Wednesday, December 7, 2011

How will the payroll tax cuts affect Social Security?

Differing opinions in a report from National Public Radio.

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New papers from the Social Science Research Network

"First-Round Impacts of the 2008 Chilean Pension System Reform" 
Michigan Retirement Research Center Research Paper No. WP 2011-245

JERE R. BEHRMAN, University of Pennsylvania - Department of Economics
MARIA CECILIA CALDERON, affiliation not provided to SSRN
OLIVIA S. MITCHELL, University of Pennsylvania - Insurance & Risk Management Department, National Bureau of Economic Research (NBER), University of Pennsylvania - Business & Public Policy Department
JAVIERA VASQUEZ, affiliation not provided to SSRN
DAVID BRAVO, University of Chile

Chile's innovative privatized pension system has been lauded as possible model for Social Security system overhauls in other countries, yet it has also been critiqued for not including a strong safety net for the uncovered sector. In response, the Bachelet government in 2008 implemented reforms to rectify this shortcoming. Here we offer the first systematic effort to directly evaluate the reform's impacts, focusing on the new Basic Solidarity Pension for poor households with at least one person age 65. Using the Social Protection Survey, we show that targeted poor households received about 2.4 percent more household annual income, with little evidence of crowding-out of private transfers. We also suggest that recipient household welfare probably increased due to slightly higher expenditures on basic consumption including healthcare, more leisure hours, and improved self-reported health. While measured short-run effects are small, follow-ups will be essential to gauge longer-run outcomes.

"Differences in Portfolios Across Countries: Economic Environment Versus Household Characteristics" 
Review of Economics and Statistics, Forthcoming

DIMITRIS CHRISTELIS, Centre for Studies in Economics and Finance (CSEF), University of Naples Federico II, Center for Financial Studies (CFS)
DIMITRIS GEORGARAKOS, University of Frankfurt, Center for Financial Studies (CFS)
MICHAEL HALIASSOS, Goethe University Frankfurt - Faculty of Economics and Business Administration, Goethe University Frankfurt - Center for Financial Studies (CFS), CEPR, Goethe University Frankfurt - House of Finance

We use cross-country micro-data and counterfactual methods to document international differences in ownership and holdings of stocks, private businesses, homes, and mortgages among older households in thirteen countries. We decompose these differences into two parts, related to population characteristics and economic environments. Shortly prior to the recent financial crisis, US households tended to invest more in stocks and less in homes, and to have larger mortgages than Europeans of similar characteristics. Differences in ownership and amounts are primarily linked to differences in economic environments that are more pronounced among European countries than among US regions, suggesting considerable potential for harmonization.

"German Private Pension Law: Current State and Future Directions" 

MARKUS ROTH, University of Marburg - Faculty of Law

Germany's occupational pension system should provide employees with investment choices and encourage higher participation rates. The latter goal should be realized through automatic enrollment in occupational pension schemes, giving employees the possibility to opt-out. Incentives for automatic enrollment should be set by the Occupation Pensions Act or by tax law, at least with regard to large employers. Cost-effective individual choices for employees should be promoted through including defined contribution pensions in the German Occupational Pensions Act. Offering investment alternatives with different risk profiles would allow employees to find solutions corresponding with their individual risk preferences. In light of typical German saving behavior and the corresponding expectations of beneficiaries, a traditional insurance product should be chosen as the default investment product.

"Social Security Benefits: Windfall Elimination Provision" 
Orange County Lawyer, Vol. 35, No. 12, p. 30, December 2011

FRANCINE J. LIPMAN, University of Nevada, Las Vegas - William S. Boyd School of Law
JAMES E. WILLIAMSON, San Diego State University - College of Business Administration

Twenty-five percent of all public employees, or more than five million state and local workers as well as one million federal workers, participate in alternative plans to Social Security. These employers and employees do not pay Social Security taxes or receive Social Security credit for their wages. These non-Social Security pension benefits can supplement and diversify a retirement income portfolio that includes Social Security benefits if the worker can structure his career to otherwise qualify for Social Security benefits. Not surprisingly the interplay of Social Security with alternative pensions can be confusing and does have traps for the unwary, including the windfall elimination provision, but rewards for strategic planners. This article will describe this interplay and demonstrate undue hardships in the existing structure and suggest strategies for maximizing aggregate retirement income benefits.

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Tuesday, November 29, 2011

New papers from the Social Science Research Network

"Tax Reform Options: Promoting Retirement Security" 
EBRI Issue Brief, No. 364, November 2011

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)

This paper analyzes two recent proposals to change the existing tax treatment of 401(k) retirement plans and is based on EBRI's proprietary Retirement Security Projection Model.™ Currently, the combination of worker and employer contributions in a defined contribution plan is capped by the federal tax code at the lesser of $49,000 per year or 100 percent of a worker's compensation (participants over age 50 can make additional "catch-up" contributions). As part of the effort to lower the federal deficit and reduce federal "tax expenditures," two major reform proposals have surfaced that would change current tax policy toward retirement savings: (1) a plan that would end the existing tax deductions for 401(k) contributions and replace them with a flat-rate refundable credit that serves as a matching contribution into a retirement savings account; (2) the so-called "20/20 cap," included by the National Commission on Fiscal Responsibility and Reform in their December 2010 report, "The Moment of Truth," which would limit the sum of employer and worker annual contributions to the lower of $20,000 or 20 percent of income, the so-called "20/20 cap." If the current exclusion of worker contributions for retirement savings plans were ended in 2012 and the total match remains constant, the average reductions in 401(k) accounts at Social Security normal retirement age would range from a low of 11.2 percent for workers currently ages 26-35 in the highest-income groups, to a high of 24.2 percent for workers in that age range in the lowest-income group. Earlier EBRI analysis of enacting the 20/20 cap starting in 2012 showed it would, as expected, most affect those with high income. However, EBRI also found the cap would cause a significant reduction in retirement savings by the lowest-income workers as well, and younger cohorts would experience larger reductions given their increased exposure to the proposal. A key factor in future retirement income security is whether a worker has access to a retirement plan at work. EBRI has found that voluntary enrollment in 401(k) plans under the current set of tax incentives has the potential to generate a sum that, when combined with Social Security benefits, would replace a sizeable portion of a worker's preretirement income, and that auto-enrollment could produce even larger retirement accumulations. The potential increase of at-risk percentages resulting from (1) employer modifications to existing plans, and (2) a substantial portion of low-income households decreasing or eliminating future contributions to savings plans as a reaction to the proposed elimination of the exclusion of employee contributions for retirement savings plans from taxable income, needs to be analyzed carefully when considering the overall impact of proposals to change existing tax incentives for retirement savings.

"How Prepared are State and Local Workers for Retirement?" 

JEAN-PIERRE AUBRY, Center for Retirement Research at Boston College
LAURA QUINBY, Boston College - Center for Retirement Research
ALICIA MUNNELL, Boston College - Center for Retirement Research
JOSH HURWITZ, affiliation not provided to SSRN

A widespread perception is that state-local government workers receive high pension benefits which, combined with Social Security, provide more than adequate retirement income. This study uses the Health and Retirement Study (HRS) and actuarial reports to test this hypothesis. The major finding from the HRS analysis is that most households with state-local employment end up with replacement rates that, while on average higher than those in the private sector, are well below the 80 percent needed to maintain pre-retirement living standards. Even those households with a long-service state-local worker – those who spend more than half of their careers in public employment – have a median replacement rate, including Social Security, of only 72 percent. And this group accounts for less than 30 percent of state-local households. The remaining 70 percent of households with a short- or medium-tenure state-local worker have replacement rates of 48 percent and 57 percent, respectively. Adding income from financial assets still leaves most state-local households short of the target.

"Do Couples Self-Insure? The Effect of Informal Care on a Couple's Labor Supply" 

NORMA B. COE, Boston College - Center for Retirement Research
MEGHAN SKIRA, Boston College - Center for Retirement Research

How does informal care provision to an elderly parent affect the labor supply outcomes of a couple? Previous work examines the relationship between caregiving and the labor market decisions of the care provider, but ignores any labor supply response of the spouse to such decisions. Using data from the Health and Retirement Survey, we examine how informal care provision affects the labor supply of both members of a couple, at both the intensive and extensive margins. Such analysis is especially important for evaluating informal care's potential effect on retirement timing and household wealth accumulation. We find that providing personal care to an elderly parent reduces a married man's chance of working by 3.2 percentage points, but providing such care does not affect a married woman's chance of working. Additionally, male labor force decisions remain inelastic in response to the wife's caregiving behavior. Working married women do adjust their hours of work in response to caregiving, but in the opposite direction that within-couple insurance would suggest. Instead, the woman increases her work by one hour a week if she is the only care provider, and decreases her work when the husband is the only care provider. When both members of the couple provide informal care these effects cancel out.

"Spending Flexibility and Safe Withdrawal Rates" 

MICHAEL S. FINKE, Texas Tech University, University of Missouri at Columbia - Department of Finance
WADE PFAU, National Graduate Institute for Policy Studies (GRIPS)
DUNCAN WILLIAMS, affiliation not provided to SSRN

Shortfall risk retirement income analyses offer little insight into how much risk is optimal, and how risk tolerance affects retirement income decisions. This study models retirement income risk in a manner consistent with risk tolerance in portfolio selection in order to estimate optimal asset allocations and withdrawal rates for retirees with different risk attitudes. We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk averse clients with moderate guaranteed income sources. The ability to accept greater shortfall probabilities means that risk tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio. A risk tolerant client may prefer a withdrawal rate of between 5 and 7 percent with a guaranteed income of $20,000. The optimal retirement portfolio allocation to stock increases by between 10 and 30 percentage points and the optimal withdrawal rate increases by between 1 and 2 percentage points for clients with a guaranteed income of $60,000 instead of $20,000.

"The Demand for Social Insurance: Does Culture Matter?" 
University of Zurich Department of Economics Working Paper No. 41

BEATRIX BRÜGGER, University of Lausanne
RAFAEL LALIVE, University of Lausanne - Department of Economics (DEEP), Institute for the Study of Labor (IZA), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
ANDREAS STEINHAUER, University of Zurich
JOSEF ZWEIMUELLER, University of Zurich - Department of Economics, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Institute for the Study of Labor (IZA)

Can different social groups develop different demands for social insurance of risks to health and work? We study this issue across language groups in Switzerland. Language defines social groups and Swiss language groups are separated by a clear geographic border. Actual levels of social insurance are identical on either side of the within state segments of the language border. We can therefore study the role of culture in shaping the demand for social insurance. Specifically, we contrast at the language border actual voting decisions on country-wide changes to social insurance programs. Key results indicate substantially higher support for expansions of social insurance among residents of Latin-speaking (i.e. French, Italian, or Romansh) border municipalities compared to their German-speaking neighbors in adjacent municipalities. We consider three possible explanations for this finding: informal insurance, ideology, and the media. We find that informal insurance does not vary enough to explain stark differences in social insurance. However, differences in ideology and segmented media markets are potentially important explanatory factors.

"Diversity and Defined Contribution Plans: The Role of Automatic Plan Features" 

STEPHEN P. UTKUS, Vanguard Group, Inc.
CYNTHIA A. PAGLIARO, The Vanguard Group, Inc.

In a sample of seven large defined contribution (DC) plans, automatic enrollment reduces differences in savings and investment behavior associated with race and ethnicity. Participation rates rise across the board with automatic enrollment, but particularly for blacks and Hispanics. Automatically enrolled whites and Asians are more likely to override the default deferral rate than blacks and Hispanics, leading to a difference in deferral rates. Automatic enrollment to a default target-date fund equalizes risk-taking and reduces extreme portfolio allocations for all groups.

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Monday, November 21, 2011

New issue brief: "Disability Insurance: Does Extending Unemployment Benefits Help?"

The Center for Retirement Research at Boston College has released a new Issue in Brief:

"Disability Insurance: Does Extending Unemployment Benefits Help?"

by Matthew S. Rutledge

The brief's key findings are:

  • Jobless individuals tend to delay applying for disability insurance (SSDI) until their extended unemployment insurance (UI) runs out.
  • Those who do apply for SSDI while still on unemployment are more likely to be approved, suggesting they are less healthy than those who delay.
  • UI extensions do not appear to reduce SSDI costs, because any given application is more likely to be approved due to worsening health or poor job prospects.

The brief is available here.

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Friday, November 18, 2011

New papers from the Social Science Research Network


"Optimal Discrete Ratchet Consumption" 

JOHN G. WATSON, Financial Engines, Inc., Stanford University - Graduate School of Business
JASON S. SCOTT, Financial Engines, Inc.

Philip Dybvig (1995) found optimal spending and investment strategies for endowments with zero tolerance for spending declines. His spending rule is a ratchet - spending never decreases, but has a substantial chance of increasing. Many retirees find this strategy appealing, and in this paper, we find an optimal consumption rule for them. In particular, we solve a discrete-time, finite-horizon version of the ratchet problem. Further, we generalize the utility's felicity and time preference functions, so that we can tailor a solution to a retiree's specific preferences. For optimality, a spending rule must be paired with an investment rule. Here, we investigate dynamic investment strategies - we treat consumption as a derivative security and derive formulas for its delta-hedge.

"The 2006 Earnings Public-Use Microdata File: An Introduction" 
Social Security Bulletin, Vol. 71, No. 4, pp. 33-59, 2011

MICHAEL COMPSON, Office of Research, Evaluation and Statistics

This article introduces the 2006 Earnings Public-Use File (EPUF) and provides important background information on the file's data fields. The EPUF contains selected demographic and earnings information for 4.3 million individuals drawn from a 1-percent sample of all Social Security numbers issued before January 2007. The data file provides aggregate earnings for 1937 to 1950 and annual earnings data for 1951 to 2006. The article focuses on four key items: (1) the Social Security Administration's experiences collecting earnings data over the years and their effect on the data fields included in EPUF; (2) the steps taken to "clean" the underlying administrative data and to minimize the risk of personal data disclosure; (3) the potential limitations of using EPUF data to estimate Social Security benefits for some individuals; and (4) frequency distributions and statistical tabulations of the data in the file, to provide a point of reference for EPUF users.

"What Can We Learn from Analyzing Historical Data on Social Security Entitlements?" 
Social Security Bulletin, Vol. 71, No. 4, pp. 1-13, 2011

JOYCE MANCHESTER, Government of the United States of America - Congressional Budget Office (CBO)
JAE SONG, U.S. Social Security Administration

We use data from Social Security administrative records to examine the lifetime patterns of initial entitlement to retired-worker and Disability Insurance (DI) benefits across cohorts born in different years. Breaking out age-at-entitlement patterns for different birth-year cohorts reveals close adherence in entitlement ages to changes in program rules, such as increasing the full retirement age. The proportion of a cohort that becomes newly entitled to DI benefits rises noticeably during recessions and at ages 50 and 55, and cumulative entitlement rate patterns show that more recent cohorts rely increasingly on DI benefits in their late 30s and 40s.

"Behavioral and Psychological Aspects of the Retirement Decision" 
Social Security Bulletin, Vol. 71, No. 4, pp. 15-32, 2011

MELISSA KNOLL, Social Security Administration - Office of Retirement Policy

The majority of research on the retirement decision has focused on the health and wealth aspects of retirement. Such research concludes that people in better health and those enjoying a higher socioeconomic status tend to work longer than their less healthy and less wealthy counterparts. While financial and health concerns are a major part of the retirement decision, there are other issues that may affect the decision to retire that are unrelated to an individual's financial and health status. Judgment and decision-making and behavioral-economics research suggests that there may be a number of behavioral factors influencing the retirement decision. The author reviews and highlights such factors and offers a unique perspective on potential determinants of retirement behavior, including anchoring and framing effects, affective forecasting, hyperbolic discounting, and the planning fallacy. The author then describes findings from previous research and draws novel connections between existing decision-making research and the retirement decision.

"Caregiver Credits in France, Germany, and Sweden: Lessons for the United States" 
Social Security Bulletin, Vol. 71, No. 4, pp. 61-76, 2011

JOHN JANKOWSKI, Government of the United States of America - Social Security Administration

Recently, analysts in the United States (US) have proposed adopting caregiver credits, or pension credits, provided to individuals for time spent out of the workforce while caring for dependent children and sick or elderly relatives. The primary objective of these credits, used in almost all public pension systems in the European Union, is to improve the adequacy of old-age benefits for women whose gaps in workforce participation typically lead to fewer years of contributions, lower lifetime average earnings, and consequently lower pensions. This article examines caregiver credits in the context of future reforms to the US Social Security system, with attention given to the adequacy of current spouse and survivor benefits and how changing marital patterns and family structures have increased the risk of old-age poverty among certain groups of women. It then analyzes caregiver credit programs in selected countries, with particular focus on design, administration, and cost.

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Wednesday, November 9, 2011

New paper: “How Reforms Would Affect Social Security’s Funding Shortfalls, Total Spending, and Distribution of Benefits and Taxes”

The National Center for Policy Analysis released a new paper, "How Reforms Would Affect Social Security's Funding Shortfalls, Total Spending, and Distribution of Benefits and Taxes,"
by Liqun Liu and Andrew J. Rettenmaier. Here's the summary:

Entitlement reform has dominated the ongoing debate over reducing the federal government's persistent deficits and mounting debt. Together Medicare and Social Security account for a third of current federal spending and will continue to grow as a share of both the economy and federal spending in coming years. Since the inception of Medicare and Social Security, numerous reforms have been proposed. This study focuses on Social Security reform, examining four types of reform that represent the range of most commonly mentioned options.

Click here to read the entire article.


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Cut the budget and reduce inequality – by cutting Social Security?

Over at NPR, Marilyn Geewax outlines some of the interesting cross-currents in the Social Security debate: one of the sources of income inequality is the country is that seniors are a lot better off than younger Americans, in part due to programs like Social Security. At the same time, both Republicans and Democrats tell pollsters it's extremely important to protect the program. That makes the supercommittee's job tricky.

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Monday, October 31, 2011

New papers from the National Bureau of Economic Research

The Composition and Draw-down of Wealth in Retirement by James M. Poterba, Steven F. Venti, David A. Wise - #17536 (AG EFG PE)

Abstract: This paper presents evidence on the resources available to households as they enter retirement. It draws heavily on data collected by the Health and Retirement Study and calculates the "potential additional annuity income" that households could purchase, given their holdings of non-annuitized financial assets at the start of retirement.    

Even if households used all of their financial assets inside and outside personal retirement accounts to purchase a life annuity, only 47 percent of households between the ages of 65 and 69 in 2008 could increase their life-contingent income by more than $5,000 per year.

At the upper end of the wealth distribution, however, a substantial number of households could make large annuity purchases. The paper also considers the role of housing equity in the portfolios of retirement-age households, and explores the extent to which households draw down housing equity and financial assets as they age.

Many households appear to treat housing equity and non-annuitized financial assets as "precautionary savings," tending to draw them down only when they experience a shock such as the death of a spouse or a period of substantial medical outlays. Because home equity is often conserved until very late in life, for many households it may provide some insurance against the risk of living longer than expected.

How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study? by Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai - #17547 (AG EFG LS PE)

Abstract: This paper uses asset and labor market data from the Health and Retirement Study (HRS) to investigate how the recent "Great Recession" has affected the wealth and retirement of those in the population who were just approaching retirement age at the beginning of the recession, a potentially vulnerable segment of the working age population. The retirement wealth held by those ages 53 to 58 before the onset of the recession in 2006 declined by a relatively modest 2.8 percentage points by 2010.    In more normal times, their wealth would have increased over these four years. Members of older cohorts accumulated an additional 5 percent of wealth over the same age span.

To be sure, a part of their accumulation was the result of the upside of the housing bubble. The wealth holdings of poorer households were least affected by the recession. Relative losses are greatest for those who initially had the highest wealth when the recession began.

The adverse labor market effects of the Great Recession are more modest. Although there is an increase in unemployment, that increase is not mirrored in the rate of flow out of full-time work or partial retirement. All told, the retirement behavior of the Early Boomer cohort looks similar, at least so far, to the behavior observed for members of older cohorts at comparable ages.

Very few in the population nearing retirement age have experienced multiple adverse events. Although most of the loss in wealth is due to a fall in the net value of housing, because very few in this cohort have found their housing wealth under water, and housing is the one asset this cohort is not likely to cash in for another decade or two, there is time for their losses in housing wealth to recover.

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Friday, October 28, 2011

What can the presidential candidates learn from Social Security privatization abroad?

Elaine Fultz of the National Academy of Social Insurance weighs in. She sums up:

The candidates should take a close look at countries where social security privatization is a reality.  Based on their findings, they should explain to the public how they would meet its high transition costs, avoid erosion of worker accounts by private management fees, and deal with workers who are disadvantaged by financial market volatility.

Given where NASI stands on things, you're not likely to get the full story on the positive aspects of defined contribution pensions. And there ARE good answers to all of these questions. But still, her comments are worth reading since many policymakers haven't thought closely about these questions.

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Friday, October 21, 2011

Finally, a COLA coming your way…

The AP reports on a 3.5 percent Cost of Living Adjustment for Social Security benefits in 2012. If you want a detailed look at how we got where we are on COLAs, here's my take for AEI.

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Wednesday, October 19, 2011

New papers from the Social Science Research Network


"Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2010" 
EBRI Issue Brief, No. 363, October 2011

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

This paper examines the level of participation by workers in public- and private-sector employment-based pension or retirement plans, based on the U.S. Census Bureau's March 2011 Current Population Survey (CPS), the most recent data currently available (for year-end 2010). Among all working-age (21-64) wage and salary employees, 54.2 percent worked for an employer or union that sponsored a retirement plan in 2010. Among full-time, full-year wage and salary workers ages 21-64 (those with the strongest connection to the work force), 61.6 percent worked for an employer or union that sponsors a plan. Among full-time, full-year wage and salary workers ages 21-64, 54.5 percent participated in a retirement plan. This is virtually unchanged from 54.4 percent in 2009. Participation trends increased significantly in the late 1990s, and decreased in 2001 and 2002. In 2003 and 2004, the participation trend flattened out. The retirement plan participation level subsequently declined in 2005 and 2006, before a significant increase in 2007. Slight declines occurred in 2008 and 2009, followed by a flattening out of the trend in 2010. Participation increased with age (61.4 percent for wage and salary workers ages 55-64, compared with 29.2 percent for those ages 21-24). Among wage and salary workers ages 21-64, men had a higher participation level than women, but among full-time, full-year workers, women had a higher percentage participating than men (55.5 percent for women, compared with 53.8 percent for men). Female workers' lower probability of participation among wage and salary workers results from their overall lower earnings and lower rates of full-time work in comparison with males. Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan. The gap between the percentages of black and white plan participants that exists overall narrows when compared across earnings levels. Wage and salary workers in the South and West had the lowest participation levels (Florida had the lowest percentage, at 43.7 percent) while the upper Midwest, Mid-Atlantic, and Northeast had the highest levels (West Virginia had the highest participation level, at 64.2 percent). White, more highly educated, higher-income, and married workers are more likely to participate than their counterparts.

While individual factors are important, retirement plan participation by workers is also strongly tied to macroeconomic factors such as stock market returns and the labor market. Better macroeconomic conditions of the late 1990s resulted in higher levels of participation, while less positive macroeconomic conditions of the 2000s led to lower levels of participation. Regardless of the current direction, this trend has important implications for workers, since having more opportunities to participate in an employment-based retirement plan greatly increases the amount of money a retiree is likely to have in retirement. The downturns in the economy and stock market in 2008 and into 2009 showed a two-year decline in both the number and percentage of workers participating in an employment-based retirement plan. The 2010 levels stabilized as the economy was more stable but not experiencing strong growth, so these levels were just above the lowest levels set in 1997. The economy has improved but is still stagnant, which is likely to mean the 2011 numbers will see essentially no change or a decrease.

"Do Low-Income Workers Benefit from 401(K) Plans?" 
Center for Retirement Research at Boston College Working Paper No. 2011-14

ERIC J. TODER, Urban Institute
KAREN E. SMITH, Urban Institute

Economists frequently assume that employees "pay for" employer-provided fringe benefits, such as contributions to retirement plans, in the form of reduced wages. Because low-income employees receive little tax benefit from saving in qualified retirement plans, however, and may prefer immediate consumption to additional retirement accruals, they may not be willing to accept a one dollar reduction in their wage in return for an additional dollar contributed to their 401(k) plan, while high income workers may be willing to give up more than a dollar in wages to get the tax benefit.

"Effects of Legal and Unauthorized Immigration on the US Social Security System" 
Levy Economics Institute of Bard College Working Paper No. 689

SELCUK EREN, Bard College - Levy Economics Institute
HUGO BENÍTEZ-SILVA, affiliation not provided to SSRN
EVA CARCELES-POVEDA, State University of New York (SUNY), Stony Brook - Department of Economics

Immigration is having an increasingly important effect on the social insurance system in the United States. On the one hand, eligible legal immigrants have the right to eventually receive pension benefits but also rely on other aspects of the social insurance system such as health care, disability, unemployment insurance, and welfare programs, while most of their savings have direct positive effects on the domestic economy. On the other hand, most undocumented immigrants contribute to the system through taxed wages but are not eligible for these programs unless they attain legal status, and a large proportion of their savings translates into remittances that have no direct effects on the domestic economy. Moreover, a significant percentage of immigrants migrate back to their countries of origin after a relatively short period of time, and their savings while in the United States are predominantly in the form of remittances. Therefore, any analysis that tries to understand the impact of immigrant workers on the overall system has to take into account the decisions and events these individuals face throughout their lives, as well as the use of the government programs they are entitled to. We propose a life-cycle Overlapping Generations (OLG) model in a general equilibrium framework of legal and undocumented immigrants' decisions regarding consumption, savings, labor supply, and program participation to analyze their role in the financial sustainability of the system. Our analysis of the effects of potential policy changes, such as giving some undocumented immigrants legal status, shows increases in capital stock, output, consumption, labor productivity, and overall welfare. The effects are relatively small in percentage terms but considerable given the size of our economy.

"Trade-Offs in Means Tested Pension Design" 

CHUNG TRAN, Australian National University (ANU) - School of Economics
ALAN D. WOODLAND, University of New South Wales

Inclusion of means testing into age pension programs allows governments to better direct benefits to those most in need and to control funding costs by providing flexibility to control the participation rate (extensive margin) and the benefit level (intensive margin). The former is aimed at mitigating adverse effects on incentives and to strengthen the insurance function of an age pension system. In this paper, we investigate how means tests alter the trade-off between these insurance and incentive effects and the consequent welfare outcomes. Our contribution is twofold. First, we show that the means test effect via the intensive margin potentially improves the insurance aspect but introduces two opposing impacts on incentives, the final welfare outcome depending upon the interaction between the two margins. Second, conditioning on the compulsory existence of pension systems, we find that the introduction of a means test results in nonlinear welfare effects that depend on the level of maximum pension benefits. More specifically, when the maximum pension benefit is relatively low, an increase in the taper rate always leads to a welfare gain, since the insurance and the positive incentive effects are always dominant. However, when maximum pension benefits are relatively more generous the negative incentive effect becomes dominant and welfare declines.

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AARP's offensive new ad campaign

The Concord Coalition's Diane Lim Rogers – aka, Economist Momwrites in the Christian Science Monitor regarding the AARP's advertisements against reductions in Social Security and Medicare benefits, which Rogers calls "offensive." At the very least, it's highly deceptive – arguing that deficit hawks should focus on cutting "waste and tax loopholes" rather than entitlements. The "waste, fraud and abuse" storyline is about the oldest trick in the book when you're trying to avoid touch choices, and the real tax loopholes aren't for the top 1 percent but for people who buy homes, get health insurance from their employers, or save for retirement. I'm with Diane on this one.

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Tuesday, October 18, 2011

New paper: How Would Seniors Fare Under the Bowles-Simpson Social Security Proposals?

"How Would Seniors Fare – By Age, Gender, Race and Ethnicity, and Income – Under the Bowles-Simpson Social Security Proposals by 2070?" 
National Academy of Social Insurance: Social Security Brief, No. 39, September 2011

VIRGINIA P. RENO, National Academy of Social Insurance (NASI)
ELISA WALKER, National Academy of Social Insurance (NASI)

Micro-simulation of future benefits shows how recommendations by Alan Simpson and Erskine Bowles, co-chairs of the deficit commission appointed by President Obama, would lower Social Security benefits for almost all (92 percent) of seniors entitled to benefits in 2070. The cuts would affect all age and income groups: 88 percent of young elders (ages 62-69) and 97 percent of the oldest (ages 90 and older) are projected to receive lower benefits, as are 81 percent of seniors in the lowest household income quintile, 93 percent of the middle quintile, and 97 percent of the top quintile. Major benefit reductions – of 20 percent or more below the benefits scheduled in current law – are projected to befall about one in three women and one in two men. Slightly more than one in four black and Hispanic elders would experience cuts of 20 percent or more, as would half of all white elders and nearly half (45 percent) of middle income elders. The simulations show how Social Security proposals that rely mainly on benefit cuts to achieve long-term solvency would weaken retirement income security for the children and grandchildren of today's retirees across age, gender, income, and racial and ethnic groups.

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Monday, October 17, 2011

Would the Chilean model work in the U.S.?

Bloomberg takes a closer look at the Chilean pension model that presidential candidate Herman Cain wants to adapt to the United States. As I've argued before, it really all comes down to transition costs.

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Tuesday, October 11, 2011

10 Things Social Security Won't Tell You

Some of these seem a bit hard on SSA, but interesting nonetheless.

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Wednesday, October 5, 2011

New paper: “The Evolution of Social Security's Taxable Maximum”

The Social Security Administration has released a new research paper titled "The Evolution of Social Security's Taxable Maximum," by Kevin Whitman and Dave Shoffner. Here are the paper's major findings:

  • The tax max has been in place since Social Security's founding, but Congress has modified it over time to address several policy goals, such as improving system financing and maintaining meaningful benefits for middle and higher earners.
  • Although the nominal value of the tax max has grown from $3,000 in 1937 to $106,800 today, in inflation-adjusted dollars the tax max declined from 1937 until the late 1960s, and then grew once it was indexed to wage growth in 1975. In wage-adjusted dollars, the tax max has remained roughly constant since the mid-1980s.
  • The percentage of workers with earnings above the tax max ("above-max earners") fell from 15 percent in 1975 to about 6 percent in 1983 and has remained at that level since.
  • Historically, an average of roughly 83 percent of covered earnings have been subject to the payroll tax. In 1983, this figure reached 90 percent, but it has declined since then. As of 2010, about 86 percent of covered earnings fall under the tax max.
  • The percentage of earnings covered by the tax max has fallen since the early 1980s because earnings among above-max earners have grown faster than earnings among the rest of the working population.

Check out the whole paper here. It provides a good history of the tax max provision and a rounded discussion of some issues that don't ordinarily come up when we think about the tax max.


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Tuesday, October 4, 2011

Upcoming event: Facing Up to the Retirement Savings Deficit

Facing Up to the Retirement Savings Deficit

From 401(k)s to Universal and Automatic Accounts

Five years ago Congress enacted modest improvements for employer-sponsored pension and 401(k) plans. Little progress has been made since in narrowing the nation's projected $6 trillion retirement income deficit.

America's real retirement security crisis is not Social Security solvency, but the declining number of Americans that participate in any retirement savings plan. Employer-sponsored plans cover fewer than half of all workers, leaving a projected majority of Baby Boomers and Generation Xers even more dependent on Social Security than their parents' generation is today.

 President Obama has proposed an "Automatic IRA" that would require employers that don't already offer their employees access to retirement plans to facilitate voluntary contributions through automatic payroll deductions. While "Auto IRA" should greatly increase participation, it still leaves out tens of millions of Americans and may not have strong enough incentives or other features to ensure adequate savings over a lifetime, particularly for lower-income workers. In conjunction with the event, New America's Asset Building Program will release and present a paper suggesting improvements.

Join us for a timely discussion to discuss this proposal and alternative paths for narrowing the retirement savings deficit.

Featured Speakers

Mark Iwry

Senior Advisor to the Secretary and Deputy Assistant Secretary (Retirement and Health Policy), U.S. Department of the Treasury

Michael Calabrese
Senior Research Fellow, New America Foundation
Author, From Auto IRAs to Universal 401(k)s

William Gale

Director, Retirement Security Project
Brookings Institution

 Teresa Ghilarducci
Director, Schwartz Center for Economic Policy Analysis
The New School

 David Certner 

Director of Federal Affairs, AARP


Reid Cramer

Director, Asset Building Program
New America Foundation 

Thursday, October 13, 2011
12:15 p.m. - 1:45 p.m.

New America Foundation
1899 L St NW, Suite 400
Washington, DC 20036

To RSVP for the event, click on the red button or go to the event page: 

For questions, contact Stephanie Gunter at (202) 596-3367 or 


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Monday, October 3, 2011

Is Galveston the Fix for Social Security?

I had a letter in the Sept. 30 Wall Street Journal regarding Merrill Matthew's piece claiming that Galveston, Texas shows a model for Social Security reform:

To the editor:

Regarding Merrill Matthews's Cross Country: "Perry Is Right: There Is a Texas Model for Fixing Social Security" (Cross Country, Sept. 24): In the 1980s, Galveston, Texas pulled its employees out of Social Security and set up an alternate plan based on individual accounts. As Mr. Matthews points out, this plan has generated higher returns and benefits than Social Security, seemingly pointing to a solution to Social Security's multi-trillion-dollar shortfalls.

But Mr. Matthews's arguments are ultimately a false promise. Social Security pays a low rate of return because it is a pay-as-you-go system, which transfers income from working individuals to beneficiaries. As a result, participants receive a rate of return equal to the growth of the wage base, rather than the higher returns available in the market.

Any given individual who leaves Social Security could likely do better on his own, but the loss of his taxes makes Social Security's funding problems worse. If a small group pulls out, like Galveston's employees, the system can make up the difference. But if everyone pulled out, Social Security instantly would face a $685 billion annual shortfall. Unless a reform plan addresses these transition costs, it won't produce any long-term gains. There's no free lunch.

Policy makers should not shy away from Social Security reform or personal accounts. But President Bush's failed reforms in 2005 showed that too many in Congress and in the country believed that personal accounts could painlessly fix Social Security's deficits, with support dropping once they realized this wasn't the case. Tax increases or benefit cuts are still needed. Those hoping for Social Security reform, including reforms based on individual savings accounts, should not make the same mistake again.

Andrew G. Biggs

American Enterprise Institute


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New paper: “Do Stronger Age Discrimination Laws Make Social Security Reforms More Effective?”

From the National Bureau of Economic Research

"Do Stronger Age Discrimination Laws Make Social Security Reforms More Effective?", by David Neumark, Joanne Song - #17467 (AG LE LS PE)

Abstract: Supply-side Social Security reforms to increase employment and delay benefit claiming among older individuals may be frustrated by age discrimination. We test for policy complementarities between supply-side Social Security reforms and demand-side efforts to deter age discrimination, specifically studying whether stronger state-level age discrimination protections enhanced the impact of the increases in the Social Security Full Retirement Age (FRA) that occurred in the past decade. The evidence indicates that, for older individuals who were "caught" by the increase in the FRA, benefit claiming reductions and employment increases were sharper in states with stronger age discrimination protections.

Available here.

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Friday, September 23, 2011

Is Social Security a Ponzi scheme?

Well, no and yes….

From the left to the right, political commentators are piling onto Texas Gov. Rick Perry for calling Social Security a "Ponzi scheme." Perry's competitors for the Republican presidential nomination are overjoyed at an opening against the new front runner, with former Massachusetts Gov. Mitt Romney calling Perry "reckless and wrong on Social Security." Mr. Romney's campaign alleged that the Texas governor "believes Social Security should not exist." Even the ordinarily white-hot conservative Michelle Bachman has gotten in on the act, calling it "wrong for any candidate to make senior citizens believe that they should be nervous about something they have come to count on."

Perry has responded with a USA Today
op-ed on Social Security, stressing the need to reform the system. But, like another recent Texas Governor, Perry has the weakness of saying what he thinks without adequately explaining what he says. This doesn't mean he's wrong – as I'll explain, there's a lot that's right about Perry's claims – but it unnecessarily exposes him to attacks. That's why I don't call Social Security a Ponzi scheme; incendiary language can cloud whatever substantive point you're trying to make. Nevertheless, I'll try to sort a few things out.

To begin, Perry questions whether the Framers would even have considered Social Security to be constitutional. This sounds a bit wacky in today's context, but his claim is almost certainly true. Even the Roosevelt administration was worried that Social Security wouldn't pass constitutional muster, going so far as to delink taxes from benefits – that is, to eliminate the ownership right in benefits that Roosevelt thought so important – in order to bypass the objection that the federal government had no constitutional authority for a federally-run insurance plan.

As the Social Security Administration's history of the constitutional question makes clear, even this may not have been enough to get the Social Security Act passed by the Court without a little bit of Presidential intimidation. Prior to the Social Security case, Roosevelt threatened to "pack the Court" with additional Justices more to his liking. Roosevelt's plan failed but, as the SSA history notes,

…the Court, it seemed, got the message and suddenly shifted its course. Beginning with a set of decisions in March, April and May 1937 (including the Social Security Act cases) the Court would sustain a series of New Deal legislation, producing a "constitutional revolution in the age of Roosevelt."

In other words, the Supreme Court ruling validating Social Security's constitutionality isn't exactly how any of us would like court rulings to happen. Nevertheless, as Perry has noted, this is water under the bridge now. He isn't (and shouldn't be) seeking to re-fight a 65-year old constitutional battle. But to think Perry's constitutional claims are wrong is, well, wrong.

But now to the Ponzi comparisons. To be clear, these aren't a Perry original. As Perry's campaign pointed out, Romney himself wrote that Social Security resembles a "fraudulent criminal enterprise." Which enterprise might he have been thinking of? Likewise, Senate Majority Leader Harry Reid called borrowing from the Social Security trust fund "embezzlement, thievery," saying that if he had done this in the private sector "I could be criminally prosecuted by the district attorney." So the Texas Governor is far from alone in his comments.

But why a Ponzi scheme? The distinguishing characteristic of a Ponzi scheme is its intent to defraud. Charles Ponzi, and his modern cousin Bernie Madoff, meant to rip people off. Whatever disagreements we may have over policy, no one believes that FDR meant to rip people off and neither do modern liberals who wish to maintain the program as is by raising taxes.

But when most people refer to Social Security as a Ponzi scheme, they're not thinking intent so much as effect. What makes the Social Security/Ponzi references so common is the similarity in the way they are financed. In both cases, early participants receive payments, not from interest on their own investments, but directly from inflows from later participants. If you were describing the mechanics of how Social Security's financing works, it wouldn't be illogical to refer to a Ponzi scheme, a chain letter or something similar.

The more important similarity draws from their funding structures, but is expressed in terms of the expectations they produce. Like a Ponzi scheme, Social Security paid early participants incredible returns on their money, because they contributed to the system for only a few years but received a full retirement's worth of benefits. A person who retired in 1950 received around a 20 percent annual return on the taxes he paid (which happens to be exactly the same return that Bernie Madoff promised to his investors). Put another way, that person received around 12 times more in benefits than he'd paid in taxes. That helps explain why Social Security became so popular: it was simply an incredibly good deal.

If you were born in 1950 and heard your grandparents say how much they liked Social Security, you'd be tempted to think you'll get the same sort of deal. But you won't: an average wage earner born in 1950 will receive around a 2.2 percent return from the system, which is less than what you could earn on guaranteed government bonds. A person entering the workforce today will receive only around a 1.7 percent return. In effect, Social Security's reputation is based off a deal that it can no longer deliver. Whatever good it did in the past – and it did do a lot of it, in terms of reducing poverty and helping the disabled and survivors, in the process undercutting Perry's claims that Social Security was "by any measure" a failure – it will do less of it in the future.

The biggest difference may be that Social Security can go on forever while a Ponzi scheme can't, but that's mostly because Social Security can force you to participate. If Bernie Madoff could find enough people willing to accept a 2 percent return rather than a 20 percent return, his plan could keep going indefinitely. With Social Security participation is mandatory, so as long as Congress makes the changes necessary to keep the system from going broke it can go on forever.

Which, in the end, is what Perry and the other Presidential candidates – including President Obama, I might add – should be talking about. Whether Social Security was constitutional and whether its pay-as-you-go financing structure is optimal, we've got what we've got. A differently-designed Social Security system in 1935 might have produced better outcomes today and in the future, but we can't turn back the clock. We have to deal with the system we have and figure out how to make it solvent and how to make it work better in the future. (For my part, I put together a proposal for AEI as part of a larger budget project for the Peter G. Peterson Foundation.) Instead of arguing about what's wrong with Social Security, we should be thinking about how to put things right.

Read more!

Tuesday, September 20, 2011

AEI Event on Reforming the Disability Program

This Thursday I'll be moderating an event at AEI surrounding the release of The Declining Work and Welfare of People with Disabilities by Richard Burkhauser of Cornell University and Mary Daly of the Federal Reserve Bank of San Francisco. Here's some info, followed by a short video promo. Click here to register – it should be good.

Disability policy in the United States is failing the disabled. Social Security's disability trust fund is projected to be insolvent in 2018, and the costs of our disability programs are rising at an unsustainable rate, yet the disabled are working less than ever before. Richard Burkhauser of Cornell, author of The Declining Work and Welfare of People with Disabilities (with Mary Daly, AEI Press, September 2011), offers a "work first" approach that has the potential to shrink caseloads, curb costs, and improve the economic outlook for people with disabilities. It builds on lessons learned from the mid-1990s welfare reform effort and the recent reform of Dutch disability policy. Encouraging work enables individuals to reap the benefits of a growing economy and lead happier, more productive lives. Ron Haskins of the Brookings Institution and David Wittenburg of the Mathematica Policy Institute will respond.

Read more!

Friday, September 9, 2011

New papers from the Social Science Research Network


"The Importance of Defined Benefit Plans for Retirement Income Adequacy"

EBRI Notes, Vol. 32, No. 8, August 2011

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)

According to EBRI estimates, the percentage of private-sector workers participating in an employment-based defined benefit plan decreased from 38 percent in 1979 to 15 percent in 2008. Although much of this decrease took place by 1997, there have been a number of recent developments that have made defined benefit sponsors in the private sector re-examine the costs and benefits of providing retirement benefits through the form of a tax-qualified defined benefit plan. However, these plans still cover millions of U.S. workers and have long been valued as an integral component of retirement income adequacy for their households. In this paper, EBRI's Retirement Security Projection Model (RSPM) is used to evaluate the importance of defined benefit plans for households, assuming they retire at age 65. The paper shows the tremendous importance of defined benefit plans in achieving retirement income adequacy for Baby Boomers and Gen Xers. Overall, the presence of a defined benefit accrual at age 65 reduces the "at-risk" percentage by 11.6 percentage points. The defined benefit plan advantage (as measured by the gap between the two at-risk percentages) is particularly valuable for the lowest-income quartile but also has a strong impact on the middle class (the reduction in the at-risk percentage for the second and third income quartiles combined is 9.7 percentage points). The analysis also provides additional information on how the relative value of the defined benefit accruals impact retirement income adequacy. It should be noted that this analysis does NOT attempt to do a comparison between the relative effectiveness of defined benefit vs. defined contribution plans in providing retirement income adequacy; however, it does show that when the value of a defined benefit plan is analyzed for those without any future eligibility in a defined contribution plan, the impact on the at-risk ratings increases to 23.6 percentage points. In other words, for those households without future years of defined contribution eligibility, the presence of a defined benefit accrual at age 65 is sufficient to save nearly 1 out of 4 of these households in the Baby Boom and Gen X cohorts from becoming "at risk" of running short of money in retirement for basic expenses and uninsured medical expenses.

The PDF for the above title, published in the August 2011 issue of EBRI Notes, also contains the fulltext of another August 2011 EBRI Notes article abstracted on SSRN: "The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare."

"Social Security Reform: Sovereign Wealth Funds as a Model for Increasing Trust Fund Returns"

Fordham International Law Journal, 2011

BEN TEMPLIN, Thomas Jefferson School of Law

This article addresses the question of whether foreign sovereign wealth funds (SWFs) should serve as a model for the United States in managing the Social Security Trust Fund. The last ten years has seen a significant shift in the way countries manage public pension and social insurance reserve funds. Rather than invest solely in government bonds, many countries now use modern portfolio techniques to diversify assets and earn higher rates of return for their reserve funds. Even after considering the losses incurred during the 2007-2009 financial crisis, some funds have managed competitive returns. Well-run funds include those found in Canada, New Zealand, Norway and Australia.

Curiously, the U.S. has not followed suit even though the long-term benefits of a diversified portfolio are well-known. The reason for this economically irrational behavior is likely rooted in political beliefs about the role of government as an owner of private enterprise. Institutional studies suggest that the rules constraining government investment are not likely to change rapidly given the constraints of path dependence theory.

However, the U.S. has seen incremental change in terms of attitudes towards government ownership of private enterprise. Many states run venture capital funds and government employee pension funds have been successful as apolitical state investment entities. Moreover, attitudes towards foreign SWFs have shifted from fear and anxiety over politically motivated investments to a greater acceptance of sovereign investors as wealth-maximizing entities. Crisis also drives change. The Social Security Trust Fund is now expected to be depleted by 2036. Diversifying the Trust Fund could eliminate as much as 30 percent of Social Security's funding deficit and do so without raising taxes or reducing benefits.

Foreign sovereign wealth funds that were created for the purpose of funding national pension systems provide a model for the U.S. to form an independent entity that is apolitical yet able to be held accountable for its actions. As politicians grasp for solutions to Social Security's funding problems that minimize tax increases and benefit cuts, they should consider adopting the successful diversification models employed by other countries.

"Longevity, Life-Cycle Behavior and Pension Reform"

PETER HAAN, DIW Berlin, German Institute for Economic Research, Institute for the Study of Labor (IZA)
VICTORIA L. PROWSE, Cornell University - Department of Economics, Institute for the Study of Labor (IZA)

How can public pension systems be reformed to ensure fiscal stability in the face of increasing life expectancy? To address this pressing open question in public finance, we estimate a life-cycle model in which the optimal employment, retirement and consumption decisions of forward-looking individuals depend, inter alia, on life expectancy and the design of the public pension system. We calculate that, in the case of Germany, the fiscal consequences of the 6.4 year increase in age 65 life expectancy anticipated to occur over the 40 years that separate the 1942 and 1982 birth cohorts can be offset by either an increase of 4.34 years in the full pensionable age or a cut of 37.7% in the per-year value of public pension benefits. Of these two distinct policy approaches to coping with the fiscal consequences of improving longevity, increasing the full pensionable age generates the largest responses in labor supply and retirement behavior.

"A Modest Proposal to Enhance Reporting and Other Tax Compliance by Owner-Employees and Their Pension Plans"

Tax Management Weekly Report, Vol. 30, No. 35, p. 1033, August 29, 2011

ALBERT FEUER, Law Offices of Albert Feuer

Owner-employees often establish and maintain pension plans, which cover only themselves and their spouses ("Owner-Employee Plans") to qualify for favorable treatment under the Internal Revenue Code of 1986, as amended (the "Code"). Qualified plans must have governing instruments satisfying the qualification requirements, must be operated pursuant to those instruments, and must file annual plan reports and annual individual reports of plan distributions. Many Owner-Employee Plans violate some or all of those requirements. Moreover, some recipients do not report benefit distributions.

Four modest changes would improve compliance with the Code requirements pertaining to (1) an Owner-Employee or his beneficiaries including a benefit distribution in his or her income; (2) an Owner-Employee older than 70 ½ receiving minimum distributions; (3) the governing instruments of an Owner-Employee Plan satisfying tax qualification requirements; and (4) an Owner-Employee Plan operating pursuant to its governing instruments.

First, individuals would be required to include on their Form 1040s the names of those pension plans, if any, whose contributions they deduct from their total income to determine exclude from their adjusted gross income.

Second, Owner-Employer Plan administrators would be required to include in their Form 5500-EZ the amount of the plan's distributions and the number of participants at least 70 ½.

Third, the instructions to the Form 5500-EZ would remind plan administrators of the Code requirements (1) to report individual benefit distributions to the Service and the recipient representative, (2) to make minimum distributions to participants older than 70 ½, and (3) to operate the plan pursuant to governing instruments that satisfy tax qualification requirements.

Fourth, the lenient compliance programs pertaining to violations of the annual plan filing or prohibited transaction rules would be extended to Owner-Employee Plans, the only qualified plans excluded from such programs. If the final change is not adopted, in many cases only imprudent Owner-Employee would file annual plan reports or include plan distributions in their income because such disclosures could make the Service aware of prior violations that the Owner-Employee, unlike other pension plan fiduciaries, may not be able to correct at minimal cost.

Read more!

Thursday, September 8, 2011

New papers from the Social Science Research Network


"Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007-2009"

EBRI Issue Brief, No. 361, August 2011

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

This paper examines the use of target-date funds (TDFs) by a consistent group of 401(k) participants in plans that offered them in 2007 through 2009. The consistent group of participants were those who were in a plan that offered a TDF in 2007, were in plans that were still offering TDFs in 2008 and 2009, and were still in the data source in 2008 and 2009. This study uses the unique richness of the data in the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, which for each year from 2007-2009 had more than 20 million 401(k) plan participants from more than 50,000 plans across a spectrum of plan administrators. In this database in 2007, 67.3 percent of the plans offered target-date funds as an investment option. This study follows those 401(k) participants identified as being in plans that offered target-date funds in 2007 and remained in the database, if they continued to be in a plan offering target-date funds in 2008 and 2009. In 2007, of those participants in this database, 38.9 percent had at least some of their account balance in TDFs. By 2008, 42.6 percent had at least some of their account balance in TDFs, reaching 43.2 percent in 2009. Furthermore, 36.6 percent of this consistent group of 401(k) plan participants had some of their account balance allocated to TDFs in 2007 and 2008. Just over 35 percent of these participants had at least some assets allocated to TDFs in 2007, 2008, and 2009. Among participants who were identified as auto-enrollees in 2007, 97.2 percent were still using TDFs in 2008, and 95.7 percent used them in 2008 and 2009. While those not identified as auto-enrollees continued to invest in TDFs at a lower rate than those identified as auto-enrollees, there was a very high overall persistence rate in TDF use from 2007-2009: just over 90 percent. Of the consistent group of participants using TDFs in 2007, 36.9 percent had all of their account allocated to TDFs. The remaining 63.1 percent of those using a TDF had less than 100 percent of their allocation in TDFs. In 2009, slightly more participants (67.2 percent) had less than 100 percent of their allocation in TDFs. Among only those participants who had all of their account allocated to TDFs, a very high rate (83.0 percent) stayed at a 100 percent TDF allocation in 2009. Almost 13 percent of those who had a total allocation to TDFs in 2007 had an allocation lower than 100 percent (but not a zero) allocation in 2009. Only 4 percent of participants with a 100 percent TDF allocation in 2007 had stopped using them by 2009.

"The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare"

EBRI Notes, Vol. 32, No. 8, August 2011

PAUL FRONSTIN, Employee Benefit Research Institute (EBRI)
DALLAS L. SALISBURY, Employee Benefit Research Institute (EBRI)
JACK VANDERHEI, Employee Benefit Research Institute (EBRI)

In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added outpatient prescription drugs as an optional benefit. When the program was originally enacted, it included a controversial feature: a coverage gap, more commonly known as the "donut hole." The Patient Protection and Affordable Care Act of 2010 (PPACA) included provisions to reduce this coverage gap. This paper examines the impact that repealing PPACA would have on savings targets for health care expenses in retirement. The estimates suggest that retirees with high levels of prescription drug use throughout retirement would see their savings targets increase roughly 30-40 percent were the coverage gap reduction in PPACA repealed. Individuals at the median (midpoint) level of prescription drug use throughout retirement would not see any change in savings targets. This analysis uses a Monte Carlo simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement. Estimates are presented for persons who supplement Medicare with a combination of individual health insurance through Plan F Medigap coverage and Medicare Part D for outpatient prescription drug coverage. For each source of supplemental coverage, the model simulated 100,000 observations allowing for uncertainty related to individual mortality and rates of return on assets in retirement, and it computed the present value of the savings needed to cover health insurance premiums and out-of-pocket expenses in retirement at age 65. These observations were used to determine asset targets for having adequate savings to cover retiree health costs 50 percent, 75 percent, and 90 percent of the time. Estimates are also jointly presented for a stylized couple both of whom are assumed to retire simultaneously at age 65.

The PDF for the above title, published in the August 2011 issue of EBRI Notes, also contains the fulltext of another August 2011 EBRI Notes article abstracted on SSRN: "The Importance of Defined Benefit Plans for Retirement Income Adequacy."

"Challenges of Formal Social Security Systems in Sudan"

Global Journal of Human Social Science, Vol. 11, No. 2, March 2011

ISSAM A.W. MOHAMED, Al-Neelain University - Department of Economics

The present paper discusses issues of challenges of social security systems in Sudan. Following parameters advanced by ILO and UNCOSOC, those systems are analyzed. The conclusions focus on their applicability that faces axial difficulties mainly presented in the state of institutional interregnum facing the country. Moreover, it is important to revisit aspects of social cohesion that serves greater role in traditional social security in the Sudan.

"Pension Reform and Income Inequality Among the Elderly in 15 European Countries"

OLAF VAN VLIET, Leiden Law School - Department of Economics, Leiden University
JIM BEEN, Leiden University - Department of Economics
KOEN CAMINADA, Leiden Law School - Department of Economics
KEES GOUDSWAARD, Leiden Law School - Department of Economics

The aging of populations and hampering economic growth increase pressure on public finances in many advanced capitalist societies. Consequently, governments have adopted pension reforms in order to relieve pressure on public finances. These reforms have contributed to a relative shift from public to private pension schemes. Since private social security plans are generally less redistributive than public social security, it can be hypothesized that the privatization of pension plans has led to higher levels of income inequality among the elderly. Existing empirical literature has mainly focused on cross-country comparisons at one moment in time or on time-series for a single country. This study contributes to the income inequality and pension literature by empirically analysing the distributional effects of shifts from public to private pension provision in 15 European countries for the period 1995-2007, using pooled time series cross-section regression analyses. Remarkably, we do not find empirical evidence that shifts from public to private pension provision lead to higher levels of income inequality or poverty among elderly people. The results appear to be robust for a wide range of econometric specifications.

Read more!

What might the Super-Committee do on Social Security?

Reuters Donna Smith looks at some possibilities.

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Kotlikoff: America’s true debt: $211 trillion…

From the National Center for Policy Analysis

America's True Debt -- The Fiscal Gap

Our country is in far worse fiscal shape than its $14 trillion -- and rapidly growing -- official debt suggests.  Indeed, that figure measures just a small portion of the government's total liabilities.  Why is that?  The answer is there is no answer, and because there is no answer, the deficit is not well defined, says Laurence Kotlikoff, a senior fellow with the National Center for Policy Analysis.

Generational accounting is a well-established methodology to measure the burden of government on specific generations.  A generational account for any given generation measures the generation's remaining lifetime net tax bill as a present value -- what the generation will pay net of what it will receive, all valued as of today.  This amount has to cover the government's official debt plus the present value of all future government purchases of goods and services (discretionary spending).  If it doesn't, the difference that's not covered is called the fiscal gap. 

  • The U.S. fiscal gap, based on the Congressional Budget Office's long-term Alternative Fiscal Scenario, is nowhere close to the $14 trillion official debt.
  • Indeed, the U.S. fiscal gap is $211 trillion -- 15 times larger than the official debt.

This means that Congress and the president have been focusing on the molehill, not the mountain, in their recent contretemps over the debt ceiling.

With the retirement of the baby boomer generation, millions will turn to Uncle Sam for Social Security, Medicare and Medicaid benefits -- roughly $40,000, on average, per beneficiary per year.  This means the fiscal gap will increase exponentially in the coming years.  The fiscal gap needs to be zero for the United States' fiscal policy to be sustainable, says Kotlikoff.

  • Achieving this result via tax hikes alone would require an immediate and permanent increase in all federal tax rates (corporate, personal income, excise and estate and gift taxes) of 64 percent.
  • Alternatively, the United States could immediately and permanently cut all non-interest spending by 40 percent.

Source: Laurence J. Kotlikoff, "America's True Debt -- The Fiscal Gap," National Center for Policy Analysis, September 7, 2011.

For text:

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Tuesday, September 6, 2011

New paper: "Implications of a 'Chained' CPI"

The Center for Retirement Research at Boston College has released a new Issue in Brief:

"Implications of a 'Chained' CPI" by Alicia H. Munnell and William M. Hisey

The brief's key findings are:

  • Recent commissions have proposed a "chained" consumer price index to adjust Social Security benefits.
  • The chained index, which allows spending patterns to shift as prices change, would rise more slowly than the current index.
  • But the current index likely understates the inflation faced by the elderly, and the low-income elderly may have little flexibility.
  • An alternative way for current retirees to bear some of the burden of a Social Security fix would be a one-time delay in the inflation adjustment.

The brief is available here.

Read more!

Reason: Polling on Social Security and Medicare Reform

Reason Magazine has a new poll on public opinion on entitlement reforms. Not surprisingly, the poll finds that most people don't want to see their benefits reduced. However, Americans are more open to reform if they're assured that they'll receive back everything they've paid in. This seems to point to an opening.

However, two things stand in the way, in my view:

First, if you include interest at a reasonable rate (say, the Treasury yield) then there's no way that Social Security reform can give everyone back what they paid in. The system's underfunded by somewhere around $17 trillion, so reform ultimately will pay participants – present and future -- $17 trillion less in benefits than they'll pay in taxes.

Second, while it would be possible to reform Medicare in this way – Medicare is slated to pay people a lot more in benefits than those folks paid in taxes – the difference is so large that the cuts required to even benefits up to taxes would be pretty big. While people are open to simply receiving back what they paid I'm not sure they'll be as favorable when things are presented in a different context (such as the percentage benefit cut required to do that).

I'm all for these kinds of changes, since ultimately taxes and benefits have to match up. But as a political matter I think it will be tougher than it looks.

Read more!

Monday, September 5, 2011

Chuck Blahous: Five Myths About Social Security and Medicare

The Hoover Institution publishes an interesting article from Chuck Blahous, one of Social Security and Medicare's public trustees, outlining what he sees as important myths about the programs. These myths include:

  • We "only" have a healthcare financing problem, not a population-aging or senior-entitlement problem. Medicare's financing shortfall is therefore much bigger and more urgent than Social Security's.
  • Social Security does not and cannot add to the deficit.
  • Medicare's projected insolvency date is the critical barometer of its financial condition.
  • Social Security projections are conservative; a good portion of its projected shortfall might disappear on its own.
  • Social Security's projected solvency through 2036 means that beneficiaries have pre-paid their benefits through that date; any benefit changes, therefore, should be deferred until later.

Check it out here.

Read more!

Friday, September 2, 2011

Upcoming event: Rethinking Incentives to Save for a Secure Retirement

The Brookings Institution presents "Rethinking Incentives to Save for a Secure Retirement"

Friday, September 9, 2011, 11:00 am — 12:00 pm

Hart Senate Office Building, Room 216, Washington, DC

Americans — especially low- and middle-income workers — are simply not saving enough for retirement. The current retirement income deficit—the gap between what Americans will need in retirement and what they will actually have—is well over $6 trillion. This gap will be insurmountable without a significant change to current tax policy to help incentivize more Americans to save for their own retirement.

On September 9, the Retirement Security Project at Brookings will host a briefing in collaboration with the Senate Special Committee on Aging to examine new ways to help Americans save for retirement without increasing government spending. A panel of experts on tax, retirement and budget policy will explore ideas to modify the tax incentives for retirement savings.

After the panel, participants will take audience questions.

Introduction and Moderator

Lisa Mensah

Executive Director, Initiative on Financial Security
The Aspen Institute

Featured Speakers

William G. Gale

Senior Fellow and Co-Director, Urban-Brookings Tax Policy Center
Director, Retirement Security Project
The Brookings Institution

David C. John
Deputy Director, Retirement Security Project

Senior Research Fellow, Thomas A. Roe Institute for Economic Policy Studies
The Heritage Foundation

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