Tuesday, August 31, 2010

New CRR issue brief: "Problems with State-Local Final Pay Plans and Options for Reform"

The Center for Retirement Research at Boston College has a released a new issue in brief, "Problems with State-Local Final Pay Plans and Options for Reform" by Peter A. Diamond, Alicia H. Munnell, Gregory Leiserson, and Jean-Pierre Aubry.

The brief's key findings are: 

  • Defined benefit plans based on final pay: 
    • "backload" benefits, so younger shorter-service employees get virtually nothing;
    • favor those with high earnings growth, who tend to be higher paid; and
    • invite sudden late-career "spikes" in earnings.  
  • Moving to career-average earnings would:
    • provide reasonable benefits for younger shorter-service employees;
    • treat high- and low-paid employees more equitably; and
    • avoid late-career "spikes" in earnings.

The brief is available here

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WSJ: Obama’s Social Security Bait and Switch

The Wall Street Journal opines this morning on which President Obama will show up regarding Social Security reform: the one – sorry, The One – who wants reform to happen even if it takes cajoling his own party, or the one who'll wield Social Security as a last-gasp club to hold off electoral disaster in the fall?

On the one hand, Mr. Obama has charged his deficit commission with crafting a bipartisan plan to restrain entitlements. "Everything's on the table. That's how this thing's going to work," he said when he created the commission in February. "We now have to, in a gradual way, reduce spending, particularly on those big ticket items" like Social Security, he later added in Racine, Wisconsin. "That's going to be our project for the next couple years."

Yet even as Mr. Obama beseeches Republicans, he and his political allies are playing the Social Security card for all it's worth in this campaign season. This has all the earmarks of a political bait and switch designed to ambush Republicans if they're gullible enough to believe his bipartisan pleas.

Check it out here.

As I've argued previously, the administration has to make a choice. They can't expect Republican cooperation on Social Security reform after the election if they treat the issue cynically before the election.

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Monday, August 30, 2010

More on personal accounts with Mike Tanner

Cato's Mike Tanner followed up my NRO piece with a post on The Corner, National Review's house blog. I've got a response at the Enterprise Blog. Hopefully good reading.

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Should conservatives keep promoting Social Security personal accounts?

Over at National Review, my basic answer is a reluctant no; I don't think the policy benefits equal the political capital needed to accomplish them. On balance, a better approach is to balance Social Security's solvency on the benefit side, then push for universal savings accounts on top of Social Security.

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Friday, August 27, 2010

Who would you believe about the Social Security trust fund?

Your Congressman or the Congressional Budget Office? I know who I'd believe. Over at AEI's Enterprise blog.

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Thursday, August 26, 2010

Debating Nancy Altman on Social Security reform

A friendly debate, though, courtesy of New Hampshire Public Radio. It's nice to be on a program with no yelling and plenty of time to answer a question.

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Alan Simpson and Tits-gate

Over at AEI's Enterprise blog…

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Monday, August 23, 2010

Can Obama get Social Security reform after the election if he demagogues the issue today?

Time Magazine's Mark Halperin writes on the dilemma facing President Obama: the economy stinks, the Democratic party's poll ratings are in the toilet and they face an election in less than three months. Desperate times demand desperate actions, in this case traditional scare tactics that voting Republican will mean the end of Social Security.

The problem for Obama, of course, is that the budget is also in terrible shape and not looking to get much better on its own. He needs a big achievement on that end to restore faith in federal finances and he needs Republicans to get there. Even the left acknowledges that Obama seems to want a deal on Social Security reform after his fiscal commission reports at the end of the year.

The question is whether Obama can cut that Social Security deal after the election if he demagogues the issue before the election. I doubt it. Republicans would like to do something on Social Security and the terms the commission seem to be discussing – mostly benefit reductions and increases in the retirement age, though tax increases loom as well – are better than you could generally expect.

But Republicans aren't particularly invested in President Obama's success, to say the least, and at the personal level I can't see why GOP members of the commission would feel particularly compelled to strike a deal if they feel the President handled the issue poorly in the period leading up to November. The personal plays into the political, and the President should understand that he's going to need personal trust on both sides to make reform work.

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Saturday, August 21, 2010

Atlantic Magazine Interview on Social Security Reform

I'm interviewed by the Atlantic's Derek Thompson regarding what the fiscal commission might propose on Social Security reform. Check it out here.

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Monday, August 16, 2010

The LA Times on Social Security reform

The editors say: "There are no pain-free approaches. But changing demographics mean that the longer Congress waits, the more difficult it will be to deal with the problem."

I don't agree with everything they say, but it's a good article.

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"Nobody has a clue how to fix Medicare," he said, but "Social Security is fixable."

That he is me, in an overall good story on Social Security reform by Andrea Stone at AOL News.

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Wednesday, August 11, 2010

Washington Post: Take Social Security reform seriously

The release of the annual Social Security Trustees Report has coincided with a cross country drive – current location: Salt Lake City – so I've been a bit short on postings and comment. The short story is that not a lot has changed, except for the assumption that the health reform bill will bring some extra revenue into the program, enough to lower the long-term deficit from 2.00 percent of payroll to 1.92 percent. In the long term, I believe the health plan would raise Social Security taxes by around 8 percent.

Here's the reason: the health legislation imposes an excise tax on so-called "Cadillac" health care plans. But both the CBO and Social Security 's actuaries assume that in most cases, employers offering such plans will reduce their generosity to avoid the tax. But since health coverage is part of people's total compensation, a competitive labor market means that less expensive health coverage will tend to result in higher wages. That will keep total compensation around the same as before. Higher wages means more payroll taxes, which means more money coming into the system. That's the long and short of it. I don't disagree with this analysis, but there's also some uncertainty about it.

Today, the Washington Post responds to the Trustees Report, and in particular those who take it to mean there's no real problem or that we should solve that problem in only one way: raise taxes.

We would prefer a more balanced solution, one that relies on a combination of revenue increases and benefit adjustments. On the revenue side, it's essential that the funding source come from within the Social Security system itself. The coalition is correct that Social Security should not be used to deal with deficit problems outside the program, but the converse is also true: Getting Social Security on a sustainable footing should not add to the deficit. Raising the payroll tax ceiling to cover the same share of wages that it did in 1983 would make sense, but that would only solve about one-third of the long-term problem. Some adjustments on the benefits side, particularly making benefits less generous for the highest-income recipients, would also make sense.

To be continued…

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Thursday, August 5, 2010

Graham: Galbraith Social Security plan would create “mother of all notches”

Investor's Business Daily's Jed Graham comments on a proposal by economist James Galbraith to temporarily allow workers below the full retirement age of 66 to claim Social Security benefits without any penalty for early retirement. As Graham points out, this would imply a massive increase in lifetime benefits for eligible individuals – and a bit discontinuity for people who retired afterwards. Check it out here.

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Upcoming event: “What’s the News in the 2010 Social Security Trustees Report?”

The National Academy of Social Insurance will be himself an event discussing the release of the 2010 Social Security Trustees Report

What's the News in the 2010 Social Security Trustees Report?
When: 10:00am-11:30am, Monday, August 9, 2010
Where: B 318 Rayburn House Office Building, Washington, DC


  • Stephen C. Goss, Chief Actuary, SSA;
  • Virginia P. Reno, Vice President for Income Security, NASI; and
  • Lisa Mensah (moderator), Executive Director, Initiative on Financial Security, The Aspen Institute

Click here to register for the briefing What's the News in the 2010 Social Security Trustees Report?

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New paper: “Pension Participation and Uncovered Workers”

The Center for Retirement Research at Boston College has released a new Issue in Brief: "Pension Participation and Uncovered Workers" by Nadia Karamcheva and Geoffrey Sanzenbacher

 The brief's key findings are:

  • The Obama Administration has proposed "Auto-IRAs" to boost pension coverage among those not currently offered a plan.
  • Such a policy is seen to offer great potential, given that 60 percent of low-income workers currently offered a 401(k) choose to participate.
  • However, these low-income workers with 401(k)s are different from their counterparts at firms that do not offer 401(k)s.
  • Taking this difference into account, take-up among low-income workers could be as low as one third.

The brief is available here.

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Earnings, Not Lack of Social Security, Increased Past Poverty

In an otherwise unremarkable article in the Huffington Post, Edwin D. Hill gives Social Security a little more credit than it is due. Hill, the International President of the International Brotherhood of Electrical Workers (note to self: ask for a title like that at next annual review) says, "In the years before Social Security more than half of the elderly were impoverished." He implies that Social Security fixed all that.

But the real reason that half of the elderly lived in poverty before Social Security was that about half of everyone lived in poverty then, for the simple reason that the country was a heck of a lot poorer than it is today. Currently, the average annual wage is around $43,000. In 1935, the average annual wage in inflation-adjusted terms was around $15,000. Remembering that most households of the 1930s were single-earner and most had kids, the poverty threshold for a family of four in today's dollars is around $20,000. Tripling real average earnings can do a lot to reduce poverty.

Similarly, one of the Left's favorite factoids is that without Social Security, half of all seniors today would live in poverty. This makes it seem as if the fall in elderly poverty rates from 1935 to today was purely a function of Social Security benefit payments.

What they really mean to say, of course, is "without Social Security benefits, but with Social Security taxes." In other words, if we taxed 12.4 percent of Americans' earnings all their lives and paid them nothing in return, yes, poverty would increase. But in the absence of Social Security as a whole—benefits and taxes—Americans would have more income to save and most would save reasonably responsibly for retirement. (See here for some evidence.) Yes, many are pulled out of poverty either by Social Security's progressivity or by the simple fact that without a requirement to save they wouldn't do so on their own. But these are a minority.

The important point is that over the long term it's not Social Security or other programs that lift people out of poverty or otherwise give them better lives. It's the growth of the economy, which lifts earnings and standards of living. As we think about potential reforms to Social Security, some of which could present disincentives for people to work and contribute to the economy, we should consider the role of rising incomes in healing social ills.

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Monday, August 2, 2010

New York Times: “Social Security Jitters? Better Prepare Now”

The New York Times
reports on how individuals can prepare for uncertainty regarding Social Security's financial future:

"…while lawmakers may, in the end, not decide to make drastic changes in Social Security, many of the financial advisers and other experts we talked to said they were erring on the side of caution and were already recommending that their clients start saving more now. "People 50 and below should change their planning now to incorporate a benefit cut," said Laurence J. Kotlikoff, an economics professor at Boston University who ran some numbers for us to see what life would be like if the retirement age were immediately raised to 70. That change would translate into a nearly 20 percent cut in benefits, because you would have to wait an extra three years to get the same amount of money, he added.

Several financial planners told us they were assuming that clients in their 30s and 40s might receive just 50 to 80 percent of their full benefits. Or, the advisers say, they may figure that the cost-of-living adjustments applied to benefits won't keep pace with inflation, or some other combination of adjustments.

One of the (many) problems with delaying a fix for Social Security is that it needlessly complicates the retirement planning of millions of Americans, who don't know how the inevitable changes to Social Security's taxes and benefits will affect them. Fixing the program today isn't merely the most economically efficient way to do it, as it spreads changes over as many people as possible, it's also just plain fairer to tell people what's going to happen to them.


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LA Times: “A 27-year-old's common-sense reform ideas”…are what, exactly?

The LA Times today prints an op-ed from Sam Gill, a DC-based consultant to groups working on retirement issues, discussing what the Times calls "A 27-year-old's common-sense reform ideas." None of his suggestions – better informing younger workers regarding disability and survivors benefits; increasing the age limit on students receiving survivors benefits; educating younger people about personal saving for retirement, and potentially administering savings accounts – are terrible ideas.

But there's almost no mention of – you know, what do they call it? That thing... – oh, the fact that Social Security is over $5 trillion short of what it needs to pay the benefits it promises. In other words, to the degree that "reform" implies at least some effort to fix the program we have before expanding it, there are no real reform ideas in the piece, common-sense or otherwise.

If Gill were simply a randomly-chosen 27-year old I wouldn't particularly care. But, as Gill's more politically-oriented piece in the Huffington Post shows, his views on Social Security reform are more or less on par with the rest of the left: ignore the problem, don't propose any real funding solutions, then hope to raise taxes at some point. That's fine, at least in an abstract sense, but it seems to me that if you're proposing to expand the program you should also propose how to pay for it.

Moreover, while the public may support raising taxes to increase benefits – raising others people's taxes, for the most part – when Social Security is put into the context of the overall federal budget it pretty quickly becomes clear there are limits on how much you can tax high earners. If people want to raise Social Security benefits for certain groups – which I support – they should probably fund it by reducing costs elsewhere in the system.

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C-SPAN video for National Chamber Foundation event on public pension reform

On Friday I spoke at an event sponsored by the National Chamber Foundation on prospects for a federal bailout of state employee pension funds, which are significantly underfunded. Unfortunately I can't embed the video, but it's available online at C-SPAN here. It was a good event.

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Gokhale dismantles MoveOn’s “myths of Social Security”…

…so I don't have to. Jagadeesh Gokhale of the Cato Institute does a good job of showing how much of what MoveOn.org claims are "myths" about Social Security are, well, actually pretty much true. Some of the other myths seem to be things people on the right don't actually claim, such as that Social Security can "only" be fixed by cutting benefits. You could fix it exclusively by raising taxes, it's just that most on the right think it's not a particularly good idea.

Well worth checking out, here.

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CBO: Federal Debt and the Risk of a Financial Crisis

The Congressional Budget Office has released a new analysis of how rising federal debt could trigger a financial crisis and what the repercussions of such a crisis might be:

"[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors' confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries' experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply."

The whole paper is a good primer on where the federal budget is going and what it might mean.

I wrote on these issues last year for The American, AEI's online magazine:

Who do you think is more reliable—the full faith and credit of the United States backing up Treasury bonds, or the McDonald's Corporation, backed only by "billions and billions served"? By some market measures it is the latter, and for good reason. The price of credit defaults swaps guaranteeing payment on 10-year Treasury bonds has risen by 1000 percent since December 2007, with an implied 12 percent probability of default on government debt over the next decade, according to data from Credit Market Analysis. In the view of the markets, this makes U.S. government bonds a more risky proposition than debt issued by McDonald's.

Why? Trillion dollar annual short-term budget deficits due to the recession and financial crisis will soon merge with even larger deficits generated by government entitlement programs like Social Security, Medicare, and Medicaid. While a large short-term deficit to stimulate the economy can be absorbed, large deficits running for decades simply cannot be. Over the next decade, the combined costs of the big three entitlement programs will rise by 2.1 percent of gross domestic product; over the following decade, entitlement costs will increase by an additional 3.1 percent of GDP, with costs continuing to grow thereafter.

I haven't seen much in the past year that would give me much faith that we're going to get on top of this problem anytime soon.

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