Should you claim Social Security early?

Over at the Huffington Post, Tom Sightings gives four reasons why, contrary to common advice, you might want to claim benefits before the full retirement age of 66 (followed by my comments):

You need the money: Yes, if you need the money more at age 62 than you will at ages 72, 82 or 92, then by all means claim early. But there are fewer of those people than you’d think.

You’re in poor health: If you’re single and you KNOW you won’t be living that long, then claim early. But even for groups with known short average life expectancies – say, African-American males – there’s a ton of variation in life spans, and a higher Social Security benefit protects against outliving your assets. Moreover, if you have a spouse retiring later will provide her with a higher survivors benefit once you’re gone. You might want to delay retirement even if you know you won’t live past the average life expectancy.

You’re a financial genius: Delaying Social Security benefits gives you a guaranteed return on your money. By claiming early, you can invest that cash and maybe do better. Maybe.

If benefits change: This one is basically just wrong. First, Social Security reform is unlikely to substantially effect current retirees. And second, to the degree it does – say, by reducing COLAs – claiming early won’t exempt you. In fact, if you think COLAs might be cut that’s a reason to put off retirement, not claim earlier.

Read more!

A bigger problem than you think

It’s common to hear that the Social Security shortfall is modest in size and easily fixed. Compared to Medicare, that’s true. Compared to pretty much anything else in the budget, it’s false. Ramesh Ponnuru, writing for Bloomberg, explains.

Read more!

Poll: Public favors raising taxes, retirement age over benefit cuts

An Associated Press-GfK public opinion poll finds that most Americans would prefer to fix Social Security by raising taxes or increasing the retirement age rather than reducing monthly benefits.

“Social Security is facing serious long-term financial problems. When given a choice on how to fix them, 53 percent of adults said they would rather raise taxes than cut benefits for future generations, according to the poll. Just 36 percent said they would cut benefits instead.”

“The results were similar when people were asked whether they would rather raise the retirement age or cut monthly payments for future generations — 53 percent said they would raise the retirement age, while 35 percent said they would cut monthly payments.”

Since raising the retirement age would reduce monthly benefits, what people seem to approve of is increasing both the normal retirement age (currently 66) and early retirement age of 62. Doing so would force people to delay collecting benefits, but wouldn’t reduce benefits once they did retire.

Read more!

New papers on disability from the Social Security Bulletin

"Longitudinal Patterns of Medicaid and Medicare Coverage Among Disability Cash Benefit Awardees"
Social Security Bulletin, Vol. 72, No. 3, pp. 19-35, 2012

KALMAN RUPP, Government of the United States of America - Social Security Administration
Email: kalman.rupp@ssa.gov
GERALD F. RILEY, Health Care Financing Administration

This article explores the role of the Social Security Disability Insurance (DI) and Supplemental Security Income (SSI) cash benefit programs in providing access to public health insurance coverage among working-aged people with disabilities, using a sample of administrative records spanning 84 months. We find that complex longitudinal interactions between DI and SSI eligibility determine access to and timing of Medicare and Medicaid coverage. SSI plays an important role in providing a pathway to Medicaid coverage for many low-income individuals during the 29-month combined DI and Medicare waiting periods, when Medicare coverage is not available. After Medicare eligibility kicks in, public health insurance coverage is virtually complete among awardees with some DI involvement. Medicaid coverage continues at or above 90 percent after 2 years for SSI-only awardees. Many people who exit SSI retain their Medicaid coverage, but the gap in coverage between stayers and those who leave SSI increases over time.

"The Growth in Applications for Social Security Disability Insurance: A Spillover Effect from Workers’ Compensation"
Social Security Bulletin 72(3): 69-88, 2012

XUGUANG (STEVE) GUO, affiliation not provided to SSRN
Email: xuguang@rci.rutgers.edu
JOHN F. BURTON, Rutgers University - School of Management and Labor Relations
Email: jfburton@rci.rutgers.edu

We investigate the determinants of application for Social Security Disability Insurance (DI) benefits in approximately 45 jurisdictions between 1981 and 1999. We reproduce findings of previous studies of the determinants of DI application then test the additional influence of changes to workers’ compensation program benefits and rules on DI application rates. Our findings indicate that the programs are interrelated: When workers’ compensation benefits declined and eligibility rules tightened in the 1990s, the DI application rate increased.

"Workplace Injuries and the Take-Up of Social Security Disability Benefits"
Social Security Bulletin, Vol. 72, No. 3, pp. 1-17, 2012

PAUL O'LEARY, affiliation not provided to SSRN
Email: paul_ol@hotmail.com
LESLIE I. BODEN, Boston University - Department of Environmental Health
Email: lboden@bu.edu
SETH A. SEABURY, The RAND Corporation
Email: seabury@rand.org
AL OZONOFF, Children's Hospital Boston
Email: al.ozonoff@childrens.harvard.edu
ETHAN SCHERER, RAND Corporation
Email: escherer@rand.org

Workplace injuries and illnesses are an important cause of disability. State workers' compensation programs provide almost $60 billion per year in cash and medical-care benefits for those injuries and illnesses. Social Security Disability Insurance (DI) is the largest disability insurance program in the United States, with annual cash payments to disabled workers of $95 billion in 2008. Because injured workers may also receive DI benefits, it is important to understand how those two systems interact to provide benefits. This article uses matched state workers' compensation and Social Security data to study the relationship between workplace injuries and illnesses and DI benefit receipt. We find that having a lost-time injury substantially increases the probability of DI receipt, and, for people who become DI beneficiaries, those with injuries receive DI benefits at younger ages. This relationship remains robust even after we account for important personal and work characteristics.

Read more!

New paper: “The Distributional Effects of the Social Security Windfall Elimination Provision.”

The Distributional Effects of the Social Security Windfall Elimination Provision by Jeffrey R. Brown, Scott Weisbenner - #18342 (AG PE)

Abstract:

Millions of federal, state and local government employees have lifetime earnings that are divided between employment that is covered by the Social Security system and employment that is not covered.

Because Social Security benefits are a non-linear function of covered lifetime earnings, the simple application of the standard benefit formula to covered earnings only would provide a higher replacement rate on those earnings than is appropriate given the individuals' total (covered plus uncovered) lifetime earnings. The Windfall Elimination Provision (WEP), established in 1983, is intended to correct this situation by applying a modified benefit formula to earnings of individuals with non-covered employment. This paper analyzes the distributional implications of the WEP, and finds that it reduces benefits disproportionately for households with lower lifetime covered earnings. It discusses an alternative method of calculating the WEP that preserves the intended redistribution of the system. In recognition of the data limitations that prevent this alternative method from being used by SSA for at least another decade, the paper also analyzes two alternative ways of calculating the WEP that use the same information that SSA currently uses, are budget neutral, and come closer to maintaining the cross-sectional progressivity of Social Security than does the existing WEP formula.

http://papers.nber.org/papers/W18342?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Read more!

New papers from the Social Science Research Network

Some very interesting new papers from the Social Science Research Network this week.

"Optimal Pension Design in General Equilibrium"
Netspar Discussion Paper No. 08/2012-022

HANS FEHR, University of Würzburg - Institute of Economics and Social Sciences
Email: hans.fehr@mail.uni-wuerzburg.de
JOHANNES UHDE, University of Wuerzburg
Email: johannes.uhde@uni-wuerzburg.de

The present paper aims to quantify efficiency properties of real world social security systems of various institutional designs in order to identify an optimal pension design. Starting from a benchmark economy without social security, we introduce alternative pension systems and compare the costs arising from liquidity constraints as well as labor and savings distortions versus the benefits from insurance provision against income and lifespan uncertainty. Our findings highlight strong efficiency losses arising from both means-testing pension benefits against private assets and restricting the contribution base while indicating a positive impact of means-testing flat benefits against earnings-related benefits within pension systems resting on several tiers. Furthermore, our results suggest that the negative correlation between pension progressivity and pension generosity may be justified on efficiency grounds. In our model a single-tier universal earnings-related pension system yields the highest efficiency gains dominating flat benefits as well as two-tier systems of any form.

"Employee Market Risk and Retirement Cyclicality: A Natural Experiment"

MATTHEW GUSTAFSON, University of Rochester - William E. Simon Graduate School of Business Administration
Email: matthew.gustafson@simon.rochester.edu

A 1984 federal government retirement system shift to defined contribution (DC) pensions quasi-randomly exposes retirement income to the financial markets. The amount of additional exposure is increasing with income and amounts to an estimated 20% of retirement income for the highest income tercile. During the financial crisis, this exposure translates to an additional 2.4 percent loss in retirement income. I exploit this exogenous wealth shock to show how the market risk brought on by DC pensions affects retirement patterns.
I find that DC exposure causes retirement age federal employees to delay retirement approximately 50 percent longer during the first year of the crisis. The treatment effect is largest for high income employees, a result that is expected because of the larger treatment. Within this subsample, the DC treatment causes employees planning to retire anytime between July 2009 and July 2011 to delay retirement by an average of 3 months. In addition, as of July 2011 3 months worth of retirees continue to work because of their DC losses. This lingering effect is concentrated in employees between 60 and 65 years old as opposed to older employees for whom the effect of market losses on retirement has fully reversed.

"Shifting Income Sources of the Aged"
Social Security Bulletin 72(3): 59-68

CHRISTOPHER ANGUELOV, U.S. Social Security Administration
Email: chris.anguelov@ssa.gov
HOWARD IAMS, U.S. Social Security Administration
Email: Howard.m.iams@ssa.gov
PATRICK PURCELL, Social Security Administration
Email: patrick.purcell@ssa.gov

Traditional defined benefit pensions, once a major source of retirement income, are increasingly giving way to tax-qualified defined contribution (DC) plans and individual retirement accounts (IRAs). This trend is likely to continue among future retirees who have worked in the private sector. This article discusses the implications of those trends for the measurement of retirement income. We conclude that Census Bureau’s Current Population Survey (CPS), one of the primary sources of income data, greatly underreports distributions from DC plans and IRAs, posing an increasing problem for measuring retirement income in the future. The CPS and other data sources need to revise their measures of retirement income to account for periodic (irregular) distributions from DC plans and IRAs.

"Changes in Labor Force Participation of Older Americans and Their Pension Structures: A Policy Perspective"
Boston College Center for Retirement Research Working Paper No. 2012-18

FRANK HEILAND, City University of New York (CUNY) - School of Public Affairs
Email: frank.heiland@cuny.baruch.edu
ZHE LI, Framingham State College
Email: zli@framingham.edu

We investigate how the shift in private pension coverage from defined benefit (DB) to defined contribution (DC) retirement plans since the 1980s has contributed to the substantial rise in labor force participation of older Americans. We develop a life cycle model of retirement that captures important aspects of private (DB and DC) and public (Social Security Old-Age) pensions. We demonstrate how this novel framework can assist policy makers and researchers in analyzing the complex interrelations of labor supply decisions, retirement behavior, and wealth accumulation. We begin by illustrating important differences in the incentives for labor supply and retirement behavior provided by DB and DC pensions. We show that the timing of the exit from the labor force is closely tied to wealth accrual in DB plans, while wealth accrual in DC plans does not provide similar incentives for the timing of retirement. We then use the model to conduct a cohort-based simulation analysis of labor force participation for the period 1977 to 2010. The results illustrate the potential significance of the rise in employer-sponsored DC pensions in explaining the increase in labor force participation of older Americans. We estimate that, holding the share of individuals with employer-sponsored pensions constant, the shift from DB to DC pension coverage increased the labor force participation rate of workers age 60 to 64 by 4.9 percentage points (1.7 points for ages 65-69). Finally, we show that DC pension holders are more concentrated at the earliest take-up age for Social Security old-age retirement benefits and are less responsive to changes in Social Security retirement age policy than DB pension holders.

"Job Demand and Early Retirement"
Boston College Center for Retirement Research Working Paper No. 2012-19

SEPIDEH MODREK, affiliation not provided to SSRN
Email: smodrek@berkeley.edu
MARK R. CULLEN, Stanford University
Email: mrcullen@stanford.edu

Policy initiatives such as increases in the full retirement age implicitly reduce benefits for early retirement. Yet research suggests that those in physically demanding jobs may be particularly adversely affected by such policies. We examine to what extent physical job demand relates to early retirement decisions in a population of aging manufacturing workers. We follow a cohort of approximately 1,500 stably employed male Alcoa employees aged 51-58 in 2001 followed forward to 2008. We use a variety of models to examine whether externally rated physical job demand at middle age is related to early retirement. We also examine whether pension eligibility and payouts induce earlier retirement, especially for those with more physically demanding jobs, while accounting for wage differentials, injury history, and underlying health. Our results suggest that workers whose jobs have high physical demand retire earlier after accounting for the wage differential and health. We also find that the minority of workers who transition to lower demand jobs, due to previous injury or health issues, are less likely to retire early. Finally, while we find evidence that pension eligibility and wealth accumulation induce earlier retirement, there was limited evidence of a difference by job demand.

Read more!

Social Security: How bad a deal?

With the AP reporting that the current generation of retirees will be the first to collect less in Social Security benefits than it will pay in taxes, there’s been a lot of talk about whether Social Security remains a “good deal.”

The AARP pushes back, noting that Social Security offers some things that many private investments don’t: it’s protected against inflation, it pays benefits that last as long as you live, and so forth.

This is true, although someone wishing to replicated Social Security’s benefits could largely do so on their own: make low-risk investments, then at retirement convert them to an inflation-adjusted annuity (yes, they are available).

Moreover, while it’s hard to say whether Social Security is currently a good deal – that’s in the eye of the beholder – we can say pretty clearly that it’s not as good a deal today as it was in the past. The benefits haven’t changed much, it’s the taxes that have.

A person who retired in 1950 paid around 0.75 percent of his lifetime earnings into the program – a 2 percent tax rate, but accounting for only 15 years of taxes from 1935 through 1950. A person retiring in 1970 paid an average lifetime rate of 3.6 percent.

But a person retiring today paid an average of 10.7 percent of their lifetime earnings into Social Security, even though the benefits offered by Social Security today are roughly the same as in 1970. So you’re paying roughly three times as much in to get the same out.

Now, this may still be a good deal – who can say? But I would have been surprised to hear AARP argue in 1970 that Social Security would still be a good deal at three times the price. Yet that’s more or less what we’re looking at today.

Read more!

Entitlements vs. the Safety Net

The National Center for Policy Analysis’s Daily Policy Digest summarizes “Generational Warfare,” a new article in Reason Magazine by Nick Gillespie and Veronique de Rugy.

As a young, new generation enters the workforce, they are subjected to taxes that will be allocated to a generation gearing up for retirement. However, while this may have been an attractive option in the 1960s, it is now a strain on a fragile economy and a generation that has a hard time finding work as it is, say Nick Gillespie, editor in chief of Reason.com, and Veronique de Rugy, a senior research fellow at the Mercatus Center.

The promise of a social safety net for those that are retired and sick may seem worth fighting for, but the data paints a different picture.

• Under the Federal Insurance Contributions Act, workers must pay 6.2 percent and 1.45 percent of their incomes to fund the entitlement programs Social Security and Medicare, respectively.
• In 1940 there were 159 workers to each beneficiary, while today there are fewer than three.
• The Social Security program allotted $725 billion in 2011 with 56 million Americans receiving an average of $1,229 each month.
• That same year, Medicare spent approximately $560 billion to provide health care for 49 million people.

In addition to these costs, many seniors that benefit from these programs do not need them.

• Citizens age 65 and older have lower poverty rates than any other group, and their poverty rates have fallen in the last 50 years.
• The average wealth of seniors has increased almost 80 percent in the past 20 years.
• In 2010, only 11 percent of households headed by people age 65 or older were in poverty.
• Meanwhile, 22 percent of households headed by people under the age of 35 were in poverty.

Politics has gotten in the way of sensible policy, and as a result the current structure of these programs is not sustainable. Social Security's trust fund is set to be depleted by 2033 while Medicare's trust fund is set to be depleted by 2024.

Baby boomers and those soon to be retired argue that there is an obligation for them to receive benefits from Social Security and Medicare because they paid into these programs. However, the Supreme Court undermined this assertion in Flemming v. Nestor, when it ruled that no one is legally entitled to the money.

Source: Nick Gillespie and Veronique  de Rugy, "Generational Warfare," Reason Magazine, August/September 2012.

For text:

http://reason.com/archives/2012/07/23/generational-warfare

Read more!