Tuesday, September 28, 2010

Social Security Advisory Board Announces 2011 Technical Panel on Assumptions and Methods


For those of us in the wonkish set, this is important and interesting stuff. The 'tech panel' is appointed every four years to examine how the Social Security actuaries and Trustees make their projections for the system's finances. The Advisory Board appointed a good group of folks this year, so I'm hopeful they can make a solid contribution.


Social Security Advisory Board Announces 2011 Technical Panel on Assumptions and Methods

The Social Security Advisory Board, is pleased to announce that the Board has appointed an expert panel of economists, demographers and actuaries to review the assumptions and methods used by the Trustees of the Social Security Trust Funds in their annual reports on the long-term finances of the Social Security system. The Board previously convened technical panels in 1999, 2003 and 2007. Copies of past reports are available on publications page of the SSAB website.

The 2011 Technical Panel on Assumptions and Methods will be chaired by Brigitte Madrian, the Aetna Professor of Public Policy and Corporate Management at John F. Kennedy School of Government at Harvard University.  The other distinguished members of the panel include: Janet Barr, associate actuary at Milliman USA, and chair of the American Academy of Actuaries' Social Insurance Committee; John Bongaarts, Vice-president and Distinguished Scholar at the  Population Council; Mark Duggan, Professor of Economics at the University of Maryland; Melissa Favreault, Senior Research Associate at the Urban Institute; Timothy Marnell, consulting actuary and formerly a Senior Actuary at Towers Perrin; S. Philip Morgan, Professor of Sociology and Schaeffer Professor of International Studies at Duke University; John Sabelhaus, Senior Economist at the Investment Company Institute and adjunct in the Department of Economics at the University of Maryland; Andrew Samwick, Irving Professor of Economics and the Director of the Nelson A. Rockefeller Center for Public Policy and the Social Sciences at Dartmouth College; and Karen Woodrow-Lafield,  Research Professor and Faculty Associate in the Maryland Population Research Center at the University of Maryland.  The Technical Panel will meet in Washington D.C. from October 2010 to June of 2011 and make its final report shortly thereafter.

The Social Security Advisory Board believes the future of Social Security system is one of the most important issues that policymakers will have to confront in the coming years. It is critical, therefore, that the Nation have the best advice available regarding the projection of the factors that will affect the system's financing over the long-term. The Board is confident the distinguished members of the 2011 panel, like those before them, will make major contributions to the work of the Board of Trustees and the Social Security actuaries. 


The panel's first public meeting will be held on October 1, 2010 from 10:00am to 5:30pm at the Social Security Advisory Board offices at 400 Virginia Ave S.W., Suite 625, Washington, DC.

The agenda for the October 1 meeting can be found here. Because space is limited, those wishing to attend should contact Joel Feinleib on the Social Security Advisory Board staff: joel.feinleib@ssab.gov or 202-475-7700

Check the SSAB website for the date of future meetings. Meeting agendas will be available approximately one week before the meeting date. The panel is tentatively scheduled to meet on the following dates: November 5-6, 2010; December 13-14, 2010; January 28-29, 2011; February 25-26, 2011; April 8-9, 2011; May 6-7, 2011; June 3-4, 2011

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Friday, September 24, 2010

New papers from the Social Science Research Network


"Pensioners in the German Social Security System: Payments of Contribution and Benefits" 

MEA Discussion Paper No. 203-10

MARTIN GASCHE, University of Mannheim - Mannheim Research Institute for the Economics of Aging (MEA)
Email: gasche@mea.uni-mannheim.de

Pensioners receive pension payments as well as health insurance and nursing insurance benefits. But pensioners are also contributors to the health and nursing insurance. So the pensioners fund part of the expenditures they cause by themselves. This study takes a closer look at the different pensions (old-age pension, disability pension and widow and widower pension) and their characteristics such as the age distribution of pension recipients, the income structure or the income distribution. The social security contributions and the expenditures of the social insurance for pensioners will be determined age-specific and sex-specific. It can be stated that the contributions of the pensioners to the statutory health insurance are not sufficient to cover the caused expenditures starting at the age of 45 on average. Comparing the sum of contributions with the sum of expenditures leads to the conclusion that pensioners' contributions cover 44% of the expenditures of the statutory health insurance and 27% of the expenditures of the long term care insurance.

"Social Security Research at the Michigan Retirement Research Center" 

Social Security Bulletin, Vol. 69, No. 4, pp. 51-64, 2009

RICHARD V. BURKHAUSER, Cornell University - Department of Policy Analysis & Management (PAM), Syracuse University - Center for Policy Research
Email: rvb1@cornell.edu
ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
JOHN LAITNER, University of Michigan at Ann Arbor - Department of Economics
Email: jlaitner@umich.edu
OLIVIA S. MITCHELL, University of Pennsylvania - Insurance & Risk Management Department, National Bureau of Economic Research (NBER)
Email: mitchelo@wharton.upenn.edu
AMANDA SONNEGA, University of Michigan at Ann Arbor - Michigan Retirement Research Center (MRRC)
Email: asonnega@umich.edu

The Office of Retirement and Disability Policy at the Social Security Administration created the Retirement Research Consortium in 1998 to encourage research on topics related to Social Security and the well-being of older Americans, and to foster communication between the academic and policy communities. The Michigan Retirement Research Center (MRRC) has participated in the Consortium since its inception. This article surveys a selection of the MRRC's output over its first 10 years and highlights several themes in the Center's ongoing research.

"Performance Measurement of Empirical and Theoretical Pension Investment Strategies" 

AGNIESZKA KAROLINA KONICZ, Festina Lente, University of Copenhagen - Laboratory of Actuarial Mathematics
Email: aga@festina-lente.com

This thesis deals with both the pension products offered by Danish pension providers and optimal saving contracts under various optimization criteria. Its approach is to analyse the investment strategies defining a given product, compare them with each other and suggest the best product given a pension saver's preferences. We develop a performance measurement methodology, which allows us to compare the products with different risks. Numerical results are obtained through a number of simulation studies. We consider pure unit-linked products, with-profit unit-linked products, mean-variance optimal strategies with pre-commitment and constant proportion portfolio insurance (CPPI) strategies with a terminal floor.

"Fair Demographic Risk Sharing in Defined Contribution Pension Systems" 

DANIEL GABAY, affiliation not provided to SSRN
Email: danielgabay@yahoo.com
MARTINO GRASSELLI, University of Padua, Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV)
Email: grassell@math.unipd.it

In this article we relax the typical stationarity assumption on the population participating in a Defined Contribution pension scheme. We describe the demography with a general non stationary stochastic entry process and solve the problem of a social planner who aims at designing a fair (lump sum) pension contract including a minimum guaranteed benefit to the retirees of overlapping generations by smoothing the demographic fluctuations. Introducing the possibility to invest in a complete financial market, we solve the social planner (non Markovian delayed) stochastic optimization problem by duality and exhibit under which conditions the collective pension scheme can provide an additional benefit to its participants with respect to individual investment plans, even when investment opportunities are the same for the individuals and for the fund manager. This condition involves a coupling of demographic and market processes and leads to a comparison between past trajectories and future expectations.

"Adjusting Social Security for Increasing Life Expectancy: Effects on Progressivity" 

CRR (Center for Retirement Research) WP 2010-09

COURTNEY S. MONK, University of Oxford
Email: courtney.monk@economics.ox.ac.uk
JOHN A. TURNER, affiliation not provided to SSRN
Email: turnerjilo@aol.com
NATALIA ZHIVAN, Boston College - Center for Retirement Research
Email: natalia.jivan.1@bc.edu

Achieving long-run Social Security solvency requires addressing rising life expectancy. Increasing the Full Retirement Age (FRA), while holding the Early Entitlement Age (EEA) fixed, could be effective but eventually will result in replacement rates that are viewed by many as too low. A possible policy to prop up replacement rates is to raise the EEA, which has been age 62 for more than 40 years. However, an increase in the EEA introduces unfairness because the variation in life expectancy across socioeconomic groups is positively correlated with lifetime income. Using data from the Health and Retirement Study to investigate how earnings relate to mortality risk and health limitations, this project explores the possibility of constructing a flexible FRA that could preserve or even enhance the progressivity of Social Security benefits. If life expectancy were correlated with lifetime income, Social Security policy could use the AIME (Average Indexed Monthly Earnings) to target policies that are more equitable for people with both lower lifetime income and lower life expectancy. Unfortunately, we find that while life expectancy is strongly correlated with AIME for men, it is only weakly correlated for women, and when pooling the genders the correlation disappears. We then investigate whether targeting could be done by the max AIME, which is the AIME for single persons and the maximum of the husband's or wife's AIME for married couples. We find that the max AIME, which is a household measure of lifetime income, could be used for constructing a flexible FRA because it is negatively correlated with mortality risk and also negatively correlated with other measures of economic vulnerability or inability to work at older ages. With a flexible FRA, individuals in households with a low max AIME would have a lower FRA than other individuals.

"Social Security Policy Rejuvenation through Accelerated Growth in the Micro-Insurance Industry" 

BAMBANG HERMANTO, University of Indonesia
Email: bhermanto78@gmail.com
ALI SYED, affiliation not provided to SSRN
Email: alisyed200@gmail.com
RATNA DERINA, affiliation not provided to SSRN
Email: ratna.derina@adelaide.edu.au
ANNA AMALYAH AGUS, affiliation not provided to SSRN
Email: anna.agus@gmail.com
SIGIT S. WIBOWO, University of Indonesia - Management
Email: sigit.sw@ui.ac.id

The Indonesian workforce is dominated by workers in the informal sector, complicating the task of providing social security to workers nation-wide. The vast majority of these people have neither a plan to fund their retirement, nor income, health or life insurance coverage to protect them. From the year 2030, the Indonesian population will, collectively, be an aging one. This policy paper addresses the urgent need to begin post-retirement planning for the informal workforce. The Indonesian government has passed a law(No.40/2004) on social security, but fulfilling the aim of universal pension scheme coverage remains a distant goal. The International Labour Organisation (ILO) has identified microinsurance schemes as a viable solution for workers not covered by state social security. A number of pilot microinsurance projects have been undertaken by private insurance companies in Indonesia already. Although promising, challenges to expanding these projects remain. On the supply side, the highly dispersed distribution of informal workers creates economy of scale barriers for insurance companies in marketing products and providing services. Meanwhile, informal workers are often wary of insurance, put off by issues of trust, affordability or non comprehension. The authors argue that mobilising social networks can overcome the supply side issues, while improving financial literacy of the informal sector can help reduce perceptions of product complexity. Overcoming these barriers will require a coordinated approach involving insurance companies, central and local governments, industry associations, and the local social organisations.

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Are public sector employees underpaid?

I have a long article in the American Spectator looking at public-private pay comparisons for both federal and state/local employees, co-authored with Jason Richwine. From a research standpoint, what's interesting is that it's pretty easy to come to an answer regarding federal employees but a lot trickier on the state/local end. Check it out here.

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Thursday, September 23, 2010

Crist argues for legalization of immigrants as way to help Social Security

Florida Gov. Charlie Crist has announced his Social Security plan: legalizing illegal immigrants as a way to get them to pay into the program:

``There are other ways we can help fund it, by creating a pathway to citizenship. Secure the border, make sure we have a pathway that is earned -- no amnesty -- and if we have those 11 to 14 million people productively participating in the American economy and paying the payroll taxes that would be attended to it, that would help Social Security.''

As I've pointed out elsewhere, of course, most of those 11 to 14 million people are already paying into Social Security, as they use false Social Security numbers to get jobs. But since they're illegal, they can't collect benefits. That's good for Social Security, adding around $12 billion in revenues each year.

But if those folks become legal, they can collect benefits on those contributions – including, I believe, contributions made before they were legalized – which would worsen Social Security's finances.

The differences aren't huge – five or six years on the trust fund, for what that's worth – but you'd at least like your plan to fix Social Security to push things in the right directin rather than the wrong one.

Read more!

Wednesday, September 22, 2010

Can Budget Offices Help Us Address Demographic Pressure?

As part of his series "The Government We Deserve" the Urban Institute's Gene Steuerle asks "Can Budget Offices Help Us Address Demographic Pressure?"

As pressures mount on the nation's long-term budget, the Congressional Budget Office now views the aging of the population as the main stressor and health care costs as a close second. Yet, CBO and the Office of Management and Budget (OMB) have traditionally offered only limited analysis and estimates on addressing these demographic concerns, often leaving them to the Social Security Administration, which focuses only on the Social Security piece of the budget puzzle.

Accordingly, when groups like the president's budget commission meet, they get too few options on how government might adjust to the two distinct forces mistakenly put under a single "aging" banner: (1) longer lives and (2) fewer children (new workers) than previous generations. For better and often worse, reform groups frequently stack up reforms by their budget impact. But where there's no estimate, there's no political traction and, alas, no action.

If we want real budget reform, we need to get over this hurdle.

Click here to read how.

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Tuesday, September 21, 2010

Is Social Security Your Best Investment?

US News & World Report on why you may want to draw down your 401(k) first in order to delay claiming Social Security benefits. I don't know whether this makes Social Security your best overall investment, but the annuity-like nature of payments certainly makes it your best end-of-life investment. By relying on personal savings first, you can delay claiming and end up with a much larger benefit in old age.

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Monday, September 20, 2010

Social Security Disability – “America’s Hidden Welfare Program”

Over at Slate.com, James Ledbetter writes about Social Security Disability Insurance – "America's Hidden Welfare Program." Ledbetter obviously comes at it as someone with some skepticism about the rising number of disabled in recent decades, but he makes a lot of good points.

He also mentions a reform plan in the works from MIT economist David Autor, who has done some great analytical work on the program. It will be interesting to see what he comes up with. Check it out here.

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Thursday, September 16, 2010

New paper: “What Every American Needs to Know about Government-Entitlement Reform”

I have a new paper in AEI's Retirement Policy Outlook series, titled "What Every American Needs to Know about Government-Entitlement Reform." I don't claim it's everything you need to know, but in it I try to outline the basic issues facing Social Security, Medicare and Medicaid and the basic steps we might take to address them. Check it out here.

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Pay-as-you-go makes government grow, grow, grow

Over at The American
I conjecture on that the size and growth of government program is attributable in part to how those programs are financed. Compared to "pay-as-you-go" financed entitlement programs, which allow politicians to promise benefits today while leaving the paying part to future taxpayers, fully funded programs would provide better incentives to balance costs and benefits.

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Monday, September 13, 2010

Upcoming event: Savings and Retirement Forum

Event: Jack VanDerhei — September 16

On Thursday, September 16, 2010, the Savings and Retirement Forum will be held at the Heritage Foundation, 214 Massachusetts Ave NE Washington DC 20002 [Directions to Heritage], at 8:30 a.m.

Employee Benefit Research Institute research director Jack VanDerhei will speak on the subject of retirement income preparation and future prospects.

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 savingsandretirement.org.

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Saturday, September 11, 2010

How progressive is Social Security compared to other countries’ pension programs?

Over at The American, AEI's online magazine.

The U.S. Social Security program is already among the most progressive in the world. Both liberal and conservative reformers would make it more so.

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Does Social Security really have a perfect payout record?

A recent letter in the Washington Post repeats a talking point I've heard a number of times recently: unlike other sources of retirement income, Social Security has never missed a payment. Richard Joffe of New York writes,

The Sept. 4 editorial "Alan Simpson's truthiness" pointed out that by 2037, "Social Security's reserves will have been drained, and it will be able to pay only 76 percent of scheduled benefits." I agree that we should fix this problem. But we should also do something else. We should acknowledge that, on the day the reserves run out, Social Security will have succeeded in paying 100 percent of the benefits owed for 100 years.

In one sense, this is entirely correct: no one has ever received less from Social Security than what the law says they should receive. The problem, of course, is that the law can be changed. For instance, someone born in 1943 entered the system assuming they could retire at age 65; instead, they must work to 66 to receive the same benefits. Likewise, someone born in 1960 has to work until 67 to receive full benefits, which is an effective benefit cut of around 13 percent.

Likewise, the reason the government will never default on the bonds it owes to the Social Security trust fund is that it doesn't have to. If these costs prove too much of a burden, the government can simply reduce benefits making required repayments smaller.

The point isn't that we shouldn't have raised the retirement age; we should have and should continue to do so as one way to address the problems of an underfunded system. But one of the problems of a program that's controlled by elected officials who are reluctant to make tough choices is that these decisions get delayed, and the changes necessary get larger. So, contra what Mr. Joffe and others like to say, Social Security has missed some payments along the way.

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Thursday, September 2, 2010

Steuerle and Rennane: Slow growth, don't cut benefits

Over at the Christian Science Monitor's Tax Vox blog, the Urban Institute's Gene Steuerle and Stephanie Rennane argue that Social Security reform doesn't need to cut benefits, only slow the rate at which they grow.

I'm sympathetic to the argument, which has obvious elements of truth: under almost all reform plans, no future retiree would receive lower benefits than a retiree today receives. Say what you will about the "cat food commission" – the left's name for President Obama's fiscal commission – but if you're not eating cat food today then you wouldn't be under a reformed Social Security plan (and in fact, you'd be much less likely to be in the future). Put another way, the percentage of seniors in poverty can be significantly reduced even with a reformed Social Security program that cuts overall costs.

That said, it's also useful to think of the "benefit cuts" claim in comparison to "tax increases." Taxes increase each year even if the tax rate doesn't rise, simply because individuals have higher earnings. But a conservative wouldn't call this a tax increase. But in the same way that Social Security collects revenues through a tax rate, it also pays benefits through a "replacement rate," that is, the percentage of pre-retirement earnings replaced by the program. That percentage would go down under reform, at least for middle and high earners, and so I think they'd be justified in calling this a "benefit cut."

But Steuerle and Rennane point out that life expectancies are rising, meaning that part of a cut in monthly benefits would be recouped by collecting over a longer period. This is a legitimate point, since with longer life expectancies the required replacement rate at retirement would fall. (Why? Your ideal retirement would match the level of consumption you had before retirement; if life expectancies rise then you would need to save more to cover that longer retirement, which would reduce your pre-retirement consumption. A lower replacement rate could then match this pre-retirement consumption level.)

In other words, the issue is more complicated than most folks on either side would really think. Yet another reason why Social Security reform is hard.

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Are federal employees really underpaid by 22 percent?

I have a piece at the Washington Examiner, co-authored with Jason Richwine of the Heritage Foundation. It's a follow-up to our earlier piece in the Wall Street Journal on public sector pay.

Read more!

Tax Hikes, Social Security, and Misleading Arguments

And Ezra Klein. Over at AEI's Enterprise Blog.

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