Video of House Ways & Means Disability Hearing

Here’s the video for the February 25 hearing of the House Ways and Means Social Security Subcommittee on the solvency of the Social Security Disability Insurance program.

Broadcast live streaming video on Ustream

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Testimony from February 25 Ways and Means Hearing on Social Security Disability

Chairman Johnson Announces Hearing on Maintaining the Disability Insurance Trust Fund’s Solvency
B-318 Rayburn House Office Building at 2:00 PM

Feb 25, 2015
U.S. Congressman Sam Johnson (R-TX), Chairman of the House Committee on Ways and Means Subcommittee on Social Security announced today that the Subcommittee will hold a hearing focused on the financial status of the Disability Insurance (DI) and Old Age and Survivors Insurance Trust Funds, and the available legislative options to ensure full DI benefits continue to be paid. The hearing will take place on Wednesday, February 25, 2015 in B-318 Rayburn House Office Building, beginning at 2:00 p.m.
Hearing Advisory
Witness List

Charles P. Blahous III, Ph.D.
Public Trustee, Social Security and Medicare Boards of Trustees
Testimony
(Truth in Testimony)
Ed Lorenzen
Senior Advisor, Committee for a Responsible Federal Budget
Testimony
(Truth in Testimony)
Webster Phillips
Senior Legislative Representative, National Committee to Preserve Social Security and Medicare
Testimony
(Truth in Testimony)

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Senate Budget Committee, Hearing on Social Security Disability

Held Feb 11 2015, 10:00 AM - 12:00 PM

The Coming Crisis: Social Security Disability

 

Witnesses:

Panel 1

Carolyn W. Colvin
Acting Commissioner of Social Security, Social Security Administration

Panel 2

Dr. Mark Duggan
Wayne and Jodi Cooperman Professor of Economics, Stanford University

Dr. Philip de Jong
Professor of Economics, University of Amsterdam - Amsterdam School of Economics

Kate Lang
Staff Attorney, National Senior Citizens Law Center

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Kolbe and Stenholm: Congress Can’t Dodge Disability Issue

Over at Roll Call, former Congressmen Jim Kolbe (R-AZ) and Charlie Stenholm (D-TX) – long leaders on Social Security reform – urge Congress to tackle the looming insolvency of the Disability Insurance trust fund:

As if stirring, like Rip Van Winkle, from a 20-year snooze, Congress is finally awakened to the teetering finances of the Social Security’s disability program. Better late than never, but policymakers have known for years that this day would arrive — and it has.

While some say the alarms being raised about the projected depletion of the Social Security Disability Insurance Trust Fund by late 2016 is a manufactured crisis easily fixed by accounting maneuvers, it is actually a stark reminder of the need to address the structural imbalance in the Social Security system. We can’t afford for Congress to ignore these challenges for another 20 years

Check out the whole article here.

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New paper from the NBER: “The Great Recession, Retirement and Related Outcomes”

The Great Recession, Retirement and Related Outcomes

by Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai - #20960 (AG LS PE)

Abstract:

This paper uses data from the Health and Retirement Study to examine retirement and related labor market outcomes for the Early Boomer cohort, those in their mid-fifties at the onset of the Great Recession. Outcomes are then compared with older cohorts at the same age.

The Great Recession increased their probability of being laid off and the length of time it took to find other full-time employment.

Differences in layoffs between those affected by the recession and members of older cohorts in turn accounted for almost the entire difference between cohorts in employment change with age. The Great Recession does not appear, however, to have depressed the wages in subsequent jobs for those who experienced a layoff.

In 2010, 17 percent of the Early Boomers were Not Working and Not Retired or Partially Retired, and 6 percent were unemployed, leaving at least 9 percent who were not working and not unemployed but not retired or only partially retired.

At the recession's peak, half of those who experienced a layoff ended up in the Not Retired or Partially Retired, Not Working category. But only a quarter of those who declared themselves to be Not Retired or Partially Retired, and were Not Working, had experienced a layoff.

Most of the jump in Not Retired or Partially Retired, Not Working appears to reflect a change in expectations about the potential or need for future work, a change that is not the result of an actual job loss.

http://papers.nber.org/papers/W20960?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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New disability papers from the Social Science Research Network

"SSDI Reform: Promoting Gainful Employment While Preserving Economic Security"
Cato institute Policy Analysis, No. 762, October 2014

JAGADEESH GOKHALE, Cato Institute
Email: jgokhale@cato.org

The Social Security Disability Insurance (SSDI) program faces imminent insolvency. Annual expenditures totaled $143 billion in 2013, but program receipts amounted to $111 billion — a shortfall that is projected to continue indefinitely. According to the Social Security Trustees, the program’s trust fund will be fully depleted in 2016, compelling either a large benefit cut or a large tax hike — neither option being politically popular.
Regardless of the program’s insolvency, SSDI creates substantial work disincentives, causing many with medical impairments who could work to withdraw from the labor force and apply for SSDI. That undesirable outcome arises from the complicated rules and procedures that SSDI uses to establish benefit eligibility. But rectifying SSDI’s processes is a monumental task, unlikely to be accomplished in the short term.
Determining whether medical impairments imply inability to work is becoming more difficult in a growing number of cases, with the result that many applicants with residual capacities are admitted to SSDI. Many beneficiaries express a desire to return to work but fear of losing benefits and health coverage under SSDI’s current benefit rules impedes such a decision. Accordingly, this paper advocates a change in the structure of SSDI’s benefit payments to those admitted to the program. Shifting benefits at the margin toward paying beneficiaries to work rather than to remain out of the work force would encourage beneficiaries with residual work capacities to return to work. That shift would serve as a backstop to reduce the economic loss from wrongful allowances of applicants into SSDI. Such a switch in benefit design can be accomplished without compromising benefit eligibility for those who cannot work. The paper explains how to implement such a change to SSDI’s benefit structure and the advantages that would accrue from it. Apart from creating better incentives to work, the proposed reform complements other reforms Congress might adopt.

"Longitudinal Patterns of Disability Program Participation and Mortality Across Childhood SSI Award Cohorts"
Social Security Bulletin. 75(1): 35-64, 2015

KALMAN RUPP, Government of the United States of America - Social Security Administration
Email: kalman.rupp@ssa.gov
JEFFREY HEMMETER, Government of the United States of America - Social Security Administration
Email: jeffrey.hemmeter@ssa.gov
PAUL S. DAVIES, Government of the United States of America - Office of Research, Evaluation and Statistics
Email: paul.davies@ssa.gov

This article follows six annual cohorts of childhood Supplemental Security Income (SSI) disability awardees between 1980 and 2000, for a time horizon up to 30 years after initial SSI award, in many cases well into adulthood. The authors compare trajectories of successive awardee cohorts as the SSI program evolves from 1980 to recent years. The results show that the proportion of awardees in SSI-only status declines over the life cycle, with over half transitioning to other statuses roughly after 10 to 15 years. Many awardees transition from the SSI program to concurrent or Disability Insurance-only benefit status, and increasing proportions of awardees are deceased or off the rolls and alive. These patterns are common for all awardee cohorts, but there are major changes in trajectories across cohorts. Compared with the early cohorts, the more recent cohorts display sharper declines in mortality and steeper increases in the proportion off the disability rolls for other reasons. These two trends have opposite effects on the duration of disability program participation over the life cycle, with important policy implications.

"Perspectives: Long-Term Work Activity and Use of Employment Supports Among New Supplemental Security Income Recipients"
Social Security Bulletin. 75(1): 73-95, 2015

YONATAN BEN-SHALOM, Mathematica Policy Research, Inc.
Email: yben-shalom@mathematica-mpr.com
DAVID C. STAPLETON, Mathematica Policy Research, Inc.
Email: dstapleton@mathematica-mpr.com

Long-term cumulative statistics on the employment activities of Supplemental Security Income recipients offer a different perspective than the Social Security Administration's published statistics, which are based on monthly or annual data, and have important policy implications.

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New papers from the Social Science Research Network

"Social Security Trust Fund Cash Flows and Reserves"
Social Security Bulletin, 75(1): 1-34, 2015

DAVID PATTISON, Government of the United States of America - Social Security Administration
Email: david.h.pattison@ssa.gov

This article examines the Social Security trust fund reserves and cash flows and their interrelationships with the Treasury's cash management operations and the budget of the rest of the federal government. The article considers the extent to which the trust fund reserves and interest income reflect cash transactions between the trust funds and the public and are not, as some commenters have asserted, just accounting fictions. It also considers whether, under the Social Security system's self-financing framework, an improvement in trust fund finances can help relieve the accumulated debt commitments of the rest of the federal government.

"Longitudinal Patterns of Disability Program Participation and Mortality Across Childhood SSI Award Cohorts"
Social Security Bulletin. 75(1): 35-64, 2015

KALMAN RUPP, Government of the United States of America - Social Security Administration
Email: kalman.rupp@ssa.gov
JEFFREY HEMMETER, Government of the United States of America - Social Security Administration
Email: jeffrey.hemmeter@ssa.gov
PAUL S. DAVIES, Government of the United States of America - Office of Research, Evaluation and Statistics
Email: paul.davies@ssa.gov

This article follows six annual cohorts of childhood Supplemental Security Income (SSI) disability awardees between 1980 and 2000, for a time horizon up to 30 years after initial SSI award, in many cases well into adulthood. The authors compare trajectories of successive awardee cohorts as the SSI program evolves from 1980 to recent years. The results show that the proportion of awardees in SSI-only status declines over the life cycle, with over half transitioning to other statuses roughly after 10 to 15 years. Many awardees transition from the SSI program to concurrent or Disability Insurance-only benefit status, and increasing proportions of awardees are deceased or off the rolls and alive. These patterns are common for all awardee cohorts, but there are major changes in trajectories across cohorts. Compared with the early cohorts, the more recent cohorts display sharper declines in mortality and steeper increases in the proportion off the disability rolls for other reasons. These two trends have opposite effects on the duration of disability program participation over the life cycle, with important policy implications.

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Rescheduled Event: Savings & Retirement Foundation

We've rescheduled the discussion with Mark Warshawsky for Friday, March 6. Please update your RSVP if you plan to attend.

LUNCH FORUM
Discussing
Illustrating Retirement Income for Defined Contribution Plan Participants:
A Critical Analysis of the Department of Labor Proposal
with Mark Warshawsky

Friday, March 6, from Noon to 1:00 at
Americans for Tax Reform
722 12th Street, NW
7th FLOOR
Washington, D.C. 20005
RSVP

(Pizza and soft drinks will be provided)
This is a widely attended event.

Mark J. Warshawsky is a visiting scholar at the Mercatus Center of George Mason University. His research interests include employer-sponsored retirement programs, social security, financial planning, health and long-term care financing, corporate and public finance, and macroeconomics. He is a co-author of the Fundamentals of Private Pensions, Ninth Edition (Oxford University Press, 2010) and author of Retirement Income: Risks and Strategies (MIT Press, 2012).

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Chairman Johnson Announces Hearing on Maintaining the Disability Insurance Trust Fund’s Solvency

U.S. Congressman Sam Johnson (R-TX), Chairman of the House Committee on Ways and Means Subcommittee on Social Security announced today that the Subcommittee will hold a hearing focused on the financial status of the Disability Insurance (DI) and Old Age and Survivors Insurance Trust Funds, and the available legislative options to ensure full DI benefits continue to be paid. The hearing will take place on Wednesday, February 25, 2015 in B-318 Rayburn House Office Building, beginning at 2:00 p.m.

Upon the announcement, Chairman Johnson made the following comment:

“In less than two years, the Disability Insurance program will be unable to pay the benefits on which millions of Americans and their families rely.  I am fully committed to ensuring the Disability Insurance program is there for those who truly need it.  This hearing will seek to start the much-needed conversation on responsibly addressing the looming insolvency of the Disability Insurance program.”

A list of witnesses will follow.

Read more!

New paper: “Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?”

The Center for Economic and Policy Research released,

“Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?” by Nicole Woo, Cherrie Bucknor, and John Schmitt

On January 1^st, the maximum amount of annual earnings subject to the Social Security tax – a.k.a. the payroll tax cap – increased to $118,500. Every year, this cap is adjusted to keep up with inflation. However, many American workers are not aware that any wages above the cap are not taxed by Social Security.

This issue brief analyzes Census Bureau data to determine how many workers would be affected if the Social Security payroll tax cap were raised or phased out. We find that the richest 6.1 percent of workers (less than 1 in 15) would pay more if the cap were scrapped. Only the top 1.5 percent (1 in 67) and 0.7 percent (1 in 140) would be affected if the tax were applied to earnings over $250,000 and $400,000, respectively.

When we look at the wage earners according to gender, race or ethnicity, age, or state of residence, the share of workers who would be affected by increasing or phasing out the cap varies widely.

You can check out the whole paper here.

Editor’s note: the percentage of individuals who earn above the payroll tax ceiling in any given year is quite small, but it is not the same people every year. Over a working lifetime, I believe that around 22% of individuals would pay higher higher taxes if the “tax max” were lifted.

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New issue brief: “Dog Bites Man: Americans Are Shortsighted About Their Finances”

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

“Dog Bites Man: Americans Are Shortsighted About Their Finances”

by Steven A. Sass, Anek Belbase, Thomas Cooperrider,
and Jorge D. Ramos-Mercado

The brief’s key findings are:

• Americans need to save more on their own for retirement, but human nature suggests they will focus more on day-to-day financial needs.

• Analysis of a recent survey confirms that a household’s level of financial satisfaction is tied more to short-term – rather than long-term – concerns.

• Even households that are in reasonable shape in the short term do not seem to focus more on distant concerns like retirement saving.

• And households that are more financially literate appear only modestly more attuned to long-term financial issues.

This brief is available here. Read more!

CRFB: Myths and Facts About Social Security Disability

The Committee for a Responsible Federal Budget has a nice blog post running through some myths and facts regarding the Social Security Disability Insurance program, which is projected to go insolvent next year. These myths influence how we think about the program and how to reform it. Well worth checking out.

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Upcoming event: “Illustrating Retirement Income for Defined Contribution Plan Participants”

LUNCH FORUM
Discussing
Illustrating Retirement Income for Defined Contribution Plan Participants: A Critical Analysis of the Department of Labor Proposal
with Mark Warshawsky

February 17, from Noon to 1:00 at the
Americans for Tax Reform
722 12th Street, NW
7th FLOOR
Washington, D.C. 20005
RSVP

(Pizza and soft drinks will be provided)
This is a widely attended event.

Mark J. Warshawsky is a visiting scholar at the Mercatus Center of George Mason University. His research interests include employer-sponsored retirement programs, social security, financial planning, health and long-term care financing, corporate and public finance, and macroeconomics. He is a co-author of the Fundamentals of Private Pensions, Ninth Edition (Oxford University Press, 2010) and author of Retirement Income: Risks and Strategies (MIT Press, 2012).

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CBO blogs on how Social Security benefits are taxed

Joshua Shakin and Kurt Seibert of the Congressional Budget Office have a nice blog explaining the taxation of Social Security benefits, how much is collected and who pays the bills. Check it out here.

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Job Opening: Director for Entitlements Reform – Niskanen Center

Director for Entitlements Reform – Niskanen Center – Washington, DC

February 11, 2015 by Talent Market

The Niskanen Center seeks a Director for Entitlements Reform with excellent communication skills to oversee the Center’s entitlements reform projects and initiatives; serving as the point-person for the organization to policymakers; and conducting outreach and building coalitions to advance the Center’s reform agenda.

The ideal candidate will have an interest in improving federal entitlements programs by economizing on taxpayer expenditures, improving the efficiency in which services and support is provided to recipients, minimizing disincentives to work, and providing the greatest room possible for recipient autonomy and choice given the current political landscape.

The ideal candidate will not be content with forwarding theoretically attractive reforms. Rather, he/she will be primarily interested in crafting and promoting politically realistic and attractive reform ideas that advance the Center’s objectives.

The Director of Entitlements Reform will report to Vice President Joe Coon. The candidate must be willing to live in the Washington metropolitan area and the position will include occasional travel.

Key job responsibilities will include:

• Researching, analyzing, and writing policy studies, issue briefs, and commentaries on current, significant policy issues
• Overseeing the production of model legislation
• Monitoring state and federal legislation
• Making media appearances, including radio, television, and print
• Building and joining coalitions of important stakeholders to advance the Center’s policy agenda

Requirements
The ideal candidate will possess the following attributes:

• Five-plus years of experience working on entitlement policy in business, academia, public policy, or government
• Firm grounding in free market economics
• Familiarity with the academic literature pertaining to the topic
• Strong analytical and research skills
• Strong interpersonal and communication skills
• Established project management skills and ability to multi-task, set priorities, and follow-through
• Experience interacting with policymakers in Washington
• Firm commitment to the principles of personal responsibility and free enterprise
• An advanced degree in public policy, economics, or related field preferred
• Media experience a plus but not required

To Apply
Qualified candidates should submit the following application materials in one PDF file:

• Résumé
• A cover letter detailing your philosophical interest in the organization and your salary requirements
• Writing sample which demonstrates an ability to communicate complex concepts to other policy experts
• Links to media appearances, if applicable

Materials should be emailed in one PDF file to Claire Kittle Dixon, Executive Director of Talent Market, who is assisting with the search: claire@talentmarket.org.

While we thank all applicants in advance for their interest in this position, we are only able to contact those to whom we can offer an interview. No phone calls please.

About the Niskanen Center (http://www.niskanencenter.org)

Established in 2014, the Niskanen Center is a libertarian 501(c)(3) think tank that works to change public policy through direct engagement in the policymaking process: developing and promoting proposals to legislative and executive branch policymakers, building coalitions to facilitate joint action, and marshaling the most convincing arguments in support of our agenda.  The Center’s main audience is the Washington insiders – policy-oriented legislators, presidential appointees, career civil servants in planning, evaluation and budget offices, congressional committee staff, engaged academics, and interest group analysts – who together decide the pace and direction of policy change.

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Upcoming event: “Disability Insurance (SSDI) Trust Fund Exhaustion Calls for Reforms, Not A Bailout”

Please join us for a Heritage Foundation Hill Lunch Event:

Disability Insurance (SSDI) Trust Fund Exhaustion Calls for Reforms, Not A Bailout

Thursday, February 19

11:30AM to 12:30PM

2360 Rayburn

The Social Security Disability Insurance (SSDI) trust fund is in immediate danger of being depleted. Beneficiaries face a nearly 20 percent indiscriminate cut to their benefits before the end of 2016. Last year, 11 million disabled workers and their eligible spouses and children received SSDI benefits—for many, SSDI is their only source of income. Congress should address the SSDI trust fund’s impending shortfall by making eligibility and benefit changes that preserve benefits for those who truly need them, while encouraging those who are able to return to work to do so.

In conjunction with the release of a new essential primer on how the SSDI programs work, the Heritage Foundation invites attendees to explore sources of recent growth in SSDI participation and avenues for reform. In light of the recent House rules change that seeks to prevent an unconditional SSDI bailout, congressional debate over SSDI reforms will likely take place this year.

Moderator:

Romina Boccia, Grover M. Hermann Fellow in Federal Budgetary Affairs, The Heritage Foundation.

Panelists:

Jason Fichtner, Senior Research Fellow, The Mercatus Center at George Mason University.

Marc Goldwein, Senior Policy Director, Committee for a Responsible Federal Budget

Ted McCann, Ways and Means Social Security Subcommittee

Please RSVP to Caitlin.Thompson@Heritage.org

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New working papers from the Retirement Policy and Research Centre at the University of Auckland

New RPRC Working Papers now available online

WP 2014-2 Turning silver to gold: Policies for an ageing population

The latest demographic projections show that the number of people aged 65+ doubled between 1984 and 2014 to reach 650,000 and is projected to double again by 2039. It is expected that about 22% of New Zealanders will be aged 65+ by 2032, compared with 14% in 2014 (Stats NZ 2014). The expected future costs of New Zealand Superannuation are easily estimated, but there are multiple other state-funded expenditures for those aged 65+ that are less readily available. This paper compiles the expected costs of providing all services and support for the older population for 2013, 2017 and 2022. Assuming that wage rates in the care sector will continue to stagnate although demand will continue to rise, by 2017, total Government costs of all aged care services and NZS will approach $15 billion (in 2013 dollars) compared to $13 billion in 2013 and by 2022 it will reach almost $17 billion. The paper suggests possible policy options that could be applied in the future to ‘turn silver to gold’: to anticipate increasing numbers of older citizens with enthusiasm or at least equanimity rather than dread. 

WP 2015-1 Improving the affordability of New Zealand Superannuation

Under existing policy settings, the costs of retirement income, health, and welfare for the rapidly growing older population lift markedly over the next decades both in absolute terms and relative to other state spending. If the cost of New Zealand Superannuation is to be reduced, raising the age of eligibility is not the only possible policy approach to consider. This Working Paper examines a way in which the tax system could be used to reduce the net cost of NZS by effectively clawing it back from people with high incomes. The innovation here is to take a basic income approach and pay the pension as a tax-free grant at the same level for everyone.  Other income is then taxed on a separate scale, which, it is argued, has advantages over other methods of income testing. Cost saving comes from the claw-back and from gradually aligning the single rate of NZS to the married rate. A saving of around 10% of net NZS costs should be feasible and timely without causing hardship or creating unmanageable complexity.

Read more!

New papers from the NBER

Veterans' Labor Force Participation: What Role Does the VA's Disability Compensation Program Play?

by Courtney Coile, Mark Duggan, Audrey Guo - #20932 (AG HE LS PE)

Abstract:

We explore trends over time in the labor force participation of veterans and non-veterans and investigate whether these patterns are consistent with a rising role for the Veterans' Affairs Disability Compensation (DC) program, which pays benefits to veterans with service-connected disabilities and has grown rapidly since 2000.

Using 35 years of March CPS data, we find that veterans' labor force participation declined over time in a way that coincides closely with DC growth and that veterans have become more sensitive to economic shocks. Our findings suggest that DC program growth has contributed to recent declines in veterans' labor force participation.

http://papers.nber.org/papers/W20932?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Racial Disparities in Savings Behavior for a Continuously Employed Cohort

by Kai Yuan Kuan, Mark R. Cullen, Sepideh Modrek - #20937 (AG PE)

Abstract:

The wealth gap has reached record highs. At the same time there has been substantial proliferation of 401(k) savings accounts as the dominant retirement savings vehicle, and these accounts make up an increasing proportion of overall wealth. In this paper we examine

401(k) saving behavior of continuously employed workers over an eight-year period at a single, geographically diverse employer. We demonstrate substantial difference in 401(k) savings behavior by employee ethnicity even within a single employer 401(k) plan architecture. We show both African American and Hispanic employees are less likely to participate in the 401(k) plans. Moreover, conditional on participation African Americans contribute a lower proportion of their income to their 401(k) plan on average. We also show that African Americans and Hispanics tend to draw down on their

401(k) balances more often. Finally, we document that both African Americans and Hispanics favor safer assets within their plan options.

Together these differences substantially impact the level of 401(k) balances accumulated and therefore overall wealth accumulation.

http://papers.nber.org/papers/W20937?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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New papers from the Social Science Research Network

"Feed the Beast: Finance Capitalism and the Spread of Pension Privatisation in Europe"

MAREK NACZYK, Sciences Po Paris - Centre d’études européennes, Sciences Po Paris - LIEPP
Email: marek.naczyk@sciencespo.fr
BRUNO PALIER, Fondation Nationale des Sciences Politiques (FNSP)

Why, since the mid-1980s, have so many European governments decided fiscally to support the development of private retirement savings accounts? Whereas analysts of pension reform in affluent democracies have traditionally considered the development of private pensions as a secondary outcome of welfare state retrenchment, we argue that governments have actively promoted their expansion as a result of financial industry lobbying. In the context of heightened competition between European financial centres that has accompanied the liberalisation and internationalisation of capital markets since the mid-1970s, stock exchanges, together with other financial services organisations, have started arguing that, by creating a vast and steadily growing pool of financial capital, private pension funds could play an essential role in strengthening the competitive position of their home country as a financial centre. Politicians have in turn been attracted to pension privatisation because a strong domestic financial sector could provide their country with greater investment capacities and help create new jobs at a time of deindustrialisation. As both market and political actors have observed policy developments in peer countries, the politics of pension privatisation has been marked by strong international interdependence and patterns of international diffusion. We support our argument through comparative process-tracing of pension reform in three very different cases, namely Great Britain, France and Germany.

"Aging and Pension Reform: Extending the Retirement Age and Human Capital Formation"
SAFE Working Paper No. 82

EDGAR VOGEL, Deutsche Bundesbank, Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)
Email: vogel.edgar@utanet.at
ALEXANDER LUDWIG, Goethe University Frankfurt - Research Center SAFE, University of Cologne - Faculty of Management, Economics and Social Sciences
Email: ludwig@safe.uni-frankfurt.de
AXEL H. BORSCH-SUPAN, Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA), National Bureau of Economic Research (NBER)
Email: AXEL@BOERSCH-SUPAN.DE

Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations — France, Germany and Italy — to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of a consumption equivalent variation.

"Retirement Planning: Contributions from the Field of Behavioral Finance and Economics"
Investor Behavior: The Psychology of Financial Planning and Investing. H. Kent Baker and Victor Ricciardi, editors, 285-305, Hoboken, NJ: John Wiley & Sons, Inc., 2014

RASSOUL YAZDIPOUR, Financial Decision Making Institute- FDMI, California State University
Email: ryazdipour@aobf.org
JAMES P. HOWARD, University of Maryland University College, University of Maryland Baltimore County
Email: jh@jameshoward.us

An important challenge facing employees and societies is saving and investing sufficient funds for a comfortable retirement. Research shows that human financial decision-making behavior is not always rational and that public trust in the economy can be lost. Surprisingly, neither better disclosure of financial services and products nor education has had little discernible effect in motivating individuals to effectively plan and save for transitioning out of the workforce. The fields of cognitive psychology and neuroscience identify many behavioral obstacles individuals face in taking the needed steps to save and invest more for the future. A host of behavioral issues influence an individual’s decision making about retirement including biases, heuristics, framing, hyperbolic discounting, self-awareness, and self-control. The emerging works on trust also add to our understanding of the retirement planning system. Exploring these findings and strategies for mitigating financial decision-making errors can make a substantive contribution to achieving a more secure retirement.

"Pension Reforms and Incentives to Domestic Capital Markets: A Global Study"

MARIA NELA SEIJAS, Universidad de la República
Email: mseijas@ccea.com.uy
JUAN GABRIEL BRIDA, Universidad de la República, Free University of Bolzano
Email: JuanGabriel.Brida@unibz.it

Personal individual capitalization systems have experienced significant growth in recent decades, following the trend of aging populations and defined benefit pension crisis. This article investigates whether the implementation of funded pension schemes globally has prompted the development of domestic capital markets worldwide, considering 31 pension funds over the period of 1990-2011. The methodological strategy relies upon panel data regressions applied to depth and liquidity indicators of stock and bond markets. The analysis has revealed that individual capitalization pension funds have meant a stimulus to stock market depth. A negative causality with stock market liquidity is also evidenced, which is linked to the long-term profile of pension portfolio management, which privileges funding strategies on trading strategies. Given the structural diversity of pension systems studied, the article uses clustering classification tools for segmenting the population according to the importance of pension funds in the economy. This analysis shows that there are homogeneous groups whose members have similar age of the systems, but not a geographical proximity or type of system structure. It is found that the attribute of belonging to a cluster determines significant impacts of pension systems in relation to indicators of capital market development. Stock markets depth and liquidity indicators receive the positive impacts of greater magnitude from the systems included in the advanced maturation cluster. Pension funds belonging to the low gradual and incipient maturation cluster exert significant impacts on public bond markets depth. These findings are consistent with existing literature and with the investment portfolio, that usually characterizes pension funds in their earlier stages of life.

Read more!

New paper: “The Impact of Leakages on 401(k)/ IRA Assets”

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

“The Impact of Leakages on 401(k)/IRA Assets”

by Alicia H. Munnell and Anthony Webb

The brief’s key findings are:

• As 401(k)s and IRAs have become the dominant source of retirement saving, the potential for pre-retirement withdrawals – “leakages” – has grown.
• Leakages occur via three channels: 1) in-service withdrawals for hardships or after age 59½; 2) cashouts when individuals leave a job; and 3) loans.
• Estimates indicate that about 1.5 percent of assets leaks out of 401(k)s/IRAs each year, reducing wealth at retirement by about 25 percent.
• Given the size of leakages, it may be time to take steps to curtail them such as:
  • limiting hardship withdrawals to unpredictable events;
  • raising the age for penalty-free withdrawals to better align with when people actually retire; and
  • closing down cashouts by requiring the money to stay in the 401(k) system or be rolled over into an IRA.

This brief is available here.  Read more!

Does Obama Budget Proposal Kick the Disability Can?

The Obama administration’s FY 2016 budget proposes a temporary transfer of payroll tax revenues from the Social Security retirement program to the Social Security disability program, which otherwise would become insolvent in 2016.

The budget states that this step is designed to buy time “while a longer-term solution to overall Social Security solvency is developed with the Congress.” I sure hope so. The budget does include a number of trial programs to help workers with disabilities remain on the job rather than going on DI benefits, from which they are unlikely ever to emerge.

But I’ve not heard much about developing fully-fledged reforms to actually address the DI program’s very serious funding and structural issues. Congress might take up some of the administration’s proposals, extending or expanding them if they prove promising. But if this is merely an effort to delay  dealing with the DI program’s problems, Congress shouldn’t play along.

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New paper from the NBER

Disability Insurance Incentives and the Retirement Decision:

Evidence from the U.S.

by Courtney Coile - #20916 (AG)

Abstract:

A rising share of older workers in the U.S. make use of the Disability Insurance (DI) program in their transition to retirement, with about one in seven men and one in nine women ages 60 to 64 now enrolled in the program. This study explores how financial incentives from Social Security and DI affect retirement decisions, using an option value approach. We find that financial incentives have a significant effect on retirement, particularly for those in poor health or with low education, who may be more actively considering retirement at younger ages. Simulations suggest that increasing the stringency of the screening process for DI would increase the expected working life of DI applicants.

http://papers.nber.org/papers/W20916?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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