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.

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Monday, November 1, 2010

Are seniors being cheated?

Over at AEI's Enterprise Blog…

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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



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