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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