Tuesday, February 22, 2011

C-SPAN Video of Woodrow Wilson Center Social Security Panel

This afternoon I spoke on a panel on Social Security reform held by the Woodrow Wilson Center. Unfortunately I can't embed the video, but it's available at C-SPAN.

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Agenda for February 25 meeting of 2011 Technical Panel on Assumptions and Methods

2011 Technical Panel on Assumptions and Methods

Meeting Agenda

February 25-26, 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, February 25, 2011

10:00-12:00 Share of Earnings Subject to OASDI Taxation:

Importance, Trends, Mechanisms

Presentation by Melissa Favreault, Panel member

Discussion by Office of the Chief Actuary, SSA

12:00-12:30 Lunch

12:30-3:00 Overview of Distributional Modeling, Focusing on Dynamic


Presentation by Melissa Favreault, Panel member

Discussion by Office of the Chief Actuary, SSA

3:00-3:15 Break

3:15-5:00 Sensitivity of OACT projections to interactions between assumptions

Presentation by Office of the Chief Actuary, SSA

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Friday, February 18, 2011

New Social Security papers from the Social Science Research Network

"Health and Retirement Effects in a Collective Consumption Model of Elderly Households" 

Boston College Center for Retirement Research Working Paper No. 2011-4

ARTHUR LEWBEL, Boston College - Department of Economics
Email: Arthur.Lewbel@bc.edu
SHANNON SEITZ, Boston College
Email: shannon.seitz@bc.edu

Using data on older individuals and couples, we estimate a collective model of household consumption of a variety of goods, showing how resources are shared between husbands and wives, and how this allocation is affected by retirement and health status. We identify the extent to which shared consumption of goods by older married couples reduces the costs of living together relative to living alone. We also identify the fraction of household resources consumed by wives versus husbands, taking the jointness of some consumption into account. The results are relevant for household bargaining models and for a variety of welfare calculations.

Among other results, we find that older couples save between 24 and 40 percent on expenditures by sharing consumption of goods, that older wives consume between 30 and 42 percent of total household expenditures (taking sharing of goods into account), and that these shares are little affected by retirement, but increase dramatically when the husband's health is poorer.

"Social Security and Retirement Around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms - Introduction and Summary" NBER Working Paper No. w16719

KEVIN MILLIGAN, University of British Columbia - Department of Economics, National Bureau of Economic Research (NBER)
Email: kevin.milligan@ubc.ca
DAVID A. WISE, National Bureau of Economic Research (NBER), Harvard University - Harvard Kennedy School (HKS)
Email: dwise@nber.org

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 cost-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 a natural experiment 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.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

"Performance Evaluation of Balanced Pension Plans" 

Quantitative Finance, Forthcoming

LAURA ANDREU, University of Zaragoza - Faculty of Business and Economics
Email: landreu@unizar.es
LAURENTIUS (LAURENS) ADRIANUS PETRUS SWINKELS, Robeco Quantitative Strategies, Erasmus University Rotterdam (EUR)
Email: l.swinkels@robeco.nl

This paper examines the ability of balanced pension plan managers to successfully time the equity and bond market and select the appropriate assets within these markets. In order to evaluate both market timing abilities in these balanced pension plans, we extend the traditional equity market timing models to also account for bond market timing. As far as we know, we are among the first to apply this multifactor timing model to investigate equity and bond market timing simultaneously. This performance evaluation has been conducted on two samples of Spanish balanced pension plans, one with Euro Zone and one with World investment focus. This allows us to decompose managers' skills in three components: selectivity, equity market timing, and bond market timing. Our findings suggest that the average stock picking ability of pension plans is positive. World schemes tend to have positive bond timing skills, while Euro Zone pension plans are on average not able to time equity or bond markets.

"Regulating Investment Advice for 401(k) Plan Participants: Is More Advice the Answer?" 

NYU Review of Employee Benefits and Executive Compensation, Chapter 5, 2010

KATHRYN L. MOORE, University of Kentucky College of Law
Email: kmoore@pop.uky.edu

Today, most retirement plan participants are covered by a 401(k) plan that requires the plan participants to decide how to invest their plan assets. Yet plan participants are notoriously poor investors. Thus, there has been a trend toward providing plan participants first with investment education and now with investment advice. This Article discusses whether the provision of investment advice is likely to be successful. The Article begins by providing an overview of ERISA's fiduciary rules as they apply to investment advice. It then discusses the types of investment support that were permissible under ERISA prior to the Pension Protection Act of 2006 ("PPA"). It then discusses the PPA statutory prohibited transaction and the proposed regulation implementing that exemption. Finally, it discusses whether the provision of investment advice pursuant to the statutory exemption is likely to benefit plan participants.

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Should we increase the Social Security retirement age – or lower it??

The American Prospect hosts competing op-eds on the Social Security retirement age. The Urban Institute's Gene Steurle argues that, with lifespans rising, maintaining the current retirement age effectively turns Social Security into a program for the middle aged. The problem is, this leaves less money for the truly old, many of whom are also the truly poor. Steurle says:

In the case of the retirement age, we should be asking whether we really intended to create what Social Security has become -- increasingly a retirement system for people in middle age, most of whom report good or excellent health. For over half of beneficiaries retiring in their early 60s today, the result is that one member of a couple with average life expectancy spends well more than a quarter century retired. We need to ask whether such a system leaves Americans adequately prepared for old age and, more broadly, allows society to take advantage of older citizens' tremendous potential. That is, does the typical 62-year-old have more ability to give and less need for support than the typical 90-year-old?

By contrast, University of Texas professor James Galbraith argues for a lower retirement age as a way to stimulate the economy:

Once workers are retired and receiving steady pensions, they will become sources of effective demand and not weak petitioners for jobs. As a result, the private sector will grow around the provision of food, shelter, care, and services to this population. Thus, a dual effect helps to cut joblessness. Wage rates would also rise -- a third benefit, as workers become a bit scarce. And older people, of course, need not remain idle. Freed from wage toil, they can devote themselves to whatever pursuit they choose, including participation in civic and cultural life.

As a short-term measure it might have some effect, since it is effectively a large payout to near retirees. If the typical person claims reduced benefits at 63 and is allowed to retire with the full benefit that would be payable at age 66, that generates a roughly 21 percent benefit increase for affected cohorts. That said, this would be a tough policy to back out of once people realized the size of the giveaway.

Moreover, it wouldn't work over the long term. Over their lifetimes, people consume (more or less) what they produce, and if they produce less by retiring earlier they'll also lower their consumption by a little bit each year. (This is basically the 'life cycle' theory of consumption.) Now, retiring earlier might open up some positions, reduce the workforce and increase the demand for labor, but the lower spending due to shorter work lives would produce a roughly matching reduction in the demand for goods and services. Once we see that production and demand are linked, then the idea that less work equals more jobs pretty much falls apart.

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Thursday, February 17, 2011


The United States Studies Program and the Program on America and the Global 

Economy of the Woodrow Wilson International Center for Scholars 


With panelists: 

  • Andrew Biggs; Resident Scholar, American Enterprise Institute 
  • Charles Blahous; Senior Research Fellow, New America Foundation  
  • Ross Eisenbrey; Vice President, Economic Policy Institute 
  • Heidi Hartmann; President, Institute for Women's Policy Research 
  • Barbara Kennelly; President and CEO, National Committee to Preserve Medicare and Social Security 
  • Mitchell Orenstein; Associate Professor of European Studies, School of Advanced International Studies, Johns Hopkins University 

The  future of  Social  Security  is  central  to discussions of  the  current budget  crisis, but whether—and how—it can be reformed remains to be seen. Policymakers and analysts have  offered  a  range  of  proposals,  many  of  them  based  on  differing  demographic projections and assessments of the future solvency of the Social Security Fund. A group of leading experts will come together to discuss the current state of Social Security and how it will affect Americans' retirement plans in the future. 

Tuesday, February 22, 2011, 3:00pm – 5:00 p.m. 

Woodrow Wilson Center, 1300 Pennsylvania Avenue N.W., Washington, D.C. 

This is a free public event, but RSVPs are requested. 

Please respond with acceptances only to usstudies@wilsoncenter.org. 

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Tuesday, February 15, 2011

Social Security Trust Fund to Go Under in 2035?

Jed Graham does some back-of-the-envelope math regarding Social Security's long-term financing, based on CBO's projections of a grimmer short-term prognosis for the system's revenues and costs. I don't know for sure how the short-term will play into the long term, given that lower payroll tax revenues today will tend to produce lower benefit obligations in the future, although not always on a one-for-one basis. Nevertheless, we don't have reason to be complacent.

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Thursday, February 10, 2011

Kristol vs Ponnuru on entitlement politics

It's an inter-conservative debate: should the House Republican majority take on entitlement reform? The Weekly Standard's Bill Kristol says yes:

"Leaving entitlements on cruise control is not a serious position for an aspiring governing party—especially one that aspires to reduce the deficit and restore our fiscal solvency."

But National Review's Ramesh Ponnuru says no:

Whether entitlements stay on cruise control is not really the question in dispute, since they are going to do so regardless of what the House budget resolution says. What Bill is really saying is that House Republicans should go on record supporting specific entitlement reforms even though the Senate won't go along and even though the resolution wouldn't actually reform entitlements even if the Senate did go along. That's an odd test of seriousness.

Sad to say, I sided with Ramesh on this in a post from a while back. I didn't mean Republican's shouldn't talk about entitlements and shouldn't put forward reform plans, but if there's no chance of passing reform now they should also think about conserving political capital for when there is.

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Retirees upset about Social Security rule change

The New York Times Bucks blog discusses the Social Security Administration's recent decision to shut off the "Social Security restart" scheme, which lets retirees repay what they've received from Social Security – without interest – and then receive a higher monthly benefit.

Sure, some of those individuals may have been gaming the system  —  perhaps even investing the money only to repay it later, all on Social Security's dime. But other individuals took benefits early because they had lost their job, for instance, and used the benefits to tide them over until they found work.

The Times then quotes a number of people who had been planning to restart, but now saw their options limited by the ruling.

It's worth pointing out that SSA still does allow individuals to restart their benefits, but they can do it only once and the restart must happen within 12 months of their original claim. Given the clear opportunity to game the system – which means, in effect, gaming the taxpayer – this seems like a reasonable compromise. Even if the restart were closed down completely, individuals could replicate it on their by using an amount equal to what the benefits they had previously received to purchase an annuity, or simply put it in the bank and draw it down a little at a time. It's not a perfect match, but it means they can more or less accomplish their goals without leaving an opportunity for financially literate retirees to game the system.

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Tuesday, February 8, 2011

A good review for the Fiscal Commission Social Security plan

After President Obama basically hung his Fiscal Commission's Social Security recommendations out to dry, it's good to see someone coming through with some support for the basic approach the Commission took. Here's a nice editorial in the Raleigh News and Observer by Andrew Dobelstein, professor of social welfare policy at UNC-Chapel Hill:

Far from "tax cuts for the rich and erosion of the social safety net," the Debt Commission recommended the opposite for Social Security. It approached Social Security in the context of overall fiscal reform, and its recommendations were directed specifically to establishing fiscal stability for Social Security as a stand-alone program. These recommendations were much more comprehensive than simply cutting benefits and/or increasing taxes in order to impact the budget deficit.

Calling Social Security "the foundation of economic security for millions of Americans," the commission affirmed that "Social Security is far more than just a retirement program - it is the keystone of the American social safety net, and it must be protected."

Taken together the commission's eight Social Security recommendations would enhance benefits for low-income earners, increase benefit limits for more affluent beneficiaries, eliminate the current Social Security "tax cap" and at the same time ensure long-range solvency. The commission would gradually increase the retirement age, while creating a hardship exemption for those unable to work. It would bring into Social Security all newly hired state and local government employees.

These recommendations, along with the commission's assertion that "Social Security must do more to reduce poverty among the very poor and very old who need help the most," give Social Security a larger redistributive effect than the current program. They would increase the level of scheduled benefits for the lowest quintile of beneficiaries by 3.8 percent and decreasing scheduled benefits for the highest quintile by 18.7 percent by 2050.

The whole article is worth a read.

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Monday, February 7, 2011

Inflation illiteracy

Writing for the Wall Street Journal, Brett Arends argues that the current Consumer Price Index (CPI) understates the true rate of inflation, a conclusion that would have a significant impact on policies such as Social Security Cost of Living Adjustments, as well as on our views of the economy as a whole. Arends's argument runs counter to that of most economists, which is that the current CPI tends to overstate the true rate of inflation.

While Arends's whole article is worth reading (though not accepting at face value), one example Arends gives struck me as worth considering. It deals with so-called "hedonic pricing," which is a way of ascribing price changes to items whose prices haven't actually changed. Arends calls this method "chicanery," saying:

Consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn't discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?

Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam calls this a price cut. His reasoning? You're getting more for the money. Today's $999 Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates that the "real" price has actually fallen.

How's that work in the real world? Try it. Go into your local Apple store and ask for 50% off thanks to hedonics. (If you do, please, please video the exchange and put in YouTube. We could all use a good laugh.)

Well, let's consider a different example: imagine that you have a Mac that's three years old, but unused and still in its original packaging—in other words, a brand-new Mac that just happens to use outdated technology. Do you think you're going to get $999 for it? Of course not, since for that same price you can get a truly new Mac that's much better on nearly every front.

Stretching things further, imagine the price that the old-new Mac might fetch. Let's just say that it's $800 (I think this is pretty generous, but we're just illustrating here). If so, then that means that the true rate of "inflation" on Macs over three years has actually been around negative 20 percent—you can buy the same computer today for $800 that would have cost you $999 three years ago.

I actually have several computers in my attic that I don't even bother trying to sell, since I figure that almost no one would want to buy them. They're no more than 3-4 years old and were decent enough at the time, but technology has moved so quickly and prices fallen so far that it's hard to see what anyone would use them for.

Actually measuring the effects of quality changes is hard and I can't say for sure that the Bureau of Labor Statistics is getting everything right. But if you consider a) how much we spend on technology, and b) how quickly prices drop for older technologies, you get a feel for how strong the negative inflationary forces may be.

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If Health Mandate Is Unconstitutional, Are Social Security Accounts Too?

Maybe so. My thoughts over at The Enterprise Blog.

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Friday, February 4, 2011

New paper: “Can we trust the Social Security Trust Funds?”

"Can We Trust the Social Security Trust Funds?" Mercatus on Policy, No. 88, January 2011

JASON J. FICHTNER, George Mason University - Mercatus Center
Email: jjfichtner@gmail.com
VERONIQUE DE RUGY, Mercatus Center at George Mason University
Email: vderugy@gmail.com

Abstract: In the next year, lawmakers will consider different options for Social Security reform. In order to adopt the best policies, they must have all the facts. Unfortunately, much rampant confusion exists about how the Social Security trust funds operate. Some question whether the bonds held as assets in the trust funds are "real," while others misleadingly claim that the existence of trust funds means that Social Security does not face a financial problem. The truth is while the trust funds hold real assets, Social Security also faces real financial problems.


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Thursday, February 3, 2011

Chuck Blahous on “slashing benefits”

Writing for the Wall Street Journal, Chuck Blahous – one of the public Trustees of Social Security and Medicare – argues against the careless use of the phrase "slashing benefits":

In no true sense, therefore, would any current Social Security reform proposal "slash" benefits. Leaders on both sides of the aisle should acknowledge that we are actually negotiating over a rate of benefit growth. The irony in all of this is that if we dither long enough, ultimately we will indeed face the threat of benefits being "slashed" by a full 22%, according to last year's Social Security Trustees' report. It's not a reformed Social Security system that threatens to cut benefits, but the status quo—and our elected leaders would do well to acknowledge this reality.

I don't totally agree with Chuck – think that it's ok for the left to talk about benefit cuts when they're actually referring to reductions in replacement rates, meaning benefits/pre-retirement earnings, just as the right talks about tax increase when we really mean taxes/earnings.

But his basic point that we need to think hard about what we mean and not be careless in using politically charged language is right on to me.

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Tuesday, February 1, 2011

New paper: “What Is ‘CLASS’? And Will It Work?”

The Center for Retirement Research at Boston College has released a new Issue in Brief: "What Is 'CLASS'? And Will It Work?" by Alicia H. Munnell and Josh Hurwitz

The brief's key findings are:

  • Long-term care is the major uninsured expense for most retirees.
  • CLASS is a new, voluntary, national program designed to:
    • alleviate the need for families to impoverish themselves to qualify for Medicaid;
    • reduce the burden of care on families; and
    • offset a bias towards institutionalization.
  • The primary challenge to CLASS is adverse selection – participation mainly by the less healthy.
  • To avoid a death spiral of rising premiums and declining participation, major program changes are needed.

The brief is available here.

Editor's note: when the key findings contain the words "death spiral," you can usually conclude the answer to the "Will it work" question is, at least as currently configured, "no."

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Did Reid say that Social Security reform is “off the table”?

A number of press outlets are reporting on comments by Senate Majority Leader Harry Reid that Social Security reform is "off the table." Given the President's flaccid discussion of Social Security in the SOTU I don't really doubt that conclusion, but it's worth bearing in mind what Reid actually ruled out: "privatizing or eliminating" the program, which to most readers would leave a fair amount of policy options on the table. (E.g., do the recommendations of the President's fiscal commission fit under "privatizing or eliminating"? If proposed by a GOP Member of Congress they probably would, but given they came from the President's own appointees I'm hoping they'd get a pass.) In any case, here's the video of Senator Reid so you can watch for yourself.

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