent Florida Gov. Charlie Crist, who is running for Senate this year, has an idea to address two of the nation's most pressing political issues: Give illegal immigrants a chance to become citizens so they can pay into Social Security. "It's certainly worth a very good debate and research," Crist told the Associated Press. "If there are people here that aren't paying into the system, which everyone agrees there are, that's in essence a form of fraud on the system." Yet, as I've earlier pointed out, most illegal immigrants do pay into Social Security—they use a false Social Security number to get a job and Social Security payroll taxes are deducted from their paychecks. Recent estimates show about $9 billion annually flowing into Social Security from taxes by illegal workers. The thing illegals don't do is collect benefits; that tends to get you deported. So the situation is exactly the opposite of what Crist supposes: illegal immigrants aren't costing Social Security anything; in fact, they're subsidizing the program. And so-called "amnesty" for illegal's won't help Social Security's finances, it will increase the program's payout. I suppose that once all other options are exhausted, Crist will start thinking about real solutions to Social Security's problems. But Crist has shown himself to be a creative man, so I'm not sure he's run out of non-solutions just yet.
Wednesday, May 12, 2010
New SSA actuaries memo on Social Security surtaxes
You may recall that during the Presidential campaign then-Sen. Obama's main – actually, only – proposal to fix Social Security was to impose a surtax on high earners. He proposed a tax of 2 to 4 percent on earnings above $250,000, which would not generate additional benefits for individuals paying it. I wrote about the surtax in the Wall Street Journal (available here). Now SSA's Office of the Chief Actuary, at the request of Republican Reps. Sam Johnson, Kevin Brady and Paul Ryan, has released an analysis of a large number of iterations on that theme. From the memo: The provisions you requested, with subsequent modifications, would apply a total tax rate of 2, 3, or 4 percent for OASDI covered earnings of individuals that exceed annual earnings thresholds set at $200,000, $300,000, or $400,000 for 2017. For each provision, the threshold would be indexed after 2017 using the national average wage indexing series (AWI) in the same manner used to index the current contribution and benefit base (which is projected to be $140,400 for 2017 under the intermediate assumptions of the 2009 Trustees Report). For each provision, one half of the indicated tax rate would be payable by the employee and the other half by the employer. The memo also explores variations in which additional benefit are or are not paid upon these contributions. I think the closest variant to President Obama's proposal evaluation by the actuaries would be a 4 percent tax on earnings above $300,000 (it's not exact, as the Obama campaign wasn't clear whether it's specification of $250,000 was the nominal dollar figure over which it would apply taxes, or whether it was a current figure that would be inflation- or wage-indexed upward to the date of implementation). In any case, though, this variant would improve the 75-year actuarial balance by around 0.36 percentage points, equal to around 18 percent of the total deficit. This sounds about right, as at the time I found a similar tax on earnings above $250,000 (using the Policy Simulation Group's GEMINI model) would address around 14 percent of the shortfall. Obviously there are different variations that could be explored, but it seems clear we'll need a fair bit more than this kind of provision to put the program back on track. And there are other reasons I'm not so keen on this idea, outlined in the Wall Street Journal piece. But combined with some benefit reductions at the high end and an increase in the retirement age, you could get pretty close.
Tuesday, May 11, 2010
New paper: “Does Staying Healthy Reduce Your Lifetime Health Care Costs?”
The Center for Retirement Research at Boston College has released a new Issue in Brief: "Does Staying Healthy Reduce Your Lifetime Health Care Costs?" by Wei Sun, Anthony Webb, and Natalia Zhivan. The brief's key findings are: This brief is available here. Bloggers note: This is why health care reform is so complicated – even being healthy causes your health care costs to rise. Retirees in good health face higher lifetime health care costs than those in poor health.
Monday, May 10, 2010
Upcoming event: “A New Deal for Young Adults: Social Security Benefits for Post-Secondary School Students"
Join us on Friday, May 14, for the release of "A New Deal for Young Adults: Social Security Benefits for Post-Secondary School Students" Social Security is best known as the foundation of retirement security for older Americans. However, Social Security also provides benefits directly to millions of children under the age of 18 who have lost parental support because of death or disability. A new brief by Alexander Hertel-Fernandez examines the case for extending Social Security benefits until age 22 when children of deceased and disabled workers are enrolled in college or vocational school. Speakers Include: Event Details When: Friday, May 14, 2010, 10:00am-11:30am Where: H-137 Capitol Building, E Capital Street, NE & 1st Street, NE, Washington, DC Coffee and pastries provided. Copies of the brief will be available at the event. For additional information on this and other NASI events visit www.nasi.org.
in the U.S. Capitol Building.
(Use the Independence Avenue Entrance)
-If traveling by cab arrive at Independence Ave & 1st St SE-
Sunday, May 9, 2010
U.S. Not As Different From Greece As We’d Like To Think
From AEI's Enterprise Blog… USA Today editorializes that the "Greek debt crisis offers preview of what awaits U.S." if we allow deficits, debt, and entitlement costs to continue to rise. And of course that's right: our situation is not qualitatively different from that of Greece, Spain, Portugal, and other countries. It's just quantitatively different: our spending, deficits, and debt are rising just as theirs are, but we're merely starting from a lower level. But this quantitative difference isn't quite as large as USA Today thinks. For instance, the editors say To be sure, there are huge differences between Greece and the United States. Here, the federal government represents about 20% of the U.S. economy, whereas the Greek government is about 40% of its economy. This looks like Greece is spending twice as much relative to the size of the economy as the U.S. government. But that ignores the fact that the United States has a more decentralized government structure such that much of our spending—and borrowing—takes place at the state level. Comparing national-level government spending doesn't show the whole picture. According to the Organization for Economic Cooperation and Development, as of 2008 total government expenditures in Greece were 44.8 percent of GDP, while in the United States they were 36.4 percent of GDP. A difference, yes, but we're far closer to Greece's spending levels than we'd like to think—and, thanks to the baby boomers' retirements and rising health costs, we're looking to close the gap. A similar story can be told with regard to debt, where states heavily burdened with borrowing and, as I've shown, massive unfunded public-sector pension liabilities, may eventually need to turn to the federal government for help. Fiscal crises in Europe might make the United States look better on a temporary basis if a financial panic forces a flight to the dollar. But longer term we're all in the same boat, and it's taking on water.
Thursday, May 6, 2010
Upcoming event: “Social Security: A Fresh Look at Policy Alternatives”
On Thursday, May 27, 2010 at noon The Cato Institute will hold a Book Forum on Social Security: A Fresh Look at Policy Alternatives There are widespread fears about Social Security's long-term solvency, and it appears quite likely that the Bipartisan Fiscal Commission will recommend Social Security reforms. But the government projects Social Security's future finances using long-outdated methods that fail to consider key features of ongoing demographic and economic change. Employing a more up-to-date approach, Jagadeesh Gokhale argues in his new book that the program faces insolvency far sooner than previously thought. Gokhale will describe key features from his analysis of forces shaping American demographics and the economy—and their implications for the future of Social Security—under current policies and under several prominent Social Security reform proposals. His evaluation will reveal how far different approaches would restore the program's financial health and which population groups would gain or lose in the process. Arguments over Social Security have taken place in a relative information vacuum; Gokhale will argue that the methods and measures employed in his new book are necessary to make meaningful progress in the Social Security reform debate. Cato Book Forums and luncheons are free of charge.
(University of Chicago Press, 2010) featuring the author, Jagadeesh Gokhale of the Cato Institute, with comments by Andrew Biggs (American Enterprise Institute) and Eugene Steuerle (Urban Institute).
To register, visit www.cato.org, fax (202) 371-0841,
or call (202) 789-5229 by noon, Wednesday, May 26.
News media inquiries only (no registrations), please call (202) 789-5200.
If you can't make it to the Cato Institute, watch this Forum live online at www.cato.org
Savings and Retirement Forum, May 11: “Banking the Underbanked: A Case Study.”
On Tuesday, May 11, 2010, the Savings and Retirement Forum will be held at the Heritage Foundation at 8:30am. Vice President and Community Education Administrator Ammar Askari, Ph.D., with M&I Marshall & Ilsley Bank will present his paper "Banking the Underbanked: A Case Study." 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. Our website, www.savingsandretirement.org contains the dates of future meetings, links to relevant papers, and a few miscellaneous links that people doing research on these issues may find useful.
New papers from the Social Science Research Network
SOCIAL SECURITY, PENSIONS & RETIREMENT INCOME eJOURNAL CRR (Boston College Center for Retirement Research) WP 2010‐2 SELAHATTIN IMROHOROGLU, University of Southern California - Department of Finance and Business Economics We build a general equilibrium model with endogenous saving, labor force participation, work hours and Social Security benefit claiming, in which overlapping generations of individuals face income, survival, and health expenditure risks in incomplete markets. We use the model to study the impact of three Social Security reforms: reductions in benefits and payroll taxes, an increase in the early retirement age from 62 to 64, and an increase in the normal retirement age from 66 to 68. We show that a reform can have a significant effect on the budget of Social Security through changes in savings as well as benefit claiming and labor force participation. When the projected aging of the population is taken into account, the case for a reform that encourages labor force participation of the elderly becomes stronger. DR. AMARENDRA SWARUP, Pension Corporation This paper focuses on an issue, which so far has received relatively little attention by policy makers and the media, namely that the economic crisis has highlighted inherent weaknesses in existing pension systems in many countries. "Getting to the Top of Mind: How Reminders Increase Saving" DEAN S. KARLAN, Yale University - Economic Growth Center, Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab, Center for Global Development We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with other models of present-bias. Our model also generates the unique predictions that reminders will increase saving, and that a reminder that makes a specific expenditure more salient will be especially effective. We find support for these predictions in three field experiments that randomly assign reminders to new savings account holders.
Email: selo@marshall.usc.edu
SAGIRI KITAO, Federal Reserve Banks - Federal Reserve Bank of New York
Email: sagiri.kitao@gmail.com
Email: swarup@pensioncorporation.com
FRANK EICH, Pension Corporation
Email: eich@pensioncorporation.com
Using the example of the UK, the paper argues that the economic crisis will usher in further changes to the future provision of pensions, with the role of the private and public sectors likely to evolve in the years ahead. To support this argument, the paper first presents the pension landscape in the UK prior to the crisis, which was dominated by the closure of defined benefit pension schemes in the private sector and the government's reform efforts. The paper then describes the impact of the economic crisis from both a macroeconomic and financial perspective on all aspects of the pension system, from the government's deteriorating public finances to the collapsing funding position of occupational defined-benefit and defined-contribution schemes. The paper concludes by suggesting that the crisis has left the British pension system in a weakened state and that it is unlikely that it will return to its "pre-crisis" status once the economy recovers from the crisis.
Email: dean.karlan@yale.edu
MARGARET MCCONNELL, Harvard University
Email: mmcconne@hsph.harvard.edu
SENDHIL MULLAINATHAN, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)
Email: mullain@fas.harvard.edu
JONATHAN ZINMAN, Dartmouth College, Innovations for Poverty Action; Jameel Poverty Action Lab
Email: jzinman@dartmouth.edu
Wednesday, May 5, 2010
Did falling Social Security benefits generate higher labor force participation?
I spotted this story yesterday, reporting on a new study by David Blau of Ohio State and Ryan Goodstein of the Federal Deposit Insurance Corporation that argues that the decline in Social Security benefits – driven by increases in the Full Retirement Age from 65 to 66 – was a big part of why we've seen a rebound in labor force participation by men in recent years. The study concludes: Since the early 1980s, Social Security rule changes have favored increased LFP. The rise in the [Delayed Retirement Credit] and the [Full Retirement Age] are estimated to account for one quarter to one half of the increase in LFP of older men since the 1980s. This amounts to a 1.2 to 2.4 percentage point increase in the LFPR of men aged 55-69. Rising LFP of married women and changes in the educational composition of the older male population contributed to the increase as well. I'll admit I haven't read the study carefully yet, so these are my initial thoughts, which may well be wrong: I'm not sure why an increase in the DRC, which raises benefits for those who delay claiming after the Full Retirement Age, would necessarily increase labor force participation since there is no long a retirement earnings test for individuals beyond the FRA who claim benefits while continuing to work. It might, to the degree that claiming benefits and leaving the workforce are treated as a joint decision, but if they are treated separately then it may not. I'm also not convinced most people have any idea how delayed retirement credits work, which obviously would mute any response. An increase in the Full Retirement Age can raise labor force participation in two ways. Directly, a rise in the retirement age is effectively a reduction in benefits, and if benefits are reduced people will tend to work a little longer to make up the difference. (That's one reason why I favor solvency based on reduced benefits rather than higher taxes, which would tend to encourage people to work a little less.) But second, the FRA acts as a signal that many will treat as the "correct" time to retire. As the retirement age increases, people's claiming behavior appears to rise as well. This paper by my former SSA colleagues Joyce Manchester and Jae Song covers some similar ground and is worth checking out.
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