Another Social Security commission?

Sen. Dick Durbin (D-IL) says yes. Read all about it at the Washington Post…

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“Repeat after Me: Social Security Adds To The Deficit”

So argues Veronique de Rugy over at National Review Online.

I explored this issue recently for Real Clear Markets. Check out that piece here.

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Killing Social Security With a Smile?

So says liberal columnist Froma Harrop. I don’t agree with her, but she puts her points well.

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New paper from the Social Science Research Network: “Will Delayed Retirement by the Baby Boomers Lead to Higher Unemployment Among Younger Workers?”

"Will Delayed Retirement by the Baby Boomers Lead to Higher Unemployment Among Younger Workers?"
Boston College Center for Retirement Research Working Paper No. 2012-22

ALICIA H. MUNNELL, Boston College - Center for Retirement Research
Email: MUNNELL@BC.EDU
APRIL YANYUAN WU, Boston College - Center for Retirement Research
Email: wuuv@bc.edu

Using 1977-2011 data from the Current Population Survey, this paper investigates the often-repeated claim that delayed retirement by baby boomers will result in higher unemployment among the young, a claim which has been garnering increased attention from the media during the Great Recession. It explores both time-series and cross-state variation, and uses state-level regressions and instrumental-variable models to determine the extent to which such “crowding out” exists in the United States. The estimates show no evidence that increasing the employment of older persons reduces the job opportunities or wage rates of younger persons.

Indeed, the evidence suggests that greater employment of older persons leads to better outcomes for the young in the form of reduced unemployment, increased employment, and a higher wage. The patterns are consistent for both men and women and for groups with different levels of education. Estimates using elderly male mortality rates as instrumental variables also produce no consistent evidence that changes in the employment rates of older workers adversely affect the employment and wage rate of their younger counterparts. If anything, the opposite is true. Finally, despite the fact that the labor market downturn that accompanied the Great Recession was the most severe experienced in the post-war era, the effects of elderly employment on other segments of the labor market do not differ from those during typical business cycles.

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New paper: “Mismeasurement of Pensions Before and After Retirement: The Mystery of the Disappearing Pensions with Implications for the Importance of Social Security as a Source of Retirement Support”

The National Bureau of Economic Research has released a new article, titled “Mismeasurement of Pensions Before and After Retirement: The Mystery of the Disappearing Pensions with Implications for the Importance of Social Security as a Source of Retirement Support,” by Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai.

Abstract:

A review of the literature suggests that when pension values are measured by the wealth equivalent of promised DB pension benefits and DC balances for those approaching retirement, pensions account for more support in retirement than is suggested when their contribution is measured by incomes received directly from pension plans by those who have already retired. Estimates from the Health and Retirement Study (HRS) for respondents in their early fifties suggest that pension wealth is about 86 percent as valuable as Social Security wealth. In data from the Current Population Survey (CPS), for members of the same cohort, measured when they are 65 to 69, pension incomes are about 56 percent as valuable as incomes from Social Security. Our empirical analysis uses data from the Health and Retirement Study to examine the reasons for these differences in the contributions of pensions as measured in income and wealth data.

A number of factors cause the contribution of pensions to be understated in retirement income data, especially data from the CPS.

One factor is a difference in methodology between surveys affecting what is included in pension income, especially in the CPS, which ignores irregular payments from pensions. In CPS data on incomes of those ages 64 to 69 in 2006, pension values are 59 percent of the value of Social Security. For the same cohort, in HRS data, the pension value is 67 percent of the value of Social Security benefits.

Some pension wealth "disappears" at retirement because respondents change their pension into other forms that are not counted as pension income in surveys of income. Altogether, 16 percent of pension wealth is transformed into some other form at the time of disposition. For those who had a defined benefit pension just before termination, the dominant plan type for current retirees, at termination 12 percent of the benefit was transformed into a state that would not count as pension income after retirement.

For those who receive benefits soon after termination, there is a 3.5 percent reduction in DB pension value at termination compared to the year before termination. One reason may be the form of annuitization that is chosen.

A series of caveats notwithstanding, the bottom line is that CPS data on pension incomes received in retirement understates the full contribution pensions make to supporting retirees.

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New paper: “Understanding Social Security Benefit Adequacy: Myths And Realities Of Social Security Replacement Rates” Charles Blahous

The Mercatus Center at George Mason University has released “Understanding Social Security Benefit Adequacy: Myths And Realities Of Social Security Replacement Rates,” by Chuck Blahous, one of Social Security’s public trustees. Here’s the abstract:

“Discussions of Social Security benefit adequacy are often framed in terms of the replacement rate, defined as the ratio of one’s retirement benefits to pre-retirement income. Three aspects of Social Security replacement rates are often misunderstood. First, the rising tax costs of maintaining constant replacement rates cause
pre-retirement standards of living to decline relative to post-retirement standards of living. Second, Social Security’s actual replacement rates are substantially higher than many understand because they are not reported as defined by most financial planners. Third, the Social Security benefit formula causes replacement rates to rise over time for a given level of real wages. Removing these quirks that arise under the current benefit formula could both reduce projected cost growth and strengthen system finances, while still honoring the replacement rate concept.”

And for anyone interested, here’s Glenn Springstead and my take on replacement rates from a few years back. The main takeaway is that Social Security’s benefit adequacy depends a lot upon how you measure it, and SSA’s definition of replacement rates (as Chuck notes above) differs from the conventional one.

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Social Security: Off the Table or On?

The Washington Times reports that Sen. Majority Leader Harry Reid has declared Social Security reform to be “off the table” in terms of a budget deal to address the looming “fiscal cliff”:

“Mr. Reid said Democrats have already made changes to Medicare as part of President Obama's health law, and said Social Security is solvent for the time being and shouldn't be tapped to pay for other government needs.”

"’Social Security is not part of the problem, That's one of the myths the Republicans have tried to create,’ he said. "Social Security is sound for the next many years. But we want to make sure that in the outer years people are protected also, but it's not going to be part of the budget talks, as far as I'm concerned.’"

On the other hand, the Washington Post weighed in with an editorial arguing that Social Security should be included in budget talks:

“Social Security’s retirement age is already headed to 67, which is one reason that program is no longer a major cause of government insolvency. Still, it can and should be rendered more sustainable. The disability component’s explosive recent growth, at a time when the nation’s general health is stable, suggests that reform would not harm those who truly need help.”

I don’t know whether a rush-job reform of Social Security is what’s needed to avert the fiscal cliff, which is more of a short-term issue. But any broader budget talks should put everything on the table, including Social Security.

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Are Social Security payroll taxes regressive?

That’s the claim made by Paul Krugman, among others.

But it’s not true when you count the benefits they generate, argue Kip Hagopian and Lee Ohanian in the Wall Street Journal. While taxes are a flat rate capped at earnings of around $110,000, benefits are paid on a progressive basis.

“Given the design of Social Security, the only way the program could be regressive is if the mortality rate differences between the group of higher-income and lower-income workers were so large that higher-income people received greater lifetime benefits for each dollar contributed. But this is not the case, according to a 2009 study by the Social Security Administration's Office of Retirement and Disability Policy. Rather, the study concludes that ‘Social Security is modestly progressive on a lifetime basis; currently, the program lies approximately halfway between paying a benefit directly proportional to lifetime taxable earnings and paying a flat dollar benefit to each retiree.’"

For anyone interested, the SSA study was written by me, Mark Sarney and Chris Tamborini during the time I was at the agency. Both Mark and Chris continue their good work at Social Security.

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