Wednesday, February 29, 2012

Allan Sloan: Social Security already IS means-tested

Social Security’s weakening financial state has caused some to call for means-testing, which would restrict benefits to lower-income retirees. (I discuss some of the issues with means-testing here.)

But writing for Fortune, Allan Sloan points out that Social Security is already progressive, such that low-earning individuals are treated better than high earners.

But does this mean we couldn’t make Social Security even more focused on low earners? Not in my opinion. After all, the program still pays a lot of benefits to retirees who are well above the poverty line and who could and would save more on their own if their future Social Security benefits were reduced.

Read more!

New papers from the Social Science Research Network

"Home Production and Social Security Reform"
FRB of Philadelphia Working Paper No. 12-5

MICHAEL DOTSEY, Federal Reserve Bank of Philadelphia
WENLI LI, Federal Reserve Bank of Philadelphia

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Comparing our benchmark economy to one with differentiated goods but no home production, we find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing our economy to a one-good economy without home production, we show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production.

"Expenditure Patterns of Older Americans, 2001-2009" EBRI Issue Brief, No. 368, February 2012

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)

This paper examines the consumption pattern of the older section of the U.S. population. The majority of the households studied here have either reached retirement age or are on the cusp of retirement. The data come from the Health and Retirement Study (HRS) and the Consumption and Activities Mail Survey (CAMS), which is a supplement of the HRS. CAMS contains detailed spending information on 26 nondurable and six durable categories, and it follows the same group of people over eight years. Using this information coupled with the income, wealth, health, and labor-market information available in the HRS, this study attempts to summarize the consumption behavior of the American elderly. It has three primary objectives: (1) To examine how consumption patterns evolve with age, income, and other demographic characteristics; (2) To study the income, expenditures, and wealth-holding patterns of the elderly to get a sense of how they are managing their finances and if they are at risk of outliving their assets; (3) To determine if long-term care (LTC) insurance and private health insurance affect the elderly’s consumption behavior. Household expenses steadily decline with age. With the age 65 expenditure as a benchmark, household expenditure falls by 19 percent by age 75, 34 percent by age 85, and 52 percent by age 95. Home and home-related expenses remain the single largest spending category for older Americans. On average, those over age 50 spend around 40-45 percent of their budget on home and home-related items. Health-related expenses are the second-largest component in the budget of older Americans. It is the only component which steadily increases with age. Health care expenses capture around 10 percent of the budget for those between 50-64, but increase to about 20 percent for those age 85 and over. The results show that while high-income households are managing their income and expenses well in retirement, low-income households are struggling. The high-income households maintain high levels of wealth, but whether these wealth levels will be sufficient to support them through very advanced ages or in case of catastrophic expenditure shocks is beyond the scope of this study. But for low-income households that are already struggling, such events will only make matters worse. There are several key demographic groups that are also not doing well in retirement, and they may be at risk of running short of wealth at some point in retirement. Demographic groups such as singles, blacks, and high school dropouts are outspending their resources in retirement. Not surprisingly, the lowest-income group (bottom-income quartile) which is generally overwhelmingly represented by the above groups, appears to be struggling the most. Long-term care and some form of private health insurance coverage have a significant effect on increased spending by older households.

"Labor-force Participation Rates of the Population Age 55 and Older, 2011: After the Economic Downturn" EBRI Notes, Vol. 33, No. 2, February 2012

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

This paper examines the most recent U.S. Census Bureau data on labor-force participation among Americans age 55 and older in 2011, including the trends after the economic recession that started in late 2007-early 2008 and thereafter. The labor-force participation rate measures the fraction of individuals within a specific group (in this case those 55 or older) who are working or actively pursuing work. This rate reflects both the desire and/or the need of individuals to work in a particular group. The first section uses annualized data on labor-force participation from the Current Population Survey (CPS), available from the Bureau of Labor Statistics website. However, these data provide only an overall picture, with few specific demographic details. In order to examine additional demographic trends of the U.S. population, the second section uses data from the March 2011 Supplement to the CPS. The labor-force participation rate for those age 55 and older has remained above its level before the economic downturn. For those ages 55-64, this is almost exclusively due to the increase of women in the work force; the male participation rate is flat to declining. However, among those age 65 and older, labor-force participation increased for both males and females. This upward trend is not surprising and is likely to continue because of workers’ need for continued access to employment-based health insurance and for more earning years to accumulate savings in defined contribution (401(k)-type) plans. Older Americans, particularly those in the private sector, increasingly have less access to guaranteed levels of income (such as pensions) or health insurance benefits when they retire; consequently, they have a greater need to work to help make their assets last longer or to continue to build up (or to rebuild) the assets they had or were not able to accumulate previously. However, financial concerns are not the only incentives involved here -- there also is an increased desire among many Americans to work longer, particularly among those with more education, for whom more meaningful jobs are often available that can be done well into older ages. The recent economic downturn did not alter the trend of older workers increasingly being in the labor force; rather, it appears that this remains the trend, as more opportunities for older workers exist and there is a greater necessity for them to remain in the labor force to accumulate sufficient or adequate resources for retirement.
The PDF for the above title, published in the February 2012 issue of EBRI Notes, also contains the fulltext of another February 2012 EBRI Notes article abstracted on SSRN: “Employer and Worker Contributions to Health Savings Accounts and Health Reimbursement Arrangements, 2006-2011.”

"This is Not Your Parents’ Retirement: Comparing Retirement Income Across Generations"
Social Security Bulletin, Vol. 72, No. 1, pp. 37-58, 2012

BARBARA A. BUTRICA, The Urban Institute
KAREN E. SMITH, Urban Institute
HOWARD IAMS, U.S. Social Security Administration

This article examines how retirement income at age 67 is likely to change for baby boomers and persons born in generation X (GenX) compared with current retirees. We use the Social Security Administration’s Modeling Income in the Near Term (MINT) model to project retirement income and assets, poverty rates, and replacement rates for current and future retirees at age 67. We find that, in absolute terms, retirement incomes of future cohorts will increase over time, and poverty rates will fall. However, projected income gains are larger for higher than for lower socioeconomic groups, leading to increased income inequality among future retirees. Finally, because post retirement incomes are not expected to rise as much as pre-retirement incomes, baby boomers and GenXers are less likely to have enough post-retirement income to maintain their pre-retirement standard of living compared with current retirees.

Read more!

Friday, February 17, 2012

Chuck Blahous on how NOT to make public policy

Over at e21, Chuck Blahous – of the Hoover Institution and a public trustee of the Social Security program – argues that the payroll tax cut undermines Social Security in a wide variety of ways. Check it out here.

Read more!

That damn Obama…

That’s not me talking, that’s FDR! Or so Jeffrey Brown of the University of Illinois thinks FDR might react to the current payroll tax cut. Check it out at Jeff’s Forbes blog.

Read more!

Why target date funds might work for you

The Financial Security Project at Boston College has generated several user-friendly guides to target data funds, which automatically shift from stocks to bonds as you grow closer to retirement age. It has really useful discussions of the risk of different assets and the importance of keeping investment fees low. You can check it out here.

Read more!

Thursday, February 16, 2012

Can Congress Ever Raise the Payroll Tax Back?

NPR’s Alan Greenblatt talks to a number of social security experts from across the spectrum (including me). There’s a surprising level of consensus that, once cut, “uncutting” payroll taxes will prove tougher to do.

Read more!

Wednesday, February 15, 2012

Tanner: Social Security Accounts “Still a Better Deal.”

Over at the Cato Institute, Mike Tanner writes that

“If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.”

I’ve made similar calculations and they’re right. That said, these kinds of analyses need to better account for:

a) Market risk: we really don’t know a lot about long-term market returns because we have so few non-overlapping periods of data from which to sample. If we’ve got good data since, say, around 1870, that means  that for 30-year holding periods we have a sample of four. Not much to go on. If we look at the risk of single-year returns and then extrapolate over longer periods, we’ve got a much bigger sample – and the potential downside risk looks a lot worse; and

b) Transition costs: Grandma’s benefits aren’t going to pay themselves, and they’re going to get paid at all if I take my payroll taxes out of the system. So we need to put in extra money during that transition period as accounts are built up. Mike is right that financing the transition with spending cuts is better than with tax increases. But does it really make a difference? If we cut spending and I get to keep the proceeds, I’m better off (assuming that the spending is wasteful). But if we cut spending and it’s used to finance the transition, I’m not better off. In any case, it’s really the spending cuts, not the accounts, that are doing the leg-work here. 

Read more!

Monday, February 13, 2012

New papers from the NBER

Numeracy, financial literacy, and financial decision-making by Annamaria Lusardi - #17821 (AG)


Financial decisions, be they related to asset building or debt management, require the capacity to do calculations, including some complex ones. But how numerate are individuals, in particular when it comes to calculations related to financial decisions? Studies and surveys implemented in both the United States and in other countries that are described in this paper show the level of numeracy among the population to be very low. Moreover, lack of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment. This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions. Now more than ever, numeracy and financial literacy are lifetime skills necessary to succeed in today's complex economic environment.

Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts by James M. Poterba, Steven F. Venti, David A. Wise - #17824 (AG)


Many analysts have considered whether households approaching retirement age have accumulated enough assets to be well prepared for retirement. In this paper, we shift from studying household finances at the start of the retirement period, an ex ante measure of retirement preparation, to studying the asset holdings of households in their last years of life. The analysis is based on Health and Retirement Study with special attention to Asset and Health Dynamics Among the Oldest Old (AHEAD) cohort that was first surveyed in 1993.

We consider the level of assets that households hold in the last survey wave preceding their death. We study how assets at the end of life depend on three family status pathways prior to death-- (1) original one-person households in 1993, (2) persons in two-person household in 1993 with a deceased spouse in the last year observed, and (3) persons in two-person households in 1993 with the spouse alive when last observed. We find that a substantial fraction of persons die with virtually no financial assets--46.1 percent with less than $10,000--and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support. In addition this group is disproportionately in poor health. Based on a replacement rate comparison, many of these households may be deemed to have been well-prepared for retirement, in the sense that their income in their final years was not substantially lower than their income in their late 50s or early 60s.

Yet with such low asset levels, they would have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities. This raises a question of whether the replacement ratio is a sufficient statistic for the "adequacy" of retirement preparation.

Read more!

Wednesday, February 8, 2012

New papers from the Social Science Research Network

"How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study?" Free Download
Michigan Retirement Research Center Research Paper No. 2011-253

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
THOMAS STEINMEIER, Texas Tech University - Department of Economics and Geography
NAHID TABATABAI, Dartmouth College - Department of Economics

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 that 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.

"An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans" Free Download
Upjohn Institute Working Paper No. 12-179

NANCY MOHAN, University of Dayton
TING ZHANG, University of Dayton - School of Business Administration

This paper investigates the determinants of public pension plan risk-taking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and beta. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing financial constraints allocate more assets to equity and have higher pension asset betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds. Finally, the results offer mild support of a public union effect.

"Why Has the Crisis Been Bad for Private Pensions, But Good for the Flat Tax? The Sustainability of ‘Neoliberal’ Reforms in the New EU Member States" Free Download
Centre for European Policy Working Paper No. 356

MIROSLAV BEBLAVÝ, Centre for European Policy Studies (CEPS)

This paper examines two questions related to the sustainability of the major neoliberal, economic and social reforms in the new EU member states, namely the flat income tax and private pension pillars. First, we look at the relationship between the political consensus/controversy at the time major policy reforms were passed and the future sustainability of these reforms after a change of government. Second, we explore what we call a paradox of reverse sustainability, whereby the flat income tax has been more politically resilient during the global financial and economic crisis than private pensions, even though ex ante expectations and the literature would lead us to expect the opposite.
The paper shows that controversy at the time the reforms were passed had no effect on subsequent sustainability, and the levels of partisanship and public support with regard to a specific reform seem less important than the political costs and benefits. We also find that despite their apparent neoliberal bent, the two policies are versatile enough to be shaped towards a variety of policy goals, allowing their introduction and retention in a variety of economic and social circumstances. In other words, even though private pensions and particularly the flat tax have powerful political connotations, they are by no means policy straitjackets.
While both reforms could sustain themselves throughout the ‘good’ times before the global crisis, their fates diverged during the crisis. Neither public support nor the large constituency of savers could fully protect private pensions from a policy reversal during a period of exceptional fiscal pressure. That is because a reversal was associated with significant, short-term fiscal gains and the states where these reversals took place also took a range of other decisions that were politically extraordinarily difficult. On the other hand, we demonstrate that the introduction or potential reversal of the flat tax was not associated with significant, short-term revenue gains. It is the relatively ‘cheap’ nature of the flat tax that distinguishes it from private pensions, because it sends a highly cost-effective signal in terms of revenues lost owing to its existence.

"Racial and Ethnic Differences in the Retirement Prospects of Divorced Women in the Baby Boom and Generation X Cohorts" Free Download
Social Security Bulletin, Vol. 72, No. 1, pp. 23-36, 2012

BARBARA A. BUTRICA, The Urban Institute
KAREN E. SMITH, Urban Institute

Blacks, Hispanics, and divorced women have historically experienced double-digit poverty rates in retirement, and divorce and other demographic trends will increase their representation in future retiree populations. For these reasons, we might expect an increase in the proportion of economically vulnerable divorced women in the future. This article uses the Social Security Administration’s Modeling Income in the Near Term (version 6) to describe the likely characteristics, work experience, Social Security benefit status, and economic well-being of future divorced women at age 70 by race and ethnicity. Factors associated with higher retirement incomes include having a college degree; having a strong history of labor force attachment; receiving Social Security benefits; and having pensions, retirement accounts, or assets, regardless of race and ethnicity. However, because divorced black and Hispanic women are less likely than divorced white women to have these attributes, income sources, or assets, their projected average retirement incomes are lower than those of divorced white women.

Read more!

Friday, February 3, 2012

Trust fund falling short?

Over at Investors Business Daily, Jed Graham writes that "The outlook for Social Security's trust fund has deteriorated to an astonishing degree over the past year, new Congressional Budget Office projections show.”

“The nonpartisan budget scorekeeper now expects the trust fund to peak in 2018 and decline to $2.7 trillion in 2022 — a full $1 trillion less than Social Security's own actuaries were expecting last year.”

“The new trajectory suggests that the trust fund's current depletion date of 2036 may jump ahead several years when Social Security's trustees release their annual report this spring, making the retirement program more central to the 2012 election.”

Read more!

Debating rising disability costs

The USA Today editorial page hosts contrasting views on rising beneficiary rolls for the Social Security disability program. The editors argue for a number of possibilities – including tightening eligibility standards and increasing employer incentives to keep workers with disabilities on the job – as a way to restrain rising costs for the program.

Charles Martin, president of the National Organization of Social Security Claimants' Representatives, counters the rising disability rolls are a function of the aging of the population and increased female labor force participation, which makes more women eligible for DI benefits.

Last month I testified at the House Ways and Means Social Security Subcommittee on rising disability costs and strategies disabled workers on the job.

Read more!

Wednesday, February 1, 2012

Can Americans work past 65? Should they?

Diane Lim Rogers discusses the pros and cons in her latest Christian Science Monitor column.

Read more!

How Social Security Really Began

Over at Bloomberg, Kristin Aguilera, the deputy director of the Museum of American Finance and the editor of Financial History magazine, has a nice discussion of Social Security’s history, including the note that it was another Roosevelt – Teddy – who first proposed a social insurance program to protect against poverty in old age.

Read more!

Event: “Can Boomer Women Afford to Retire?”

The Urban Institute, Tuesday, February 7, 2012 • Noon-1:30 p.m. ET

To attend in person in Washington, D.C., register at: (Registration is required.)

To watch the video webcast or a recording, go to (No registration is necessary.)


Barbara Bovbjerg, managing director for education, workforce, and income security issues, Government Accountability Office

Mary Beth Franklin, contributing editor, InvestmentNews (moderator)

Heidi Hartmann, president, Institute for Women’s Policy Research

Richard Johnson, director, Program on Retirement Policy, Urban Institute

Jack VanDerhei, research director, Employee Benefit Research Institute

Many boomers, the 77 million or so Americans born between 1946 and 1964, face daunting retirement challenges. Traditional employer-sponsored pensions have been disappearing, replaced by 401(k)-type plans whose payouts depend on unpredictable investment returns. The 2008 stock market crash wiped out trillions of dollars in retirement savings, and the worst housing slump since the Great Depression has suppressed home equity values. Rising health care costs and potential Social Security cutbacks add to boomers’ concerns.

The outlook for women is more uncertain. They still earn less than men, and poverty rates will likely remain high among older widows. Yet, boomer women have worked and earned more than ever before, boosting their retirement wealth. The shift toward 401(k) plans helps women with spotty employment histories, who don’t benefit much from traditional pensions. And men’s growing longevity is reducing the number of widows.

Join our panel of experts as they answer such questions as

- How will boomer women’s retirement incomes compare to those of previous generations?

- How many will see their living standards fall when they retire?

- Will medical and long-term care costs undermine retirement income security?

- How vulnerable are boomer women to potential changes in Social Security and Medicare?

At the Urban Institute: 2100 M Street N.W., 5th Floor, Washington, D.C.

Lunch will be provided at 11:30 a.m. The forum begins promptly at noon.

Read more!