Friday, July 26, 2013

New paper: "How Do the Changing Labor Supply Behavior and Marriage Patterns of Women Affect Social Security Replacement Rates?"

"How Do the Changing Labor Supply Behavior and Marriage Patterns of Women Affect Social Security Replacement Rates?"

APRIL YANYUAN WU, Boston College - Center for Retirement Research
NADIA S. KARAMCHEVA, Urban Institute, Boston College - Center for Retirement Research
ALICIA H. MUNNELL, Boston College - Center for Retirement Research
PATRICK PURCELL, Government of the United States of America - Social Security Administration

This paper seeks to determine the impact of the changing lives of women – increased labor force participation/earnings and reduced marriage rates – on Social Security replacement rates. First, our estimates, based on the Health and Retirement Study and Modeling Income in the Near Term, show that Social Security replacement rates have dropped sharply at both the household- and individual-level, and the decline will continue for future retirees. Our second finding is that this aggregate change masks a complex relationship between replacement rates and the marital status and income levels of individuals. The decline in replacement rates over time is largest for married couples with husbands whose earnings are in the top tercile. Decomposing the reasons for the overall decline shows that increases in the labor supply and earnings of women explain more than one-third of the change. In contrast, the impact of changing marital patterns is relatively small. Much of the remaining explanation rests with the increased Full Retirement Age and changing claiming behaviors.

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Hypocrisy on Social Security and Public Sector Pensions?

A Roll Call article today looks at my positions on Social Security personal accounts and public employee pensions, finding a seeming contradiction:

As a top aide to President George W. Bush, Andrew Biggs argued for allowing workers to funnel payroll taxes into stocks instead of the Social Security trust fund backed by Treasury bonds. But Biggs has now emerged as a leader in prodding public pension funds to use a new gauge — based on Treasury bonds, not stocks — to evaluate unfunded liabilities.

Put more simply: “Biggs denies any change of heart of about the value of stocks as retirement investments,” the article says. I also deny beating my wife, but who’s going to believe that?

This claim of hypocrisy or bias has come up a number of times, including as part of my work with the Society of Actuaries Blue Ribbon Panel on public pensions. And at first sight, it seems pretty compelling: I advocated personal accounts investing in stocks, and even argued that account holders would have done well in the most recent market downturn. Yet today I’m arguing that public pensions should assume that their equity investments will return no more than Treasuries. What gives?

In most personal account plans, an individual could choose to invest part of his Social Security taxes in an account, with the option to hold stocks if he wished. The issue then was how to describe the benefits he might receive from this account. SSA’s actuaries focused on the ‘expected benefits’, based on assumptions regarding typical returns for the assets held by the accounts. Even then, SSA provided illustrations of higher or lower returns, which goes much farther than public pensions do today in illustrating the effects of market risk. At the time I supported this approach.

But over time other approaches became more prominent. The CBO used “Monte Carlo” simulations to illustrate the full range of possible outcomes for account holders, which I supported. And CBO also argued, strongly enough to convince me, that if a single “point estimate” was to be provided, benefits should be calculated using a bond return to account for the fact that stocks are riskier than Social Security is. In other words, so that accounts didn’t appear to be a free lunch. But to be clear, these were descriptive issues: the costs of the plan to the budget wouldn’t be affected at all by how you chose to think about investment returns.

But in the mid-2000s came several personal account plans, sponsored by then-Rep. Jim DeMint and Rep. Paul Ryan, in which the government would have guaranteed accounts against market downturns. And a guarantee, as I’ve argued in my public pension work, is a lot different than a mere “expectation.” If the worker’s account balance wasn’t sufficient to pay his full promised benefit, the government would make up the difference. For the individual it was no-lose: you get at least as much as Social Security promises, and probably more. Better yet, SSA’s actuaries argued that such guarantees would be relatively cheap. Thus, a personal accounts plan could guarantee participants a Social Security benefit at least as high as current law at lower cost than the current program. That’s a budget score that personal account proponents like me should have jumped at.

Except that it was wrong. That government guarantee is very similar to a “put option” – a financial product that gives the holder the right to sell a stock for some minimum price in the future – and, I argued, it needed to be priced as options are, using the so-called Black-Scholes formula. And once you do, you find that such guarantees are really pretty expensive, so much so that these guaranteed accounts plans would cost more, not less, than the current program. And in 2006 I co-authored an article showing why that was true.

Similarly, when a public employee pension guarantees participants a given level of benefits but funds those benefits with risky assets, there’s an implicit put option – provided by the taxpayer – that would top up the pension fund if its investments failed to generate their projected returns. And that’s precisely the logic I used in a 2011 journal article on public pension liabilities: once you count the contingent liabilities that risky pension investments place on taxpayers, the plans are a lot more expensive than you think. Unfunded liabilities that are reported at less than $1 trillion dollars become something north of $4 trillion.

That 2011 paper also shows that you don’t need to actually price the implicit put options that guarantee public pension investments. Through a principal known as put-call parity, pension liabilities calculated using this options pricing approach are mathematically identical to simply discounting the pension’s liabilities at a riskless rate of return.

This shows something important: that, contrary to Dean Baker’s somewhat-disingenuous claims in the Roll Call article, my arguments for discounting public pension liabilities using a Treasury bond rate don’t in any way assume that pensions invest in Treasuries. I can generate the exact same liability numbers based on the pensions’ own investment portfolios of stocks, bonds, real estate and alternative investments. All I need to do is calculate, based on the characteristics of those portfolios, the cost of guaranteeing that they’ll produce the returns they promise.

So the conclusion isn’t simply that there’s no inconsistency between my positions on Social Security accounts and on public employee pension accounting. It’s that my views on pension accounting are derived directly from my views on personal account plans, in particular plans that would guarantee account holders against low market returns. In both cases, the taxpayer is taking on a big liability. Yet, in both cases, the taxpayer would be kept in the dark about it. That’s what I've been fighting against.

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Wednesday, July 24, 2013

How much does Social Security pay in your area?

Check out county-by-county data in an interactive map constructed by the Private Enterprise Research Center at Texas A&M.

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The Brady Bunch and Social Security Progressivity

Via Third Way. Check it out at the Wall Street Journal.

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Tuesday, July 16, 2013

Boskin: The Disability Time Bomb

Stanford economist Michael Boskin writes in the Wall Street Journal on the looming insolvency of the Social Security Disability Insurance program.

Social Security for retirement and Medicare are the best known of the major entitlement programs with looming financial disasters. While some argue about when they will run out of money, their projected 75-year unfunded liabilities grow larger every year and now total $40 trillion, much worse thereafter.

But the ticking time bomb of entitlement reform is Social Security's Disability Insurance Fund. According to the Social Security trustees, the bomb is due to go off—when the fund, running out of money, will need to make steep cuts in benefits—just in time for the 2016 election.

I don’t agree with every word, but it’s worth checking out.

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Monday, July 15, 2013

Upcoming event: Rethinking Retirement

Friday July 26, 2013
9 AM - 12:15 PM (Breakfast available 8:30 AM)
National Press Club - Holeman Lounge
Washington, DC

The US Chamber of Commerce and the AARP Public Policy Institute invite you to join us to discuss improving retirement security.  If current trends continue, far too many Americans may not be able to maintain their standard of living in retirement- largely because they have inadequate savings.  This conference will engage key stakeholders, policy makers, advocacy groups, employers, and the financial service industry in a critical discussion about how to increase retirement savings. The conference will explore:
* Unique challenges to retirement saving facing women, African Americans, Hispanic Americans and  non-traditional workers. 
* Specific ways to expand coverage with innovative plan designs, new incentives, and broader use of automatic enrollment and automatic escalation. 
* Employer and consumer perspectives on improving access to retirement saving.
* Randy Johnson, SVP, Labor, Immigration & Employee Benefits, U.S. Chamber of Commerce
* Bob Reynolds, President & Chief Executive Officer, Putnam Investments, Inc.
* Debra Whitman, AARP EVP for Policy, Strategy and International Affairs
* Paula Calimafde, Chair, Small Business Council of America
* Stacey Dion, VP, Corporate Public Policy, Boeing
* Heather Hooper, VP, Retirement Strategies, Loring Ward
* Cindy Hounsell, President, Women's Institute for a Secure Retirement
* Jaime Kalamarides, SVP, Institutional Investment Solutions, Prudential Retirement
* Michael Kiley, President, Plan Administrators, Inc. (PAi)
* Beth McHugh, VP of Workplace Investing, Fidelity Investments
* Leticia Miranda, Senior Economic Security Policy Advisor, National Council of La Raza (NCLR)
* Shaun O'Brien, Assistant Policy Director for Health Care and Retirement, AFL-CIO

Seating is limited. Reserve your place NOW

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Thursday, July 11, 2013

Upcoming event: Savings and Retirement Forum

Join Us at Noon for a Lunch Forum with Guest Speaker:

Hilary Waldron

Economist with the Social Security Administration

Who will discuss her paper:

Mortality Differentials by Lifetime Earnings Decile

Wednesday, July 17, 2013

Noon-1:00 p.m.



Information Technology and Innovation Foundation

1101 K Street N.W. Suite 610,

Washington, DC 20005

Noon-1:00 p.m.

(Lunch will be provided)

Abstract To evaluate the distributional effects of some proposed Social Security law changes, such as an increase in Social Security's early entitlement age, retirement policy analysts typically tabulate the number of workers who fall below a predetermined threshold of hardship. Analysts using this technique often implicitly assume that the insured population falls neatly into a low-earnings poor health group and a remaining good health group. If the hardship threshold assumption is correct, there should be no difference in mortality risk between lifetime earnings deciles above a hardship threshold. This study finds that the hardship threshold model is overwhelmingly rejected in US Social Security data, a result consistent with similar studies conducted in Canada, Germany, and England.

Hilary Waldron has worked as an economist with the Social Security Administration since 1997. Much of her work has been concentrated on mortality, retired worker claiming behavior, and earnings patterns.  Her recent paper, “Mortality Differentials by Lifetime Earnings Decile:  Implications for Evaluations of Proposed Social Security Law Changes” is a part of a three part series looking at ways of evaluating the distributional effects of proposed changes to Social Security’s retired worker benefit.

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Tuesday, July 2, 2013

New paper: “The Funding of State and Local Pensions: 2012-2016”

The Center for Retirement Research has released a new Issue in Brief:

“The Funding of State and Local Pensions: 2012-2016” by Alicia H. Munnell, Jean-Pierre Aubry, Josh Hurwitz, and Madeline Medenica

The brief’s key findings are:

  • During 2012, using current GASB standards, the funded status of public plans declined slightly from 75 percent to 73 percent.
  • This decline reflected slow asset growth, which was only partly mitigated by reduced liability growth.
  • States and localities also continued to fall short on their annual required contribution payments.
  • Going forward, the funded ratio is projected to gradually move above 80 percent, assuming a healthy stock market.

This brief is available here

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Immigration reform and Social Security

Over at National Review I write about the challenges in modeling the effects of immigration reform on Social Security’s finances, arguing that SSA and CBO’s models need to be sure that they’re catching all the important things that make immigrants differ from U.S. residents. In particular, immigrants have lower average lifetime earnings and longer life expectancies, which means they’ll pay less in taxes and receive more in benefits than you’d think.

At AEI’s blog, I provide an update where I tried to replicate SSA’s recently released score for the Senate immigration reform legislation. SSA concluded that the plan would cut Social Security’s 75-year deficit by around 8 percent, which is worth about half a trillion in present value dollars. But using the Policy Simulation Group’s microsimulation model, which models immigrant earnings and mortality separate from natives, the gains to social security fall to less than 1 percent. Higher future immigration still generates small gains for the system, but these are largely offset by the costs of legalizing current undocumented workers.

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Third Way: The left needs to get real on entitlements

Jon Cowan and Jim Kessler of Third Way, a centrist organization, write in the Washington Post on the political left’s four fantasies regarding entitlements. It’s worth a read.

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Monday, July 1, 2013

New paper: “Decision Complexity as a Barrier to Annuitization”

Decision Complexity as a Barrier to Annuitization by Jeffrey R. Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S. Mitchell - #19168 (AG PE)


We show that people have difficulty valuing annuities, and this, instead of a preference for lump sums, helps explain observed low annuity demand. Although the median price at which people are willing to sell an annuity stream is close to the actuarial value, many responses diverge greatly from optimizing behavior. Moreover, people will pay substantially less to buy than to sell annuities. We conclude that boundedly rational consumers adopt "buy low, sell high"

heuristics when confronting a complex trade-off. This suggests that many consumers do not make optimizing decisions, underscoring the difficulty of explaining cross-sectional annuity valuation differences using standard models.

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