Monday, January 31, 2011

AARP Video on Social Security and Minorities

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New papers from the NBER

The National Bureau of Economic Research has released several pensions-related working papers:

Social Security and Retirement around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms - Introduction and Summary by Kevin S. Milligan, David A. Wise - #16719 (AG)

Abstract: This is the introduction and summary to the fifth phase of an ongoing project on Social Security Programs and Retirement Around the World. The first phase described the retirement incentives inherent in plan provisions and documented the strong relationship across countries between social security incentives to retire and the proportion of older persons out of the labor force. The second phase documented the large effects that changing plan provisions would have on the labor force participation of older workers. The third phase demonstrated the consequent fiscal implications that extending labor force participation would have on net program costs--reducing government social security benefit payments and increasing government tax revenues. The fourth phase presented analyses of the relationship between the labor force participation of older persons and the labor force participation of younger persons in twelve countries. We found no evidence that increasing the employment of older persons will reduce the employment opportunities of youth and no evidence that increasing the employment of older persons will increase the unemployment of youth.

This phase is intended to set the stage for and inform future more formal analysis of disability insurance programs, with this key question: Given health status, to what extent are the differences in LFP across countries determined by the provisions of disability insurance programs? Here we first consider changes in mortality over time and in particular the relationship between mortality and labor force participation, thinking of mortality as one indicator of health that is comparable across countries and over time in the same country. We then consider how mortality is related to other indicators of health status, in particular self-assessed health and then how trends in DI participation are related to changes in health. Finally we consider the effect on disability insurance participation of "natural experiments" in which the disability insurance reforms were not prompted by changes in health status or by changes in the employment circumstances of older workers. We find that these "exogenous" reforms can have a very large effect on the labor force participation of older workers.

Behavioral Economics Perspectives on Public Sector Pension Plans by John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian - #16728 (AG)

Abstract: We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted towards defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee's work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers' need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors by Justine S. Hastings, Olivia S. Mitchell - #16740 (AG LS)

Abstract: Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs.    We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement wellbeing would do well to consider the importance of these factors.




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Thursday, January 27, 2011

Chuck Blahous on President Obama’s SOTU Social Security language

Chuck Blahous, former Bush White House Social Security point man and current Public Trustee of the Social Security and Medicare programs, comments on what was behind President Obama's opaque language on Social Security reform in the State of the Union address. Contained in it is a good taxonomy of the different factions of the Social Security reform debate:

  • Free-lunch conservatives: Free-lunch conservatives also don't want to raise taxes, but unlike fiscal conservatives they are unwilling to embrace the benefit changes required to hold down cost growth. They tend to focus on personal accounts exclusive of other solvency measures. (Personal accounts change the method of funding benefits but not necessarily the total amount of taxpayer dollars committed.) Some in this camp have even argued for making current benefit promises more generous.
  • Centrists: This group is motivated primarily by closing the gap between scheduled benefits and projected revenues, and is open to changes on both sides.
  • The realistic left: This group is unwilling to constrain cost growth enough to avoid a significant tax increase. Basically, they acknowledge the fiscal problem but would prefer to raise taxes to fix most (and in some cases nearly all) of it.
  • The anti-empirical left: This group implicitly advocates that Social Security continue to promise trillions more in future benefits than it can finance, often even to the point of denying that the program's financing shortfall even exists. Some in this group have (wrongly) alleged that projections of a shortfall were predicated on overly conservative assumptions. More recently some have said (equally wrongly) that Social Security was being "targeted" to solve a deficit problem to which it does not contribute. (For refutations of these myths, see here and here).

Check it out at e21.

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We’ve finally “stopped the raid” on Social Security…

For years, politicians and members of the public have decried the so-called "raid" on the Social Security trust fund, in which surpluses generated by Social Security were spent on other programs. For instance, back in 1990, Sen. Harry Reid asked, "Are we as a country violating a trust by spending Social Security trust fund monies for some purpose other than for which they were intended? The obvious answer is yes."

Now, there was nothing illegal about this practice; since Social Security was required by law to invest it surpluses in Treasury securities that pretty much means the Treasury was required to borrow the money. That said, Sen. Reid assured us, as a lawyer, that someone doing this outside of government would be prosecuted.

More importantly, there's good reason to believe that borrowing from Social Security encouraged the rest of the government to spend more and tax less than it otherwise would have, since the deficits and debt involved were effectively "off the books." The Social Security trust fund still has meaning in an accounting sense, but it doesn't represent any true saving in a budget-wide or economy-wide sense.

Personal accounts were proposed as one means of "saving the surplus," though they ran into problems when it became clear that a lot of people – both in Washington and elsewhere – didn't particularly want the surplus to be saved. They liked their spending higher and taxes lower. Former Vice President Gore proposed the much-derided "lock box" to save the surplus, although even to Social Security specialists it was never quite clear how that would work. Seemingly, the Social Security raid was an unsolvable problem.

But some problems solve themselves. According to the Congressional Budget Office's most recent projections, released this week, Social Security is running cash deficits and will continue running cash deficits, well, pretty much forever. Last year, both CBO and the Social Security Trustees projected that Social Security – while currently running deficits due to the recession – would return to surpluses again for several years before making a final turn South in 2016. The new projections show deficits every year from 2011 through 2021, totaling $593 billion over that period.

So breathe easy, America, the "raid" on Social Security has finally been stopped. Now we just need to think about repaying the trust fund and making the rest of the program sound. But all we heard from President Obama on that subject in the State of the Union address was the sound of a ball being punted.

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Wednesday, January 26, 2011

Social Security in permanent deficits

According to the CBO. The Associated Press gives the details. Read more!

That Leaves You With Precisely One Choice…

The Washington Post reports, and the President's State of the Union Address confirms, that "[President] Obama won't endorse raising retirement age or reducing Social Security benefits," scotching rumors that Obama would support the recommendations of his deficit commission to do both those things. Of course, ruling out those two options for Social Security reform means you only have one left: raising taxes, and by a lot.

According to Social Security's Trustees, to make the program permanently solvent—which they measure as being solvent over 75 years and financially healthy at the end of the period—would require an immediate and permanent increase in the current 12.4 percent Social Security payroll tax to 15.7 percent, a 27 percent increase in what is already the largest tax for most workers. If we delay raising taxes—and I'm not sensing any urgency from the administration to get on with the job—then the required tax increase only gets larger.

Alternately, we could increase or eliminate the cap on earnings subject to payroll taxes. Currently, only the first $106,800 in earned income is subject to payroll taxes, and retirement benefits are based upon those same earnings. (For a good reason, I've pointed out.) We could make Social Security solvent over 75 years (though not permanently solvent) by eliminating that "tax max."

But think about what that would do to top marginal tax rates. Currently, the top federal income tax rate is 35 percent. Adding in the 2.9 percent Medicare tax and a typical state income tax rate of around 6 percent, the all-in top marginal tax rate on earned income is around 44 percent. In some high-tax states it could be as much as 49 percent.

Under the Obama administration's plans, after the current tax cut extensions run out the top income tax rate will rise to 40.8 percent, due to an increase in the top rate to 39 percent and the phasing out of itemized deductions for high earners. The Medicare tax rate on high earners is scheduled to rise to 3.8 percent as of 2013 as part of the recent health reform legislation. Assuming, probably optimistically (see: Illinois), that state income tax rates remain constant, the top marginal tax rate will rise under current plans to 51 percent, with a maximum in states such as Hawaii and Oregon of around 56 percent.

Now imagine that we eliminate the Social Security payroll tax ceiling. The net tax rate—that is, the statutory 12.4 percent Social Security tax net of benefits that would be paid in return—is approximately 10 percent. We then are in a situation where high earners pay approximately 61 percent of each additional dollar they earn to the government. And these tax increases, which would leave high earners essentially tapped out in terms of revenues, would be before we've addressed Medicare and Medicaid's multi-trillion dollar funding shortfalls.

But, Mr. President, by all means go ahead and propose what you like. It's not as if we're facing a budget crisis or anything.

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Tuesday, January 25, 2011

Jed Graham on Obama and the SOTU

I'm a few days late on this, but over at Investors Business Daily Jed Graham discusses how President Obama can "thread the Social Security reform needle."

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Thursday, January 20, 2011

New papers from the Social Science Research Network


"Pensions in Nigeria: The Performance of the New System of Personal Accounts" International Social Security Review, Vol. 64, No. 1, pp. 1-14, 2011

BERNARD H. CASEY, University of Warwick - Faculty of Social Studies

In 2004, Nigeria copied the 1981 Chilean pension reform and established a funded system based upon personal accounts. The new system was neither appropriate for a country such as Nigeria, nor did it meet aspirations of improving pension coverage or helping economic growth. The current financial and economic crisis hit the scheme in so far as it hit stock values. However, more important has been the negative real interest rates that can be earned on government bonds and on bank deposits where the majority of contributions are invested. Bank scandals and rising fiscal deficits do not breed confidence in the system or the government's ability to deliver meaningful benefits in old age.

"Multi-Pillared Social Insurance Systems: The Post-Reform Picture in Chile, Uruguay and Brazil" International Social Security Review, Vol. 64, No. 1, pp. 53-71, 2011

FLORENCIA ANTA, affiliation not provided to SSRN
ARNALDO PROVASI LANZARA, affiliation not provided to SSRN

This article focuses on an analysis of social insurance models and reforms in Chile, Uruguay and Brazil. Noting that these three countries are following different reform trajectories, the article explores trends in the restructuring of each of these insurance systems across the course of successive reforms. In the systems, different trends are supporting a closer link between contributions and benefits, according growing importance to private individual accounts and favouring the expansion of the role played by social assistance. These trends all suggest a move towards various forms of multi-pillared social insurance, but with uncertain results in terms of redistribution and the dynamics of the fundamental objectives of social insurance.

"Working Life and Retirement Pensions in Spain: The Simulated Impact of a Parametric Reform" International Social Security Review, Vol. 64, No. 1, pp. 73-93, 2011

RAFAEL MUOZ DE BUSTILLO, affiliation not provided to SSRN
PABLO DE PEDRAZA, affiliation not provided to SSRN
JOS IGNACIO ANTN, affiliation not provided to SSRN
LUIS ALBERTO RIVAS, affiliation not provided to SSRN

This article aims to offer an ex ante evaluation of the impact of a parametric reform of the Spanish pension system that would involve increasing the reference period used to calculate benefits, an approach proposed many times by various actors in the socioeconomic field. Such gradual change may be categorized as a non-structural reform of the pension system. This contrasts with reforms of a structural nature that have been very popular in Latin America and elsewhere, involving the creation of defined contribution individual account schemes. As regards the parametric reform proposed in this article, the main findings indicate that it would have a small but negative impact on pension income for pensioners and would reduce income distribution.

"The Swiss Social Insurance System: Social Security and Grass-Roots Democracy" International Social Security Review, Vol. 64, No. 1, pp. 95-110, 2011

PHILIPP PORTWICH, affiliation not provided to SSRN

The foundations of Switzerland's social insurance system can be traced to 1890 when a public referendum voted the inclusion of an article into the Federal Constitution that gave the executive the task of creating a sickness and accident insurance scheme. Currently, as in other European countries, the Swiss social insurance system is facing challenges as a result of rising health costs and demographic shifts, which are placing a growing burden on both public finances and private households. To reach policy decisions to address these challenges, the Swiss system is distinguishable from those of its European neighbours because of a continuing tradition of political decision-making based on grass-roots democracy: through referenda, the Swiss people remain directly responsible for the development of the national social insurance system. Importantly, not only might this unique feature of Swiss democracy lead the Swiss people more readily to accept and identify with their social insurance system but it may offer a sound democratic base upon which to build a consensual approach to address the policy challenges that lie ahead.

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Wednesday, January 19, 2011

New CRR Issue in Brief: “Improving Sweden’s Automatic Pension Adjustment Mechanism.”

The Center for Retirement Research at Boston College has released a new Issue in Brief: "Improving Sweden's Automatic Pension Adjustment Mechanism," by Nicholas Barr and Peter Diamond.

 The brief's key findings are:

  • The economic crisis has provided a 'stress test' for many pension systems.
  • In Sweden, the crisis triggered an automatic 'brake' to restore financial balance and revealed two problems with the brake's design:
    • it can favor workers over retirees; and
    • it can result in large shocks for retirees.
  • In response, the brake could be modified to prevent unintended gains for workers and better insulate retirees from risk.

AB: In an AEI working paper back in 2008, I looked at how similar auto-adjustment features could be applied to the US Social Security program. Compared to some alternate approaches to reform, which actually increased the amount of uncertainty regarding future system financing, auto-adjustments could be designed to gradually change taxes and benefits so the program is always in balance and the costs of keeping it in balance are spread among as many generations of workers and retirees as possible.

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Friday, January 14, 2011

Agenda for January 28 Meeting of SSAB Technical Panel

2011 Technical Panel on Assumptions and Methods

Meeting Agenda

January 28, 2011

The meetings will be held in the offices of the Social Security Advisory Board:

400 Virginia Avenue SW, Suite 625, Washington, DC 20024

Friday, January 28, 2011

9:30-10:30 Immigration assumptions and methods

Presentation by Office of the Chief Actuary

10:30-10:45 Break

10:45-12:00 Immigration assumptions and methods

Presentation by Karen Woodrow-Lafield, Panel member

12:00-12:30 Lunch

12:30-3:15 Disability assumptions and methods

Presentation by Mark Duggan, Panel member

3:15-3:30 Break

3:30-5:30 Labor force participation assumptions and methods

Presentation by John Sabelhaus, Panel member


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Ponnuru: GOP should wait to address entitlement reforms

Writing in the New York Times, National Review's Ramesh Ponnuru argues that, as pressing as budget issues may be, Congressional Republicans shouldn't push for Social Security and Medicare reforms unless President Obama clearly wants to engage:

Reforming these programs is vital to our nation's long-term fiscal health — which is why Republicans should resist this advice and leave the issue alone. Reform is impossible this year or next unless President Obama takes the lead on it. What's more, Republicans have no mandate for reform, and a failed attempt will only set back the cause.

Ponnuru also argues that the "third rail of politics" still carries a lot of juice:

Some Republicans are understandably eager to take on these entitlements. "The third rail is not the third rail anymore," Representative Paul Ryan, a Republican from Wisconsin, said in December. Maybe he's right. But Republicans have gotten a painful shock every time they have decided it's finally safe to take on entitlements. Ronald Reagan suffered a defeat in his first year when he tried cutting Social Security's early retirement benefits. Newt Gingrich's 1995 Republican revolution fizzled when President Bill Clinton fought him over Medicare cuts. President George W. Bush's effort to reform Social Security in 2005 ended any political momentum he brought to his second term.

I think Ramesh is right. In the past, I've often wanted to think that the public is ready to deal with entitlement reforms, but Congress's propensity to procrastinate is often a function of the public's habit of doing just the same. It would be better to deal with these issues sooner rather than later, but unless both the public and the opposition party are ready to engage, it's very hard for one party to do it on its own. Just consider how difficult it was for Congressional Democrats, despite massive majorities, to pass health care reform. Entitlements would probably be even tougher since there's much more "take" and much less "give" involved.

I'm hopeful that President Obama will choose to engage on Social Security, perhaps taking up his deficit commission's proposals in the State of the Union address. It could help him re-establish some centrist credentials and, if accomplished successfully, could give the public and financial markets renewed confidence that the federal government can tackle its budget challenges. But it might be better to do nothing than to try and fail. I'm not sure how many more unsuccessful attempts at entitlement reform our lenders are willing to overlook before they decide we're not going to be able to repay what we owe.

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Wednesday, January 5, 2011

Gokhale: Reform Disability Insurance

At Investor's Business Daily, the Cato Institute's Jagadeesh Gokhale writes about the need to reform Social Security's disability program. While DI has widely been ignored as part of Social Security reform plans to date, with most solvency-oriented reformers finding it too complex to tackle, there's growing interest in looking at DI reform – both to hold down rapidly growing costs and to improve the efficiency of the program in finding disabled people and granting them benefits in a reasonable period of time.

Gokhale references a proposal from David H. Autor of the Massachusetts Institute of Technology and Mark Duggan of the University of Maryland, which would require employers to provide private disability insurance as a "front end" for the Social Security DI program. The idea is that the private plans would be focused on helping individuals remain on the job; for those who couldn't, the path to receiving Social Security DI would be smoothed.

In a recent New York Times blog, I touched on some other ideas from Autor and Duggan for DI reform. Also worth noting is that Richard Burkhauser of Cornell University is currently completing a book for AEI on disability insurance reform, co-authored with Mary Daly of the San Francisco Federal Reserve. I'm hopeful that the Autor-Duggan paper and the Burkhauser-Daly book will instigate a new momentum for DI reform.

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Tuesday, January 4, 2011

Social Security “more at risk than it was in 2005”? Really?

The Hill reports that Democratic congressmen and liberal activists are concerned that President Obama will cut a deal with Republicans on Social Security reform, producing a package that would cut benefits for future retirees. Apparently the Left is really concerned:

Maria Freese of the National Committee to Preserve Social Security and Medicare said she thinks Social Security is "more at risk than it was in 2005," when President Bush proposed far-reaching changes to the program, including personal accounts. The plan was vigorously opposed by Democrats and liberal groups and never came up for a vote in Congress. 

Ok, I can see there's some danger that Obama, looking to his own re-election prospects, will tack to the middle by compromising with Congressional Republicans to produce a big achievement they can both tout to voters.

But is this really a bigger risk for liberals than 2005, when a newly re-elected President Bush and a GOP-controlled House and Senate sought to fix Social Security without any new revenues AND with personal accounts? President Obama is, after all, a pretty liberal guy and the Senate still is under Democratic control.

But this does reflect what I've noted before as a liberal lack of confidence on Social Security: while endlessly repeating how much everyone loves and values the program (evil conservatives excepted, of course), they also seem convinced that pretty much any legislative fix will end up gutting the program. Either our representative government functions really poorly or they may not think Americans support higher taxes for Social Security quite as much as the Left does.

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Monday, January 3, 2011

Video from C-SPAN appearance on Social Security

I was on C-SPAN's Washington Journal this morning to discuss Social Security, with a focus on proposals to raise the early retirement age of 62. Plus phone calls, which are always the best part.

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