The CBO weighs in on the “replacement rates” debate

On December 18 the Congressional Budget Office released its latest report on Social Security. In addition to updating its projections for system financing – which has worsened considerably in recent years – CBO touched on the debate over how to measure Social Security “replacement rates.”

Back in July, Syl Schieber and I wrote in the Wall Street Journal that the Social Security Administration’s method of calculating replacement rates understates the adequacy of Social Security benefits. A replacement rate is designed to measure the degree to which retirement income can “replace” working-age earnings and thus allow retirees to maintain their pre-retirement standard of living. Most financial advisors recommend a replacement rate from total retirement income of about 70%, while SSA’s actuaries calculate a typical replacement rate from Social Security benefits of about 40%.

But SSA’s actuaries use a method that overstates individuals’ pre-retirement earning and thus understates their replacement rates from Social Security. SSA compares Social Security benefits to the wage-indexed average of the retiree’s highest 35 years of earnings. This “wage indexing” adjusts past earnings for substantially more than the rate of inflation and thus understates the degree to which Social Security benefits help retirees maintain their pre-retirement standard of living. Here’s how we put it back in July:

“Say you are retiring at age 65 this year and earned $20,000 in 1985. The purchasing power of that 1985 salary in 2014 dollars is $43,640. But in calculating replacement rates, SSA wage indexes that $20,000 for the growth of the economy, and so under that model you earned $53,281. Replacing 70% of $53,281 is a lot more difficult than replacing 70% of $43,640. SSA’s wage indexing of past earnings in effect credits retirees with salaries that they never had, then deems retirement income inadequate if it fails to replace that nonexistent past salary.”

In its new report, CBO seems to grasp these points. CBO calculates replacement rates relative both to wage-indexed earnings (its previous practice) and inflation-indexed earnings. In both cases, CBO calculates replacement rates using the 35 highest years of pre-retirement earnings.

Moreover, the language CBO uses makes clear they understand what we were getting at:

“Indexing earnings to prices better captures the real amount of resources available to a worker over his or her lifetime, whereas indexing earnings to wages may overstate those amounts.”

How much does this matter? A lot. CBO’s wage-indexed replacement rate for a typical worker born in the 1980s is 46%, while that person’s price-indexed replacement rate is 61%, about one-third higher.

A replacement rate is merely a shorthand for a much more complex “life cycle” calculation in which individuals try to maximize their standard of living over their full lifetime, while accounting for changing family sizes, uncertainty regarding their life expectancies and the return they can receive on their savings, their attitudes toward risk, and other factors. No shorthand will be perfect.

But CBO’s use of the inflation-adjusted average of the highest 35 years of earnings isn’t a bad shorthand. It will tend to reflects earnings from the individual’s late 20s through retirement, a period in which he or she has paid off some debts, established a career path and begun to anticipate the standard of living they will enjoy through their working life, which is the standard of living they will seek to replicate through their retirement savings. If you want a single measure that’s easy to understand while being consistent with the more sophisticated life cycle approach to retirement saving, CBO hasn’t chosen a bad one.

By contrast, SSA’s “wage-indexed” measure isn’t consistent with a life cycle approach. In the life cycle model, for which Franco Modigliani won the Nobel Prize, individuals care about smoothing their own standard of living from year to year. SSA’s actuaries, by contrast, assume that individuals want their standard of living to rise each year with the average wages of other workers in the economy. But they don’t present any research or data to back this “Keeping up with the Joneses” theory, they merely assert it. Personally, I’ll stick with the guy who’s got the Nobel Prize…

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Smith: Social Security deal of 1983 was a punt

Writing in The Hill, Brenton Smith of Fix Social Security Now argues that the 1983 bipartisan deal to fix Social Security, which some have cited as a blueprint for current reformers to follow, was in fact a “punt” that pushed most of the costs of reform onto future generations.

Check it out here.

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New working papers from the Center for Retirement Research at Boston College

The Center for Retirement Research at Boston College has recently released seven working papers:

Do Tax Incentives Increase 401(k) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions Matthew S. Rutledge, April Yanyuan Wu, and Francis M. Vitagliano Are Retirees Falling Short? Reconciling the Conflicting Evidence Alicia H. Munnell, Matthew S. Rutledge, and Anthony Webb Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions Lauren Hersch Nicholas Who Is Internationally Diversified? Evidence from 296 401(k) Plans Geert Beckaert, Kenton Hoyem, Wei-Yin Hu, and Enrichetta Ravina The Causes and Consequences of Financial Fraud Among Older Americans Keith Jacks Gamble, Patricia Boyle, Lei Yu, and David Bennett New Evidence on the Risk of Requiring Long-Term Care Leora Friedberg, Wenliang Hou, Wei Sun, Anthony Webb, and Zhenyu Li Why Do SSI and SNAP Enrollments Rise in Good Economic Times and Bad? Matthew S. Rutledge and April Yanyuan Wu

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New papers from the NBER

Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions

by John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian - #20738 (AG)

Abstract:

Can governments increase private savings by taxing savings up front instead of in retirement? Roth 401(k) contributions are not tax-deductible in the contribution year, but withdrawals in retirement are untaxed. The more common before-tax 401(k) contribution is tax-deductible in the contribution year, but both principal and investment earnings are taxed upon withdrawal. Using administrative data from eleven companies that added a Roth contribution option to their existing 401(k) plan between 2006 and 2010, we find no evidence that total 401(k) contribution rates differ between employees hired before versus after the Roth introduction, which means that the amount of retirement consumption being purchased by 401(k) contributions increases after the Roth introduction. A survey experiment suggests two behavioral factors play a role in the unresponsiveness of contribution rates to their tax treatment: (1) employee confusion about or neglect of the tax properties of Roth balances and (2) partition dependence.

http://papers.nber.org/papers/W20738?utm_campaign=ntw&utm_medium=email&utm_source=ntw

4. The Long Reach of Education: Early Retirement by Steven Venti, David A. Wise - #20740 (AG)

Abstract:

The goal of this paper is to draw attention to the long lasting effect of education on economic outcomes. We use the relationship between education and two routes to early retirement - the receipt of Social Security Disability Insurance (DI) and the early claiming of Social Security retirement benefits - to illustrate the long-lasting influence of education. We find that for both men and women with less than a high school degree the median DI participation rate is

6.6 times the participation rate for those with a college degree or more. Similarly, men and women with less than a high school education are over 25 percentage points more likely to claim Social Security benefits early than those with a college degree or more. We focus on four critical "pathways" through which education may indirectly influence early retirement - health, employment, earnings, and the accumulation of assets. We find that for women health is the dominant pathway through which education influences DI participation.

For men, the health, earnings, and wealth pathways are of roughly equal magnitude. For both men and women the principal channel through which education influences early Social Security claiming decisions is the earnings pathway. We also consider the direct effect of education that does not operate through these pathways.

The direct effect of education is much greater for early claiming of Social Security benefits than for DI participation, accounting for 72 percent of the effect of education for men and 67 percent for women.

For women the direct effect of education on DI participation is not statistically significant, suggesting that the total effect may be through the four pathways.

http://papers.nber.org/papers/W20740?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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New papers from the Social Science Research Network

"Individual Account Retirement Plans: An Analysis of the 2013 Survey of Consumer Finances"
EBRI Issue Brief, Number 406 (November 2014)

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper assesses the status of American families’ accumulations in individual account (IA) retirement plans, both through the incidence of ownership and the amounts accumulated, using the Federal Reserve Board’s triennial Survey of Consumer Finances (SCF). Building on previous research by the Employee Benefit Research Institute (EBRI) using prior SCF surveys, this paper investigates the percentage of families who own various types of retirement plans, including IRAs. Next, it provides both median and average estimates of the value of the assets in these accounts, as well as the proportion of total financial assets represented and their relative percentages within the IA retirement plan universe. It then focuses on the value of IRA rollovers as part of the total IRA market, in order to glean a sense of the full contribution that the employment-based, retirement-plan system makes to total retirement assets. The percentage of all families with an employment-based retirement plan from a current employer decreased from 38.8 percent in 1992 to 36.2 percent in 2013. While retirement plan ownership from a current employer among families declined from 2010-2013, the percentage of family heads who were eligible for defined contribution (DC) plans and chose to participate held essentially stable at 78.2 percent in 2010 to 78.7 percent in 2013. The percentage of families owning individual retirement accounts (IRAs) or Keoghs was also unchanged from 2010 (28.0 percent) to 2013 (28.1 percent). Furthermore, the percentage of families with an individual account retirement plan from a current employer or a previous employer or an IRA/Keogh declined from 50.4 percent in 2010 to 48.2 percent in 2013. However, when including defined benefit (pension) retirement plans, the percentage with any retirement plan was unchanged from 63.8 percent in 2010 to 63.5 percent in 2013. While ownership of employment-based plans and IRAs was unchanged to declining in 2013, the median (mid-point) account balance of those families owning an individual account retirement plan increased in 2013: The value was $22,992 in 1992, reached $38,608 in 2001, and increased to $59,000 in 2013. Individual account retirement plan assets were a clear majority of families’ total financial assets (among those owning such plans): 70.3 percent in 2013 at the median, unchanged from 2010. Across all demographic groups in 2013, these assets’ share at the median of total financial assets was at least 49.2 percent (when these accounts were owned). By IRA type, regular IRAs accounted for the largest percentage of IRA ownership, but rollover IRAs had a slightly larger share of assets than regular IRAs in 2013.

"The Gap Between Expected and Actual Retirement: Evidence From Longitudinal Data"
EBRI Notes, Vol. 35, No. 11 (November 2014)

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)
Email: banerjee@ebri.org

This EBRI paper compares the expected and actual retirement for the same group of workers. It finds a majority (55.2 percent) of these workers retired within three years (before or after) of their expected retirement. Specifically, the longitudinal findings show that 38.0 percent retired before they expected, 48.0 percent retired after they expected, and 14.0 percent retired the year they expected to retire. It also shows that more people (35.9 percent) actually retired after 65 than expected (18.9 percent), and among those who expected to retire after 65, 56.6 percent did so. The study also shows that these longitudinal findings (comparing one cohort at different times) differ from cross-sectional findings (comparing different cohorts at the same time), which are reported more frequently. It shows that in 2012, the expected probability of working full-time after age 65 was 48.7 percent and 46.0 percent, respectively, among men and women working full-time. But only 12.7 percent of men and 6.0 percent of women worked full-time after age 65 in 2012. EBRI also found that people who have a retirement plan tend to retire closer to when they expected, compared with those without a plan. It also found that the gap between expected and actual retirement among those with defined benefit plans and defined contribution plans is generally very small. A large difference exists in later-than-expected retirement between pre- and post-September 2008, when the markets crashed. Pre-September 2008, 83.9 percent retired either earlier or no later than three years after their expected retirement, but only 59.3 percent did so post-September 2008. Clearly, the economic recession delayed the retirement of many people. The EBRI study uses data from the University of Michigan’s Health and Retirement Study (HRS), which is sponsored by the National Institute on Aging, and is the most comprehensive national survey of older Americans.
The PDF for the above title, published in the November 2014 issue of EBRI Notes, also contains the fulltext of another November 2014 EBRI Notes article abstracted on SSRN: “Views on the Value of Voluntary Workplace Benefits: Findings from the 2014 Health and Voluntary Workplace Benefits Survey.”

"Insights from Switzerland's Pension System"
Pension Research Council WP 2014-16

MONIKA BUTLER, University of St. Gallen, CESifo (Center for Economic Studies and Ifo Institute)
Email: Monika.Buetler@unisg.ch

This chapter takes Switzerland's much praised three-pillar system to illustrate some of the challenges pension system reforms face in an aging society. It shows that policymakers are confronted by some individuals with behavioral anomalies, and by others who strategically exploit the system. The trade-off between providing incentives and adequate retirement income limits policy options, especially if reformers do not want to impose too many restrictions on individual choice and avoid excessive burdens for the young generation. Pension reforms can also be seriously challenged by political constraints, in particular, when voters have a direct say on proposed changes.

"Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions"
CRR WP 2014-15

LAUREN HERSCH NICHOLAS, University of Michigan at Ann Arbor - Institute for Social Research (ISR)
Email: lnichola@umich.edu

We use Health and Retirement Study data linked to the Department of Labor’s O*Net classification system to examine the relationship between lifetime exposure to occupational demands and retirement behavior. We consistently found that both non-routine cognitive analytic and non-routine physical demands were associated with worse health, earlier labor force exit, and increased use of Social Security Disability Insurance. The growing share of workers in jobs with high levels of cognitive demand may contribute to growth in DI use.

"Are Retirees Falling Short? Reconciling the Conflicting Evidence"
CRR WP 2014-16

ALICIA H. MUNNELL, Boston College - Carroll School of Management
Email: crr4381@bc.edu
MATTHEW S. RUTLEDGE, Boston College
Email: rutledma@umich.edu
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu

This paper examines conflicting assessments of whether people will have adequate retirement income to maintain their pre-retirement standard of living. The studies that it examines use data from the Survey of Consumer Finances (SCF), the Health and Retirement Study (HRS), and the HRS supplement Consumption and Activities Mail Survey (CAMS). Critical components of the analysis are behavioral assumptions about household consumption patterns when children leave home and when households retire. A key limitation is that the behavioral assumptions in the different studies are based on incomplete knowledge of actual household behavior.
The paper found that:
*A simple – assumption-free – calculation of wealth to income by age clearly indicates that households retiring in the future will be less prepared than those in the past.
*Studies showing that households are saving optimally hinge crucially on assumptions that people are willing to accept declining consumption as they age and that they sharply reduce their consumption when the children leave home.
*While other studies have found consumption does not decline early in retirement, new analysis suggests that many will be unable to maintain this pace over their full retirement.
The policy implications of the findings are:
*Households are more likely than not to be falling short in their retirement preparedness.
*Such shortfalls should be taken into consideration as policymakers discuss options for reforming Social Security.
*To bolster retirement preparedness, policymakers may want to consider ways to encourage more private saving, such as requiring 401(k)s to adopt auto-enrollment and auto-escalation policies and to apply these policies to current workers as well as new hires.

"Causal Effects of Retirement Timing on Subjective Physical and Emotional Health"

ESTEBAN CALVO, Universidad Diego Portales - Facultad de Economía y Empresa - Instituto de Políticas Públicas, Boston College - Sociology Department - Center for Retirement Research
Email: estebancalvo@gmail.com
NATALIA SARKISIAN, Boston College, Department of Sociology
Email: natalia@sarkisian.net
CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
Email: Chris.Tamborini@ssa.gov

Objective: This article explores the effects of the timing of retirement on subjective physical and emotional health. Using panel data from the Health and Retirement Study (HRS), we test four theory-based hypotheses about these effects — that retirements maximize health when they happen earlier, later, anytime, or on time.
Methods: We employ fixed and random effects regression models with instrumental variables to estimate the short- and long-term causal effects of retirement timing on self-reported health and depressive symptoms.
Results: Early retirements — those occurring prior to traditional and legal retirement age — dampen health.
Discussion: Workers who begin their retirement transition before cultural and institutional timetables experience the worst health outcomes; this finding offers partial support to the psychosocial-materialist approach that emphasizes the benefits of retiring later. Continued employment after traditionally expected retirement age, however, offers no health benefits. In combination, these findings offer some support for the cultural-institutional approach, but suggest that we need to modify our understanding of how cultural-institutional forces operate: Retiring too early can be problematic, but no disadvantages are associated with late retirements. Raising the retirement age, therefore, could potentially reduce subjective health of retirees by expanding the group of those whose retirements would be considered early.

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New paper from the Social Science Research Network

"Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions"
CRR WP 2014-15

LAUREN HERSCH NICHOLAS, University of Michigan at Ann Arbor - Institute for Social Research (ISR)
Email: lnichola@umich.edu

We use Health and Retirement Study data linked to the Department of Labor’s O*Net classification system to examine the relationship between lifetime exposure to occupational demands and retirement behavior. We consistently found that both non-routine cognitive analytic and non-routine physical demands were associated with worse health, earlier labor force exit, and increased use of Social Security Disability Insurance. The growing share of workers in jobs with high levels of cognitive demand may contribute to growth in DI use.

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New papers from the Social Science Research Network

"Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk."
Max Planck Institute for Social Law and Social Policy Discussion Paper No. 290-14

DANIEL HARENBERG, Swiss Federal Institute of Technology Zurich - CER-ETH - Center of Economic Research at ETH Zurich
Email: dharenberg@ethz.ch
ALEXANDER LUDWIG, Goethe University Frankfurt - Research Center SAFE, University of Cologne - Faculty of Management, Economics and Social Sciences
Email: ludwig@safe.uni-frankfurt.de

When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.

"Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013"
EBRI Issue Brief, No. 405 (October 2014)

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

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 2014 Current Population Survey (CPS), the most recent data currently available. It begins with an overview of retirement plan types and participation in these types of plans and describes the data used in this study, along with their relative strengths and weaknesses. From these data, results on participation in employment-based retirement plans are analyzed for 2013 across various worker and employer characteristics. The report then explores retirement plan participation across U.S. geographical regions, including state-by-state comparisons, as well as comparisons by certain consolidated statistical areas (CSAs). In addition, trends from 1987-2013 in employment-based retirement plan participation are presented across many of the same worker and employer characteristics that are used for 2013. Furthermore, an accounting of the number of individuals who worked for employers that did not sponsor a plan and of workers who did not participate in a plan in 2013 is provided by various demographic and employer characteristics. The percentage of workers participating in an employment-based retirement plan increased in 2013, increasing for the first time since 2010 among all workers and private-sector workers. The retirement plan participation level depends on the type of worker being considered: Among all American workers in 2013, 51.3 percent worked for an employer or union that sponsored a retirement plan (the sponsorship rate), while 40.8 percent participated in a plan. Among wage and salary workers ages 21-64, the sponsorship rate increased to 56.0 percent, and the portion participating increased to 45.8 percent. Among full-time, full-year wage and salary workers ages 21-64, the sponsorship rate was 62.3 percent and 54.5 percent of the workers participated in a retirement plan. Almost 74 percent of wage and salary public-sector workers participated in an employment-based retirement plan. Being white or having attained a higher educational level were also associated with higher probabilities of participating in a retirement plan. Of the 67.9 million wage and salary workers who worked for an employer who did not sponsor a plan, 17.9 million (26.4 percent) were ages 25 or younger or 65 or older. Almost 30 million (43.6 percent) were not full-time, full-year workers, and 29.2 million (43.0 percent) had annual earnings of less than $20,000. Furthermore, 39.3 million (57.8 percent) worked for employers with less than 100 employees. Workers at large employers were far more likely to participate than those at smaller firms.

"Distributional Effects of Means Testing Social Security: An Exploratory Analysis"
Michigan Retirement Research Center Working Paper No. 2014-306

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu
NAHID TABATABAI, Dartmouth College - Department of Economics
Email: nahid.tabatabai@dartmouth.edu

This paper examines the distributional implications of introducing additional means testing of Social Security benefits where proceeds are used to help balance Social Security’s finances. Benefits of the top quarter of households ranked according to the relevant measure of means are reduced using a modified version of the Social Security Windfall Elimination Provision (WEP). The replacement rate in the first bracket of the benefit formula, determining the Primary Insurance Amount (PIA), would be reduced from 90 percent to 40 percent of Average Indexed Monthly Earnings (AIME).
Four measures of means are considered: total wealth; an annualized measure of AIME; the wealth value of pensions; and a measure of average indexed W2 earnings. The empirical analysis, based on data from the Health and Retirement Study, starts with a baseline benefit for each household, calculated as the product of the average benefit-tax ratio under the current system, multiplied by the taxes paid by the household.
These means tests would reduce total household benefits by 7 to 9 percentage points, amounting to 15.4 to 16.4 percent of the benefits of affected workers at baseline. We find that the basis for means testing Social Security makes a substantial difference as to which households have their benefits reduced, and that different means tests may have different effects on the benefits of families in similar circumstance. We also find that the measure of means used to evaluate the effects of a means test makes a considerable difference as to how one would view the effects of the means test on the distribution of benefits.

"Life-Cycle Consumption, Asset Allocation, and Pension Design Under Non-Standard Preferences"

STEFAN ZIMMERMANN, University of Vienna - Faculty of Business, Economics, and Statistics
Email: stefan.zimmermann.sz@gmail.com

This paper uses a behavioral life-cycle model to analyze different pension schemes when people display non-standard consumption preferences and income-heterogeneity. Retirement resources depend on public pension benefits and individual savings accumulated over working life. Individual savings crucially depend on the choice between low-risk and high-risk assets, because there is a sizable return gap. Mainstream economic models do not adequately capture peoples’ life-cycle asset allocation patterns, that is, their investment in safe and risky assets. The proposed model makes a better prediction. I investigate whether a transition towards a funded pension scheme is desirable, and whether different income classes could benefit from different pension schemes. The rationale is that a non-funded pension component provides better downward risk protection for the low-income earners, whereas a funded pension component is more appealing to rent-seeking, high-income earners. Simulation results reveal that a funded pension scheme is most promising for all income classes — considering reasonable demographic and financial market projections for Germany.

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Upcoming event: “AARP - Better Financial Security in Old-Age? The Promise of Longevity Annuities”

Public Policy Economic Security Update

About PPI More PPI Research

Join the Discussion Better Financial Security in Old-Age? The Promise of Longevity Annuities November 6, 2014 10:00 AM - 12:00 PM EST The Brookings Institution Washington, DC David John, Deputy Director of the Retirement Security Project and senior advisor at the AARP Public Policy Institute, is one of the featured speakers at the event described below. Better Financial Security in Old-Age? The Promise of Longevity Annuities Longevity annuities-a financial innovation that provides protection against outliving your money late in life-have the potential to reshape the retirement security landscape. Typically bought at retirement, a longevity annuity offers a guaranteed stream of income beginning in ten or 20 years at a markedly lower cost than a conventional annuity that begins paying out immediately. Sales have grown rapidly and it will be even easier to purchase the annuities in the future given new Treasury regulations. While economists have touted the attractiveness of longevity annuities as a way to ensure the ability to maintain one's living standards late in life, significant barriers to a robust market remain-including lack of consumer awareness, questions about product value, and employer concerns with taking on fiduciary responsibility by offering these products to their employees. Can longevity annuities overcome these barriers to find widespread popularity among Americans retirees? On November 6, the Retirement Security Project will host a panel of experts to discuss the potential for these products to contribute to the economic security of older Americans.  Speakers include William Gale, David John, Henry J. Aaron, David Wessel, Benjamin Harris, Mark Iwry and more. Register to Attend

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New paper: “Injecting Work Incentives into the Social Security Disability Program”

 

Summary from the NCPA Policy Digest:

In 2013, the Social Security Disability Insurance (SSDI) program spent $143 billion while taking in just $111 billion. That shortfall, explains Jagadeesh Gokhale, economist for the Cato Institute, will only continue, and the SSDI Trust Fund is projected to run out of money entirely in 2016.

In addition to being insolvent, Gokhale explains that the SSDI program -- intended to provide a safety net for individuals unable to work -- is full of work disincentives. Many individuals enrolled in the program are actually able to work, at least to some degree, but they choose not to for fear of losing SSDI benefits.

Gokhale explains that some individuals move into the SSDI program after exhausting unemployment benefits. Indeed, various research indicates that there are a number of SSDI enrollees with work capabilities:

• A study comparing identical SSDI applicants -- some of whom were admitted to the program while the rest were rejected from the program -- found that many rejected applicants returned to  the work force, indicating that over 25 percent of current SSDI beneficiaries actually have work capacity.
• Another study found the likelihood of a rejected SSDI applicant returning to work to be 35 percent.

If a substantial number of SSDI enrollees actually have work capabilities, shouldn't they be encouraged to exercise those capabilities and reenter the work force? Gokhale suggests a new benefit structure in order to induce enrollees to work rather than remain in SSDI, outside of the labor force, for fear of losing benefits. His plan would:

• Use a "benefit offset" that would reduce an enrollee's SSDI benefits if he enters the workforce but would provide an additional subsidy -- from a non-SSDI source -- based on his earnings.
• That subsidy would increase as his earnings increase, in order to encourage, rather than discourage, additional work.

In short, Gokhale describes his plan as one that would pay capable individuals to work rather than pay them to remain idle. While there are many SSDI enrollees who appear to have some level of work capability, they choose not to enter the labor force. By creating an incentive structure that only improves with work activity, Gokhale suggests more SSDI beneficiaries would return to work and seek employment.

Source: Jagadeesh Gokhale, "SSDI Reform: Promoting Gainful Employment while Preserving Economic Security," Cato Institute, October 22, 2014.

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New paper from the NBER

Will They Take the Money and Work? An Empirical Analysis of People's Willingness to Delay Claiming Social Security Benefits for a Lump Sum

by Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, Tatjana Schimetschek - #20614 (AG LS PE)

Abstract:

This paper investigates whether exchanging the Social Security delayed retirement credit (currently paid as an increase in lifetime annuity benefits) for a lump sum would induce later claiming and additional work. We show that people would voluntarily claim about half a year later if the lump sum were paid for claiming any time after the Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age. Overall, people will work one-third to one-half of the additional months, compared to the status quo. Those who would currently claim at the youngest ages are likely to be most responsive to the offer of a lump sum benefit.

http://papers.nber.org/papers/W20614?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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CRFB: Social Security Getting Harder to Fix

The Committee for a Responsible Federal Budget blogs that the tax of fixing Social Security solvency is getting tougher:

A hypothetical solution that would have closed the shortfall last year now only closes about 95 percent of the shortfall. Previously, a 2.9 percentage point tax increase (raising the combined payroll tax from 12.4% to 15.3%) would be enough to solve the shortfall. Now, that increase would need to be 3.1 percent. Similarly, a 17.5 percent reduction in all benefits would have addressed the shortfall last year, but it would need to be 18.4 percent this year. Furthermore, these options assume the changes are made immediately. Waiting 20 years requires changes to be 50 percent larger.

Check out their full blog here.

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New papers from the Social Science Research Network

"The Retention Effects of High Years of Service Cliff-Vesting Pension Plans"

JESSE M. CUNHA, Naval Postgraduate School, Naval Postgraduate School
Email: jcunha@nps.edu
AMILCAR ARMANDO MENICHINI, Naval Postgraduate School
Email: aamenich@nps.edu
ADAM CROCKETT, University of New South Wales (UNSW) - Australian Defence Force Academy
Email: adam.j.crockett@gmail.com

We study the retention effects of the Australian military’s decision to remove a 20-year cliff-vesting requirement from their retirement system in 1991. We follow to the present individuals who self-selected into and out of the 20-year cliff-vesting plan, as well as those who were forced out of the plan. Eliminating the high years of service cliff-vesting provision leads to consistently higher attrition over time.

"Early Retirement Across Europe. Does Non-Standard Employment Increase Participation of Older Workers?"
Netspar Discussion Paper No. 10-2014-044

JIM BEEN, Leiden University - Department of Economics, Netspar
Email: j.been@law.leidenuniv.nl
OLAF VAN VLIET, Leiden University - Leiden Law School, Leiden University - Department of Economics
Email: o.p.van.vliet@law.leidenuniv.nl

In many European countries, the labor market participation of older workers is considerably lower than the labor market participation of prime-age workers. This study analyzes the variation in labor market withdrawal of older workers across 13 European countries over the period 1995-2008. We seek to contribute to existing macro-econometric studies by taking non-standard employment into account, by relating the empirical model more explicitly to optional value model theory on retirement decisions and by using a two-step IV-GMM estimator to deal with endogeneity issues. The analysis leads to the conclusion that part-time employment is negatively related to labor market withdrawal of older men. This relationship is less strong among women. Additionally, we find that part-time employment at older ages does not decrease the average actual hours worked. Furthermore, the results show a positive relationship between unemployment among older workers and early retirement similar to previous studies.

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Social Security Announces 1.7 Percent Benefit Increase for 2015

Print Version

Monthly Social Security and Supplemental Security Income (SSI) benefits for nearly 64 million Americans will increase 1.7 percent in 2015, the Social Security Administration announced today.

The 1.7 percent cost-of-living adjustment (COLA) will begin with benefits that more than 58 million Social Security beneficiaries receive in January 2015.  Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2014. The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

Some other changes that take effect in January of each year are based on the increase in average wages.  Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $118,500 from $117,000.  Of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes because of the increase in the taxable maximum.

Information about Medicare changes for 2015 is available at www.Medicare.gov.

The Social Security Act provides for how the COLA is calculated.  To read more, please visitwww.socialsecurity.gov/cola.

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Social Security COLA Likely 1.6-1.8%

The Associated Press reports on the Cost of Living Adjustment Social Security beneficiaries are likely to receive in January. The COLA will be announced this Wednesday, but the AP estimates an increase of less than 2 percent, which amounts to about $20 per month for the typical beneficiary. Read more here.

 

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New paper from the NBER

The Great Recession, Decline and Rebound in Household Wealth for the Near Retirement Population

Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai

NBER Working Paper No. 20584
Issued in October 2014
NBER Program(s):   AG LS PE

This paper uses data from the Health and Retirement Study to examine the effects of the Great Recession on the wealth held by the near retirement age population from 2006 to 2012. For the Early Boomer cohort (ages 51 to 56 in 2004), real wealth in 2012 remained 3.6 percent below its 2006 value. This is a modest decline considering the fall in asset values during the Great Recession.

Much of the decline in wealth over the 2006 to 2010 period was cushioned by wealth originating from Social Security and defined benefit pensions. For the most part, these are stable sums that ensured a major fraction of total wealth did not decline as a result of the recession.

The rebound in asset values observed between 2010 and 2012 mitigated, but did not erase, the asset losses experienced in the first years of the Great Recession.

Effects of the Great Recession varied with the household’s initial wealth. Those who were in the highest wealth deciles typically had a larger share of their assets subject to the influence of declining markets, and were hurt most severely. Unlike those falling in lower wealth deciles, they have yet to regain all the wealth they lost during the recession.

Recovering losses in assets is only part of the story. The assets held by members of the cohort nearing retirement at the onset of the recession would normally have grown over ensuing years. Members of older HRS cohorts accumulated assets rapidly in the years just before retirement. Those on the cusp of retiring at the onset of the recession would be much better off had they had enjoyed similar growth in assets as experienced by members of older cohorts.

The bottom line is that the losses in assets imposed by the Great Recession were relatively modest. The recovery has helped. But much of the remaining penalty due to the Great Recession is in the failure of assets to grow beyond their initial levels.

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Upcoming event: “Social Security: What Americans Want and Are Willing to Pay For”

Social Security: What Americans Want and Are Willing to Pay For

October 23, 2014, 10:00 am — 11:45 am

Carnegie Endowment for International Peace
1779 Massachusetts Avenue, NW
Choate Room
Washington, DC 20036
United States

With lawmakers considering future changes to Social Security, it’s important to know what their constituents want — across political parties, generations, and income levels. Join the National Academy of Social Insurance for the release of a groundbreaking new public opinion study.

Social Security faces a long-term funding challenge. How do Americans want to deal with it? This survey explores Americans’ views on Social Security and uses an innovative application of trade-off analysis, a technique widely used in market research, to explore the kinds of policy changes that Americans want for Social Security and are willing to pay for. If voters could choose their own policy package, what would it look like? 

Survey participants chose among policy options that would reduce benefits, increase benefits, or raise revenues to put the program on solid footing for future generations. Speakers will present findings from the Academy’s new report — Americans Make Hard Choices on Social Security: A Survey With Trade-Off Analysis — and discuss the implications for policymakers.

Findings:

• William J. Arnone,  Board Chair, National Academy of Social Insurance
• Elisa A. Walker, Income Security Policy Analyst, National Academy of Social Insurance
• Mathew Greenwald, President and CEO, Greenwald & Associates

Observations:

• Jason Furman, Chairman, Council of Economic Advisers

Implications:​

• Moderator: Mark Miller, Columnist, Reuters
• Andrea Louise Campbell, Professor of Political Science, MIT
• Maya MacGuineas, President, Committee for a Responsible Federal Budget
• Maya Rockeymoore, President and CEO, Center for Global Policy Solutions
• Virginia P. Reno, Vice President for Income Security Policy, National Academy of Social Insurance

» Register Now

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FactCheck: Joni Ernst and ‘Privatizing’ Social Security

Social Security has played a big role in the Iowa Senate race between Republican Joni Ernst and Democrat Bruce Braley. FactCheck.org weighs in on some of the claims. Check it out here.

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New papers from the Social Science Research Network

"How Does Household Expenditure Change With Age for Older Americans?"
EBRI Notes, Vol. 35, No. 9 (September 2014)

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)
Email: banerjee@ebri.org

Retirement saving involves a lot of unknowns, the most important being not knowing how much money will be needed in retirement. Although it is impossible to predict the retirement expenses of any particular household, the average amounts spent by current retirees can serve as important benchmarks for individual savers as well as for industry experts and policymakers. This paper examines the expenditure pattern of the older segment 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 time. Using this information coupled with the income information available in the HRS, this study summarizes the consumption behavior of the American elderly. The primary goal is to examine how overall spending and spending in different categories change with age. Home and home-related expenses is the largest spending category for every age group. Health expenses increase steadily with age. In 2011, households with at least one member between ages 50 and 64 spent 8 percent of their total budget on health items, compared with 19 percent for those age 85 or over. Health-related expenses occupy the second-largest share of total expenditure for those ages 75 or older. The two components of household expenditures that show a declining pattern across age groups are transportation expenses and entertainment expenses. Food and clothing expenses (as a share of total expenditure) remain more or less flat across the different age groups. There is a large increase in spending at the 95th percentile for those ages 90 or older, which can be attributed to very high health care expenses.

The PDF for the above title, published in the September 2014 issue of EBRI Notes, also contains the full text of another September 2014 EBRI Notes article abstracted on SSRN: “2014 Health and Voluntary Workplace Benefits Survey: Most Workers Continue to be Satisfied With Their Own Health Plan, but Growing Number Give Low Ratings to Health Care System.”

"Initial Performance of Pension Privatization in Eastern Europe – Are Reform Reversals Justified?"

NIKOLA ALTIPARMAKOV, Serbian Fiscal Council
Email: NALTI@yahoo.com

During first 15 years of their existence, mandatory private pension funds in Eastern Europe have realized rates of return that were lower and more volatile than the corresponding Pay-As-You-Go rates of return, even before the emergence of global financial crisis. Suboptimal investments in domestic government bonds dominated pension portfolios in many countries. Econometric analysis suggests that pension privatization failed to produce anticipated side-effect benefits, such as increased national saving or accelerated economic growth. If pension privatization structural weaknesses are unlikely to be resolved successfully then implementing reform reversals could improve short-term fiscal balance without deteriorating long-term pension sustainability.

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MacGuineas: “A Social Security ‘Fix’ That Falls Short”

Writing in the Wall Street Journal, the Committee for a Responsible Federal Budget’s Maya MacGuinea argues that raising the Social Security payroll tax ceiling, while perhaps justifiable, won’t fix the problem so much as delay it.

“According to the Social Security Administration (SSA), eliminating the cap would close about 70% of the system’s 75-year imbalance. According to Congressional Budget Office accounting, it would close only 45% of the gap.”

I think eliminating the so-called “tax max” would be a bad idea – for a LOT of reasons. Check out my 2011 AEI paper for the gory details…

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Call for Papers: McCrery-Pomeroy SSDI Solutions Initiative

Call for Papers: McCrery-Pomeroy SSDI Solutions Initiative Seeking Proposals to Improve the Social Security Disability Insurance Program

DEADLINE FOR SUBMITTING PROPOSALS: November 1, 2014

The McCrery-Pomeroy SSDI Solutions Initiative is now accepting proposals for papers presenting innovative ideas to improve the Social Security Disability Insurance (SSDI) system.

The SSDI Solutions Initiative is a project co-chaired by former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) dedicated to identifying practical and realistic policy changes to improve the SSDI program for its beneficiaries, those contributing to the program, the economy, and society as a whole.

The full call for papers can be read here.

The Social Security Disability Insurance (SSDI) Solutions Initiative is soliciting ideas to improve various aspects of the SSDI program. Proposals are due by November 1, 2014; selected papers will be presented at a conference in Washington, D.C., in mid-2015 and included in a consolidated volume to be disseminated widely and shared with policymakers and experts in advance of the SSDI trust fund's projected 2016 insolvency date.

Though all topics are welcomed, the SSDI Solutions Initiative is particularly looking for papers addressing one or more of the following topics:

1. Improving the Disability Determination Process
2. Modernizing Determination Criteria and Program Eligibility
3. Strengthening Program Integrity and Management
4. Improving Incentives and Support for Beneficiaries to Return to Work
5. Encouraging Disabled Workers to Remain in the Workforce
6. Improving SSDI Program Interaction with Other Federal, State, Local, and/or Private Programs
7. Moving beyond the Current "All or Nothing" System of Awarding Benefits
8. Encouraging Employers to Support Disabled Workers

Potential authors may submit a notice of intent to apply, along with any questions, to info@ssdisolutions.org.

Click here to read a detailed description of suggested paper topics, learn how to submit a proposal, and download a submission form.

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New papers from the National Bureau of Economic Research

Distributional Effects of Means Testing Social Security: An Exploratory Analysis by Alan Gustman, Thomas Steinmeier, Nahid Tabatabai - #20546 (AG LS PE)

Abstract: This paper examines the distributional implications of introducing additional means testing of Social Security benefits where proceeds are used to help balance Social Security's finances. Benefits of the top quarter of households ranked according to the relevant measure of means are reduced using a modified version of the Social Security Windfall Elimination Provision (WEP). The replacement rate in the first bracket of the benefit formula, determining the Primary Insurance Amount (PIA), would be reduced from 90 percent to 40 percent of Average Indexed Monthly Earnings (AIME). Four measures of means are considered: total wealth; an annualized measure of AIME; the wealth value of pensions; and a measure of average indexed lifetime W2 earnings. The empirical analysis is based on data from the Health and Retirement Study. These means tests would reduce total lifetime household benefits by 7 to 9 percentage points. We find that the basis for means testing Social Security makes a substantial difference as to which households have their benefits reduced, and that different means tests may have different effects on the benefits of families in similar circumstance. We also find that the measure of means used to evaluate the effects of a means test makes a considerable difference as to how one would view the effects of the means test on the distribution of benefits.

http://papers.nber.org/papers/W20546?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Annuitized Wealth and Post-Retirement Saving by John Laitner, Daniel Silverman, Dmitriy Stolyarov - #20547 (AG EFG PE)

Abstract: We introduce a tractable model of post-retirement saving behavior in which households have a precautionary motive arising from uninsured health status risks. The model distinguishes between annuitized and non-annuitized wealth, emphasizes the importance of asset composition in determining optimal household behavior, and includes an extension allowing late-in-life exchange transactions among relatives. We consider three puzzles in micro data - rising cohort average wealth of retirees, lack of demand for market annuities, and the relative scarcity of bequests - and show that our model can provide intuitive explanations for each.

http://papers.nber.org/papers/W20547?utm_campaign=ntw&utm_medium=email&utm_source=ntw

The Perception Of Social Security Incentives For Labor Supply And Retirement: The Median Voter Knows More Than You'd Think by Jeffrey B. Liebman, Erzo F.P. Luttmer - #20562 (PE)

Abstract: The degree to which the Social Security tax distorts labor supply depends on the extent to which individuals perceive the link between current earnings and future Social Security benefits. Some Social Security reform plans have been motivated by an assumption that workers fail to perceive this link and that increasing the salience of the link could result in significant efficiency gains. To measure the perceived linkage between labor supply and Social Security benefits, we administered a survey to a representative sample of Americans aged 50-70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply. Indeed, respondents generally report a link between labor supply and future benefits that is somewhat greater than the actual incentive. We also surveyed people about their understanding of various other provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming and rules on widow benefits) are relatively well understood while others (e.g., rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood.

In addition, our survey incorporated a framing experiment, which shows that how the incentives for delayed claiming are presented has an impact on hypothetical claiming decisions. In particular, the traditional "break-even" framing used by the Social Security Administration leads to earlier claiming than other presentations do.

http://papers.nber.org/papers/W20562?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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Smith: “Does Social Security Impact the Federal Deficit?”

Brenton Smith, writing for FedSmith.com, hits on a point that others have missed in the question of how Social Security affects the overall budget deficit:

Social Security is not self-supporting as [Oregon Sen. Jeff Merkley] claims.  It receives by law (Public Law 98-21) annual general fund transfers, mainly the revenue from the taxation of Social Security benefits. This revenue appears on-budget, and is dollar for dollar deficit spending. Over the past three years, Social Security has by law created more than $75 billion of “On Budget” deficit – according to the Trustees.

As I’ve written for Real Clear Markets, I think the Social Security/budget deficit issue is broader than this: when we consider the “unified budget deficit,” which is by far the most common figure used regarding the federal budget, a decline in Social Security’s funding health has basically a dollar-for-dollar impact on the deficit. So if, say, Social Security for some reason collected $10 billion less this year than anticipated then the unified budget deficit will rise by $10 billion. The intergovernmental transfers to and from the trust funds matter for Social Security’s solvency, but on a budget-wide basis those cancel each other out.

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New publication: “Using Your House for Income in Retirement”

The Center for Retirement Research at Boston College has released a new consumer guide: “Using Your House for Income in Retirement,” by Steven Sass, Alicia H. Munnell, and Andrew Eschtruth

The booklet’s key points are:

• Home equity is the largest store of wealth for retirees and, with reduced support from Social Security and pensions, many more will need it for retirement income.
• The two ways to tap home equity are downsizing and a reverse mortgage.
• Downsizing:
  • Adds to your savings, which boosts income from savings.
  • Frees up more income by reducing taxes, insurance, and upkeep.
• A Reverse Mortgage:
  • Allows you to stay in your home.
  • Provides income through a line of credit, lump sum, or monthly payments.

A PDF of this booklet is available here.
Hard copies are available for purchase. Read more!

Better no Social Security replacement rates than wrong Social Security replacement rates

My reply to Alicia Munnell’s NASI blog post, over at the AEIdeas blog.

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Paul Ryan on Progressive Price Indexing for Social Security Benefits

Here's Rep. Paul Ryan on Bloomberg TV talking about how he would bring Social Security benefits back into line with the program's revenues: reduce the growth of benefits for retirees who had high earnings over their lifetimes. (Sorry about the sizing of the video panel on some screens; here's a link to the original: http://www.bloomberg.com/video/paul-ryan-social-security-price-indexing-best-way-to-go-hs~oHDSuSOOh03YFUW2ilg.html

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CRFB: A Primer on General Revenue Transfers to Social Security

The Committee for a Responsible Federal Budget has published a nice review of how Social Security interacts with the rest of the federal budget – a subject that generates confusion even at the highest levels of government.

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New papers from the Social Science Research Network

"The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study"
Social Security Bulletin. 74(3): 55-69.

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu
NAHID TABATABAI, Dartmouth College - Department of Economics
Email: nahid.tabatabai@dartmouth.edu

This article examines the Social Security Windfall Elimination Provision and Government Pension Offset. These provisions reduce the Social Security benefits of workers (and the resulting benefits of their spouses) if the prime beneficiary worked in “noncovered” employment (in which Social Security payroll taxes were not paid) that provided a pension, or if the spouse or survivor earned a pension from noncovered work. Using Health and Retirement Study data uniquely suited to the analysis, the authors calculate the household-level average lifetime benefit reductions resulting from these provisions and examine them in the context of lifetime Social Security income, pension income, and total wealth. The analysis also isolates the effects of pensions from noncovered employment on benefit adjustments and wealth.

"Health Effects of Containing Moral Hazard: Evidence from Disability Insurance Reform"
Tinbergen Institute Discussion Paper 14-102/V

PILAR GARCIA-GOMEZ, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Email: garciagomez@ese.eur.nl
ANNE C. GIELEN, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Email: gielen@ese.eur.nl

We exploit an age discontinuity in a Dutch disability insurance (DI) reform to identify the health impact of stricter eligibility criteria and reduced generosity. Women subject to the more stringent rule experience greater rates of hospitalization and mortality. A €1,000 reduction in annual benefits leads to a rise of 4.2 percentage points in the probability of being hospitalized and a 2.6 percentage point higher probability of death more than 10 years after the reform. There are no effects on the hospitalization of men subject to stricter rules but their mortality rate is reduced by 1.2 percentage points. The negative health effect on females is restricted to women with low pre-disability earnings. We hypothesize that the gender difference in the effect is due to the reform tightening eligibility particularly with respect to mental health conditions, which are mor e prevalent among female DI claimants. A simple back-of-the-envelope calculation shows that every dollar reduction in DI is almost completely offset by additional health care costs. This implies that policy makers considering a DI reform should carefully balance the welfare gains from reduced moral hazard against losses not only from less coverage of income risks but also from deteriorated health.

"Is Health Care an Individual Necessity? Evidence from Social Security Notch"

YUPING TSAI, Government of the United States of America - Centers for Disease Control and Prevention (CDC)
Email: ytsai@cdc.gov

This paper exploits Social Security legislation changes to identify the causal effect of Social Security income on out-of-pocket medical expenditures of the elderly. Using the household level consumption data from the 1986-1994 Consumer Expenditure Survey and an instrumental variables strategy, the empirical results show that the estimated income elasticities of out-of-pocket total medical costs, medical service expenses, and prescription drug expenses are about 0.89, 1.05, and 0.86, respectively. The estimated elasticities increase substantially and are statistically significant for elderly individuals with less than a high school education. The corresponding income elasticities are 2.49, 3.66, and 1.38, respectively. The findings are in sharp contrast to existing studies that use micro-level data and provide evidence that health care is a luxury good among the low education elderly.

"Let's Save Retirement"

RUSSELL L. OLSON, University of Rochester
Email: rlolson@rochester.rr.com
DOUGLAS W. PHILLIPS, University of Rochester
Email: douglas.phillips@rochester.edu

Unlike workers in many developed nations, far too few American workers today can look forward to financial independence as they age. As a result, many will be compelled to work much later into their lives, some into their 70s.
Social Security provides only a floor of retirement income. For many years defined benefit (DB) plans provided the core of retirement security, but today most DB plans in the private sector are closed to new employees, and those in the public sector are dramatically underfunded. A patchwork of defined contribution (DC) retirement plans – such as 401(k) 403 (b), and IRA – now serve as the primary retirement saving vehicles in the private sector, but they are complex, costly, and challenging for employers and employees to manage.
This paper recommends a single private DC pension system that can cover all working Americans, with a single set of rules.
A key part is the creation of broadly diversified Trusteed Retirement Funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities.
Payroll deduction of every employee’s salary will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF (and unless the employer already sponsors a defined benefit pension plan).
TRF’s will relieve employers from fiduciary responsibility for all future DC contributions.
To protect retirees from the risks of inflation, longevity, and the unpredictability of the stock and bond markets, retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A Federal Longevity Insurance Administration will enable private insurance companies to provide cost-effective annuities.
All TRFs and annuities will be without marketing costs.
Tax deductions will be designed to stay within our nation’s current tax expenditures for retirement.
This paper offers a basis for near-term action by Congress and the Administration to help resolve the growing problem of funding workers’ retirement.

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Brenton Smith: Fix Social Security Now

Writing for The Hill’s Congress blog, Brenton Smith of Fix Social Security Now argues that

The details of the [2014 Social Security Trustees] report clearly show that the crisis in Social Security is not only deepening but widening as well.

The reasonable solvency of the system was reduced over the course of 2013 from 19 years to 18 years.  This reduction means that for the first time in history on average someone retiring today at normal retirement age expects to outlive full benefits.  Anyone who is 48 years old or younger roughly expects to retire after the system pays depleted benefits.  This, believe it or not, is the good news.

The bad news is that the size of the crisis arriving in 2033 is growing rapidly.  The report reveals that the unfunded liabilities now exceed the Gross Domestic Product of the entire county.  The financing shortfall grew by $1.8 trillion.  The growth means that Social Security created more than $2 of broken promises for every dollar that it collected ($855 Billion in 2013). The grand total of unfunded liabilities exceeds all revenue ever collected by the system since its inception.

Click here to check out the whole piece.

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Fichtner & Kilbourne: Social Security Crisis Sooner Than You Think

Writing for the McClatchy Syndicate, the Mercatus Institute’s Jason Fitchtner and Fred Kilbourne argue that Social Security’s financial problems are larger and more pressing than you may think:

The 2014 report projects depletion of the combined Old Age, Survivors, and Disability Insurance trust funds in 2033. Social Security has no borrowing authority, and after the trust funds are exhausted there is only enough payroll tax revenue to cover a projected 77 percent of benefits; meaning future benefit payments must be reduced by about 23 percent. But the resulting cut in benefits will actually be much worse for retirees, workers and the economy if we don’t act now to reform Social Security.

Check out the whole piece here. Read more!

New papers from the Social Science Research Network

"Employee Benefits: Today, Tomorrow, and Yesterday"
EBRI Issue Brief, Number 401 (July 2014)

NEVIN E. ADAMS, Employee Benefit Research Institute (EBRI)
Email: nadams@ebri.org
DALLAS L. SALISBURY, Employee Benefit Research Institute (EBRI)
Email: SALISBURY@EBRI.ORG

In 2013, the nonpartisan Employee Benefit Research Institute (EBRI) commemorated its 35th anniversary. While much has changed with health and retirement benefits during the past three decades -- the first generation of the Employee Retirement Income Security Act (ERISA) -- many of the issues that were present at EBRI’s beginning remain today. But even if core issues endure, the historic shift away from “traditional” defined benefit pension plans and toward 401(k)-type defined contribution retirement plans, along with the recent enactment of the Patient Protection and Affordable Care Act of 2010 (PPACA), and the demographic shifts attendant with the retirement of the Baby Boomers and the workplace ascendency of the Generation X and Millennial cohorts, employee benefits are certain to continue to change and evolve in the future. Each year EBRI holds two policy forums which bring together a cross-section of national experts in the benefits field, congressional and executive branch staff, and representatives from academia, interest groups, and labor to examine public policy issues affecting health and retirement benefits. This paper summarizes the presentations and discussions at EBRI’s 73rd policy forum held in Washington, DC, on Dec. 12, 2013. Titled “Employee Benefits: Today, Tomorrow, and Yesterday,” the symposium offered expert perspectives on not only the workplace and work force of the past, but the challenges of today’s multi-generational workplace, and the difficulties and opportunities that lie ahead. Following a review of the benefits landscape by EBRI’s research team, panels discussed: 1978 to 2013: The Changing Role of Employers in Employee Benefits; Employee Benefits from 2013 to 2048: The Road to Tomorrow; 2013 to 2048: Work Force Trends and Preferences, Today and Tomorrow.

"Lifetime Accumulations and Tax Savings from HSA Contributions"
EBRI Notes, Vol. 35, No. 7 (July 2014)

PAUL FRONSTIN, Employee Benefit Research Institute (EBRI)
Email: fronstin@gmail.com

2014 marks the 10-year anniversary of the introduction of health savings accounts (HSAs), created by Congress in 2003. In 2013, enrollment in HSA-eligible health plans was estimated to range from 15.5 million to 20.4 million policyholders and their dependents. Nearly 11 million accounts holding $19.3 billion in assets as of Dec. 31, 2013, were also estimated. The number of HSA-eligible enrollees will differ from the number of accounts for various reasons. The number of enrollees is composed of the policyholder and any covered dependents and will generally be higher than the number of accounts because one account is usually associated with a family. However, over time, the number of accounts can grow relative to the number of enrollees because when an individual or family is no longer covered by an HSA-eligible plan, they are allowed to keep the HSA open. HSAs provide account owners a triple tax preference. Contributions to an HSA reduce taxable income. Earnings on the assets in the HSA build up tax free, and distributions from the HSA for qualified expenses are not subject to taxation. Because of this triple tax preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan. This paper examines the amount of money an individual could accumulate in an HSA over his or her lifetime. It also examines lifetime tax savings from HSA contributions. Limitations of an HSA are also discussed. A person contributing for 40 years to an HSA could save up to $360,000 if the rate of return was 2.5 percent, $600,000 if the rate of return was 5 percent, and nearly $1.1 million if the rate of return was 7.5 percent, and if there were no withdrawals. In order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners will need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSA. Many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. Also, HSA balances may not be sufficient to pay all medical expenses in retirement even if maximum contributions are made for 40 years.

"What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007-2012"
EBRI Issue Brief, Number 402 (July 2014)

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)
Email: vanderhei@ebri.org
SARAH HOLDEN, Investment Company Institute
Email: sholden@ici.org
LUIS ALONSO, Employee Benefit Research Institute (EBRI)
Email: alonso@ebri.org
STEVEN BASS, Investment Company Institute
Email: sbass@ici.org

This paper analyzes changes in 401(k) account balances of consistent participants in the EBRI/ICI 401(k) database over the five-year period from year-end 2007 to year-end 2012. About 34 percent, or 7.5 million, of the 401(k) participants with accounts at the end of 2007 in the EBRI/ICI 401(k) database are in the consistent sample. Analysis of a consistent group of 401(k) participants highlights the impact of ongoing participation in 401(k) plans. The analysis also looks at changes in asset allocation between year-end 2007 and year-end 2012. Overall, the average account balance of consistent 401(k) participants increased at a compound annual average growth rate of 6.8 percent from 2007 to 2012, to $107,053 at year-end 2012. The median 401(k) account balance increased at a compound annual average growth rate of 11.9 percent over the period, to $49,814 at year-end 2012. At year-end 2012, the average account balance among consistent participants was 67 percent higher than the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group’s median balance was almost three times the median balance across all participants at year-end 2012. Younger participants or those with smaller initial balances experienced higher percent growth in account balances compared with older participants or those with larger initial balances. Three primary factors impact account balances: contributions, investment returns, and withdrawal/loan activity. The percent change in average account balance of participants in their 20s was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average growth rate of 41.8 percent per year between year-end 2007 and year-end 2012. 401(k) participants tend to concentrate their accounts in equity securities. The asset allocation of the 7.5 million 401(k) plan participants in the consistent group was broadly similar to the asset allocation of the 24.0 million participants in the entire year-end 2012 EBRI/ICI 401(k) database. On average, about three-fifths of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non-target-date balanced funds, or company stock. Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants. More consistent 401(k) plan participants held target-date funds at year-end 2012 than at year-end 2007, on net; a third of those with target-date funds held all of their 401(k) account in target-date funds.

"Social Security Finances: Findings of the 2014 Trustees Report"
Social Security Brief, No. 44, July 2014

ELISA WALKER, National Academy of Social Insurance (NASI)
Email: ewalker@nasi.org
VIRGINIA P. RENO, National Academy of Social Insurance (NASI)
Email: vreno@nasi.org
THOMAS N. BETHELL, National Academy of Social Insurance (NASI)
Email: tombethell@gmail.com

The 2014 Trustees Report updates projections about the future finances of Social Security’s two trust funds. The Disability Insurance (DI) trust fund, which is legally separate from the Old-Age and Survivors Insurance (OASI) trust fund, will require legislative action soon to ensure that all scheduled benefits for disabled workers and their families can be paid in 2016 and beyond. Of the 6.2 percent of earnings that workers and employers each pay into Social Security, 5.3 percent goes to the OASI trust fund and 0.9 percent goes to the DI trust fund. A 0.2 percentage-point increase in the DI contribution rate (from 0.9 percent to 1.1 percent for workers and employers each) would fully fund the DI program for the next 75 years. Alternatively, a temporary reallocation of part of the OASI contribution rate would strengthen DI while keeping the OASI fund adequately funded for many years into the future.
On a combined OASDI basis, Social Security is fully funded until 2033, but faces a long-term shortfall thereafter. In 2013, Social Security revenue plus interest income exceeded outgo by $32 billion, leaving a surplus. Reserves, now at $2.8 trillion, are projected to grow to $2.9 trillion by the end of 2019. Then, if Congress takes no action in the meantime, reserves would start to be drawn down to pay benefits. If Congress does not act before 2033, Social Security is projected to face a shortfall. Its reserves would be depleted and revenue continuing to come into the trust funds from workers’ and employers’ contributions and taxation of benefits would cover about 77 percent of scheduled benefits (and administrative costs, which are less than 1 percent of outgo). Timely revenue increases and/or gradual benefit reductions can bring the program into balance over the long term, preventing the projected shortfall.

"Why Some Workers Should Be Allowed a 'Buy-In' for Social Security: A Policy Suggestion to Reduce the Regressive Adjustments of the Windfall Elimination Provision"

LAURA L. COOGAN, Nicholls State University
Email: laura.coogan@nicholls.edu

The Windfall Elimination Provision adjusts, through a reduction, the retirement income for workers who qualify for Social Security retirement benefits and have retirement benefits from employment outside of that system. While the WEP adjustment for workers with pensions from non-covered employment (which is common from employment by state and local governments that do not participate in the Social Security) has received some attention, there is little information for workers who have the same mix of earnings but who do not and will not receive a pension. This situation arises when workers receive their non-covered retirement benefits in a lump sum or in an Optional Retirement Plan. This paper details the WEP adjustment for these workers and suggests a policy that reduces the probability that total retirement income from the combined earnings will be less than Social Security retirement benefits as if all earnings were covered by Social Security.

"Financial Literacy Among American Indians and Alaska Natives"
Research and Statistics Note, August 2014

JOHN L. MURPHY, Government of the United States of America, Social Security Administration, Office of Retirement Policy
Email: john.murphy@ssa.gov
ALICIA GOURD, Independent
Email: aliciagourd@yahoo.com
FAITH BEGAY, Independent
Email: faithbegay7@gmail.com

This study uses data from the Health and Retirement Study (HRS) to analyze financial literacy within the American Indian and Alaska Native (AIAN) population. The HRS is a nationally representative longitudinal survey of individuals aged 50 or older and their spouses. The study compares AIAN financial literacy scores from an 18-question financial literacy module with those from other racial groups, all of whom score higher than the AIAN sample.

"Incorrect World Bank Pension Data – Consequences for Policy Making in Eastern Europe and Possible Remedies"

NIKOLA ALTIPARMAKOV, Serbian Fiscal Council
Email: NALTI@yahoo.com

In this paper we show that over the years World Bank pension studies on Eastern Europe have been based on inconsistent and mostly upward biased data on rates of return realized by mandatory private pension funds. Relevant policy makers need to be aware of these data problems in order to properly assess initial pension privatization performance and in developing adequate pension (re-)reform policies. World Bank should consider improving disclosure standards of its publications in order to prevent this kind of errors from reoccurring in the future

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