CAP: “Yet Another Reason Raising the Social Security Retirement Age Is a Terrible Idea”

Rebecca Vallas, Jackie Odum and Rachel West of the Center for American Progress argue that increasing the Social Security retirement age – currently 66 – is a bad way to move the program toward solvency:

Social Security’s benefit structure is progressive—that is, benefits replace a greater share of wages for lower-income workers, in part because they contribute a larger portion of their earnings in payroll taxes during their working years. Yet when viewed across beneficiaries’ lifetimes, the program’s progressivity has been deteriorating due to the widening gap in life expectancy between rich and poor Americans.

As I’ve argued elsewhere, linking Social Security’s retirement age to differential mortality between rich and poor misunderstands how Social Security works, because an increase in the retirement age is nothing other than a uniform percentage cut in everyone’s benefits. I can think of many reason why you wouldn’t want to fix Social Security with an across-the-board benefit cut, but the link to differing longevity for rich and poor – while seemingly intuitive – isn’t one of them.

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Butler: “It's time to end Social Security for the rich.”

The Brookings Institution’s Stuart Butler argues that Social Security should be means-tested to focus benefit on those who need them the most:

What if we were to recast regular Social Security as true insurance? Insurance is something that pays out only when things go wrong. If you don’t have a car crash, or your house doesn’t burn down, you don’t get your premiums back later in life. What you do get is protection and peace of mind.

So imagine Social Security as insurance protection against being financially insecure in retirement. If it were that, it would be very different from today.

For one thing, we would want the lowest-income retirees to get the largest regular check – assuming they had dutifully paid their payroll tax “premiums” when working – and also enough to keep them comfortably out of poverty without having to rely on SSI. Some retirees with a modest income from, say, an IRA, might still need a small Social Security “insurance payout” to maintain a reasonable standard of living.

In a true insurance model like this, retired Americans with healthy income from assets would get no Social Security check at all, rather than getting the largest checks as they do today. If Social Security is seen as insurance against financial insecurity then Warren Buffet clearly doesn’t need a check. Nor do other older Americans for whom a monthly Social Security check is just a little bit more icing on an already rich cake.

I’m not a fan of means-testing, though I do agree with Butler that Social Security needs to be refocused as a base benefit to insure against poverty rather than a middle- and upper-income substitute for personal saving. But others will disagree. Either way, Butler’s piece is well worth reading.

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How much does Social Security reduce work by older Americans?

Labor supply among older individuals has been dropping for many decades, but it is difficult to determine precisely what role Social Security benefits played in that decline. The reason is that Social Security, as a national-level program, pays the same benefits using the same formula for people in every state. While labor supply declined over the same time period that Social Security payments increased, many other things happened to the country over that long time period.

In a new issue brief published by the Cato Institute, Daniel K. Fetter of Wellesley College and Lee M. Lockwood of Northwestern look at Old Age Assistance (OAA), the precursor to Social Security. What’s important is that OAA benefit levels and eligibility rules differed between states, so Fetter and Lockwood were able to better analyze the effects of these benefits on labor supply from individuals ages 65 and over.

Our results indicate that OAA significantly reduced labor force participation among older individuals. Up to age 65, the age pattern of labor force participation was similar in states with larger and smaller OAA programs. At age 65, however, a sharp divergence in labor force participation emerges. Our estimates imply that OAA can explain close to half of the large 1930–40 drop in labor force participation of men aged 65 to 74.

We also show that when we restrict the sample to non-U.S. citizens — who were eligible for OAA in some states but not others — we find similar reductions in labor force participation after age 65 in states in which noncitizens were eligible for OAA, but we can reject comparable reductions in states in which they were ineligible.

You can find the more technical version of the Fetter-Lockwood study at the National Bureau of Economic Research.

While we want protections for individuals who cannot delay retirement, we also want incentives so that those who can work longer will do so. One idea I’ve proposed is to eliminate the 12.4% Social Security payroll tax on workers aged 62 and above, to make it pay to stay in the workforce rather than retire.

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New papers from the Social Science Research Network

"The Effect of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts"

JACOB A. MORTENSON, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
Email: jm849@georgetown.edu
HEIDI R. SCHRAMM, Joint Committee on Taxation, U.S. Congress
Email: heidi.schramm@jct.gov
ANDREW WHITTEN, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
Email: raw65@georgetown.edu

Traditional Individual Retirement Accounts (IRAs) are a substantial source of retirement savings. In 2013, individuals age 60 or older held $3.8 trillion in wealth in IRAs. Under current law, some fraction of these funds must be withdrawn each year beginning the year one turns 70.5 years of age, with the required fraction increasing in age. We study the effects of these Required Minimum Distribution (RMD) rules on the decumulation behavior of retirees using a 16-year panel of administrative tax data. Our data consist of a 5% random sample of individuals age 60 or older from 1999 to 2014, with approximately 2.6 million individuals per year. This period encompasses a unique policy change that we exploit for identification: a one-year suspension of the RMD rules in 2009. Though the RMD rules are modest – leaving one third of the original balance intact by age 90 even if investments generate zero returns – our empirical analysis shows they have large effects on behavior. We estimate that 52% of individuals subject to the rules would prefer to take an IRA distribution less than their required minimum. However, our estimate for the proportion of constrained individuals who took advantage of the RMD suspension in 2009 is 62%. The remaining 38% did not re-optimize, perhaps due to inattention or other optimization frictions. In addition, we document an extensive margin effect among 70.5-year olds: individuals newly subject to the rules are 28% more likely to close their IRAs relative to other age groups. The findings suggest that there are costs associated with paying attention to the RMD rules and that the rules represent a binding constraint for the majority of retirees with IRAs.

"Who is Saving Privately for Retirement and How Much? - New Evidence for Germany"
FZG Discussion Papers 57 (2015), University of Freiburg, Research Center for Generational Contracts (FZG)

CHRISTOPH METZGER, University of Freiburg - Institute of Public Finance
Email: chrisipissi@hotmail.com

Due to demographic change the replacement rates of the German statutory pension scheme will decrease over the next decades. Voluntary savings for retirement will therefore gain more and more relevance in order to maintain one’s standard of living during retirement. This article examines the savings behavior for retirement on an individual level in Germany. As a first step the decision to save at all is analyzed, showing that the main determinants for saving are personal income as well as the disposable household income. Furthermore migrants and individuals living in the Eastern part of Germany turn out to be less likely to save additionally privately for retirement. In a second step the chosen gross saving rates are analyzed using a Tobit, a lognormal hurdle model and a Type II Tobit Model. The results suggest that the decisions to save at all and about the saving rate are independent of each other leading to a loss of information if only a standard Tobit model is used. For example personal income increases the probability to save for retirement but decreases the resulting saving rate. Modelling both decisions separately therefore leads to a better understanding of the determinants of saving for old-age.

"'Death Tax' Politics"
Boston College Law Review, Vol. 57, No. 3, 2016, Forthcoming

MICHAEL J. GRAETZ, Columbia Law School, Yale Law School
Email: michael.graetz@yale.edu

In his Keynote Address “Death Tax” Politics at the October 2, 2015 Boston College Law School and American College of Trust and Estate Counsel Symposium, The Centennial of the Estate and Gift Tax: Perspectives and Recommendations, Michael Graetz describes the fight over the repeal of the estate tax and its current diminished state. Graetz argues that the political battle over the repeal of the estate tax reflects a fundamental challenge to our nation’s progressive tax system. This Address concludes that a revitalized estate tax is important for managing the national debt and reducing massive inequalities in wealth.

"Influencing Retirement Saving: Smart Beta in Defined Contribution Default Options"
Journal of Index Investing, Forthcoming

MANUELA SPERANDEO, Blackrock
Email: Manuela.Sperandeo@blackrock.com
MARCO CORSI, Blackrock
Email: marco.corsi@blackrock.com
SARA SHORES, Blackrock
Email: sara.shores@blackrock.com

Concerns over the adequacy of lifetime retirement income are, more than ever before, a global phenomenon. Issues around participants’ engagement and retirement security seem to be present across countries with different macroeconomic and cultural backgrounds, saving and social security setups. The traditional focus on fiduciary responsibilities, such as selecting managers and monitoring fees, has been expanded to cover areas such as participant usage and successful outcome, which are now some of the main areas of interest for industry practitioners. Prevailing academic research on the topic is grounded in the concept of the experiential learning cycle, namely that people learn from experience (see Goby and Lewis, 2000). The question then becomes how to improve participants’ experience within existing Defined Contribution (DC) plans so to encourage them to save more and save regularly. In this paper we take a look at some of the features of smart beta strategies, (i.e. passively managed portfolios that move away from market capitalization weighted indexes), which make these strategies an interesting potential tool for DC plans. We then test this by using existing smart beta indexes in the context of a traditional lifestyle fund, where market capitalization indexes are replaced with smart beta indexes on pre-defined allocations.

"The Influence of Time Preferences on Retirement Timing"

PHILIPP SCHREIBER, University of Mannheim - Department of Banking and Finance
Email: schreiber@bank.bwl.uni-mannheim.de
MARTIN WEBER, University of Mannheim - Department of Banking and Finance
Email: weber@bank.bwl.uni-mannheim.de

This study analyzes the empirical relation between the decision when to retire and individuals time preferences. Theoretical models predict that hyperbolic discounting leads to dynamic inconsistent retirement timing. Conducting an online survey with more than 3,000 participants, we confirm this prediction. The analysis shows, that time inconsistent participants decrease their planned retirement age with increasing age. The temptation of early retirement seems to become stronger the closer retirement comes. We show that the negative effect of age is between 1.5 and 3 times stronger for participants who can be classified as hyperbolic discounters. In addition, we find that time inconsistent participants actually retire earlier. On average, the most time inconsistent participants retire about 2.2 years earlier. The time inconsistent behavior has severe consequences: Time inconsistent participants are ex post more likely to regret their retirement timing decision. Also, the unplanned early retirement leads to a constant decrease of retirement benefits of about 13%.

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9 Myths About Social Security

Courtesy of the Committee for a Responsible Federal Budget.

Myth #1: We don’t need to worry about Social Security for many years.
Myth #2: Social Security faces only a small funding shortfall.
Myth #3: Social Security solvency can be achieved solely by making the rich pay the same as everyone else.
Myth #4: Today’s workers will not receive Social Security benefits.
Myth #5: Social Security would be fine if we hadn’t “raided the trust fund.”
Myth #6: Social Security cannot run a deficit.
Myth #7: Social Security has nothing to do with the rest of the budget.
Myth #8: Social Security can be saved by ending waste, fraud, and abuse.
Myth #9: Raising the retirement age hits low-income seniors the hardest.

Check them all out here.

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Brenton Smith: Chained CPI is Not Way To Fix Social Security

Writing at Forbes, Brenton Smith of Fix Social Security Now argues that the so-called “chained CPI” – which would pay lower Cost of Living Adjustments than the currently-used CPI-W – is not a good way to fix Social Security:

The appeal of the shift of the COLA to a C-CPI-U to the spend-less-crowd is easy to understand. It saves money. The Congressional Budget Office estimates that this policy option would save the system $116 billion over nine years. That savings comes disproportionately from those with the highest benefit levels. Moreover, supporters of the change sell it as a more accurate measure of inflation than the current index used. If you listen long enough, the solution not only makes the system more stable, but actually improves the inflation adjustment process.

The problem is that C-CPI-U is not a better measure of inflation.  The index does not even measure true inflation. It actually measures the cost of living, which in part reflects the behavioral response to inflation.

Click here to read the whole piece.

I’ve generally opposed the Chained CPI, as it imposes the largest benefit cuts on those who are least able to work and most reliant on Social Security, while sparing “young” retirees who could probably work longer.

That said, I feel myself shifting… I think there’s pretty solid evidence that retirees voluntarily reduce spending over their retirement, even if they have plenty of money. (Health care expenses in very old age are an exception, but don’t seem to negate the trend entirely.) If that’s the case, then a more frontloaded real Social Security benefit level isn’t as much of a problem.

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Trump open to Social Security changes if elected: adviser

Donald Trump has previously rejected calls for entitlement reforms to Social Security and Medicare. But, having secured the GOP nomination and looking to mend fences with the Republican leadership – including House Speaker Paul Ryan, a long-time leader on entitlement reform – Trump may be amending his views.

According to an advisor, “after the administration's been in place, then we will start to take a look at all of the programs, including entitlement programs like Social Security and Medicare.”

Click here to read the whole article by Reuters.

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Savings and Retirement Forum, with Robert Pozen: “How Automatic IRAs Can Help Americans Reach Their Retirement Goals.”

Savings and Retirement Foundation Breakfast Forum Discussing How Automatic IRAs Can Help Americans Reach Their Retirement Goals with Robert Pozen Tuesday, May 24 8:30am -  10:00am MORNING EVENT! Urban Institute 2100 M Street NW, 6th Floor Washington, DC RSVP Breakfast will be provided. This is a widely attended event. Robert Pozen is a nonresident senior fellow in Economic Studies at the Brookings Institution and a senior lecturer at MIT’s Sloan School of Management.  He has written on a wide variety of topics related to retirement saving. Facebook @SandRFDN Blog Robert Pozen Nonresident Scholar, Economic Studies The Brookings Institution Senior Lecturer Harvard Business School

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McCrery & Pomeroy: “It's time for action on Social Security disability insurance.”

Former Reps. Jim McCrery (R-La.) and Earl Pomeroy (D-N.D.) are the authors of a new book, “SSDI Solutions: Ideas To Strengthen The Social Security Disability Insurance Program,” featuring essays from a dozen experts on disability policy and reform.

Writing in The Hill, McCrery and Pomeroy argue that Congress needs to enact disability reforms, not merely to strengthen the program’s finances but to make it better serve the disabled:

The Social Security Disability Insurance (SSDI) program provides vital benefits to 11 million workers with disabilities and their families, but much could be done to improve the program for those who depend on it, those who pay into it, and society as a whole. And while last year’s budget deal temporarily delayed the program’s funding crisis until 2022, it took only very minor steps toward improving the program.

Rather than wait until 2021 to begin a renewed discussion of the SSDI program – a tactic the political system relies on all too often -- Congress, the White House, and the Social Security Administration should use the next six years to develop and enact improvements to the SSDI program.

Click here to read the whole article.

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Smith: “Don't blame income equality for the fall of Social Security”

Writing for The Hill, Brenton Smith argues that it’s not rising income inequality that has reduced the share of total earnings subject to Social Security taxes and weakened the program’s finances.

Social Security’s hold on the wage base has declined over the last 30 years. The majority of that fall, however, occurred more than 25 years ago. It seems unlikely that income inequality in 2015 was a significant factor in wage-allocation during the 1980s.

The biggest drop in Social Security’s hold on wages occurred in 1987 and 1988.  These two years combine to account for nearly 50 percent of the overall fall in the system’s revenue base. By 1988, wages subject to FICA taxes had fallen below 86 percent of the total. Since that time, the figure has dropped to an average of 84 percent. So the trend is not current news.

Click here to check out the whole piece.

I agree that the tax reforms of 1986 had some illusory effect on Social Security financing: the reforms created incentives for high income households to report business income as personal income. While this may have been good policy, it caused an apparent skewing of the income distribution that probably didn’t reflect reality. It’s not as if these high-income households were receiving more money; they simply were reporting it in a form that plays into the Social Security policy debate.

That said, other factors were at play. One is rising health care costs, which reduce wages in ways that create the appearance of income inequality. (See my WSJ piece with Mark Warshawsky.)

And then, of course, there was actual income inequality, which I’m sure did increase but without accounting for the other factors we can’t be sure by precisely how much.

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New paper: “Disability policies: Reform strategies in a comparative perspective”

From the National Bureau of Economic Research

René Böheim, Thomas Leoni

NBER Working Paper No. 22206
Issued in April 2016
NBER Program(s):   AG PE

We analyze different disability policy strategies using policy scores developed by the OECD for the period 1990 to 2007. Applying model-based and hierarchical agglomerative clustering, we investigate the existence of distinct country clusters, characterized by particular policy combinations. In spite of common trends in policy re-orientation, our results indicate that the reforms of the last two decades led to more, not less, heterogeneity between country groups in terms of sickness and disability policy. A set of Northern and Continental European countries emerges as a distinct cluster characterized by its particular combination of strong employment-oriented policies and comparatively high protection levels. A qualitative review of policy changes in the most recent years suggests that the gap between these countries and the rest might have further increased. We embed our empirical analysis in a theoretical framework to identify the objectives and the main components of a comprehensive disability policy strategy. The objectives of such a strategy can be subsumed under three headings, representing strategy pillars: prevention and treatment; protection and insurance; and activation and re-integration. Not all these dimensions are covered equally well by the OECD policy scores and will have to be further investigated.

Click here to access the paper.

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Goldwein: Candidates Need to Start Offering Solutions

March Goldwein of the Committee for a Responsible Federal Budget writes for Real Clear Policy:

There’s an old saying that Social Security is the third rail of American politics — touch it and you die. That’s unfortunate, given that Social Security is on a path towards insolvency; failure to touch it will result in an abrupt, 21 percent across-the-board cut in benefits for everyone who relies on the program, according to the 2015 Social Security Trustees’ report.

Far too little attention on the campaign trail has been given to the types of solutions necessary to fix Social Security and too much to perpetuating myths that cloud the discussion. In addition to an interactive online tool, “The Reformer,” that allows ordinary citizens to choose various policy options and come up with their own Social Security plan, we at the Committee for a Responsible Federal Budget have released a paper identifying and debunking some of the myths that we’ve heard in the 2016 campaign.

There are a bunch of neat charts and new facts in Goldwein’s piece, so it’s worth checking out.

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Burtless: Put a Retirement Plan in Every Workplace

I’ve been late in posting this piece by Brookings Institution economist Gary Burtless, but it’s a nice perspective on what we can do to improve retire saving.

The argument that our retirement system has gaping holes is well founded. The notion that it faces an imminent "crisis" is nonsense. If the system currently faces a crisis, it has faced the same one for the past 40 years. While elderly Americans have seen their incomes and living standards improve in recent decades, the median working-age family has experienced little improvement in its real income. Nonelderly families that depend solely on the earnings of breadwinners who have below-average schooling saw a drop in their incomes.

In recent research with Brookings colleagues, I tracked the real incomes of families headed by aged and nonaged Americans. In the 34 years ending in 2012, the median real income of working-age families climbed a little more than 2 percent (in other words, by less than one-tenth of a percentage point per year). The median real income of families headed by someone past 62 increased a little more than 40 percent. The numbers suggest our retirement system is doing a decent job improving the living standards of the aged. Unfortunately, the labor market is doing a much worse job boosting the living standards of middle-class wage earners.

You can read the whole article at Real Clear Markets.

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Should Social Security Add a Childcare Credit?

Over at MarketWatch, Alicia Munnell of Boston College writes on proposals – recently endorsed by Democratic Presidential candidate Hillary Clinton – to provide Social Security credits to individuals who take time out of the workforce to care for a child (or a dependent adult such as a parent).

The goal of the child care credit is to raise the woman’s own retirement benefits, which is increasingly important given the substantial share of women retiring today who have never married or are divorced.  The specific proposal in H.R. 4529submitted by Rep. Patrick Murphy (D-FL) would provide up to five child care drop-out years when calculating an individual’s Social Security benefits.  That means women would be able to average their earnings over 30 rather than 35 years; fewer years of zero earnings will produce a higher average and a bigger retirement benefit.

You can read the whole column here.

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Does Trust Fund Budgeting Constrain Government Programs?

Read Jacob Rese’s article at National Affairs.

Policymaking always requires a level of creativity, both to come up with new solutions to problems and to find ways to pay for those solutions. Oftentimes, however, this creativity results in fictions that we adopt for convenience and are then bound to perpetuate for the sake of politics. Such fictions ultimately constrain our policy options and lead to misinformed, sometimes damaging policy choices. Few such fictions have thrown a bigger wrench into the policymaking process than the existence of supposedly massive trust-fund reserves financing Social Security and Medicare, the very programs that threaten to drive our country into a debt crisis.

You check check out the whole article here.

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Would People Delay Retirement if Offered a Lump Sum Bonus?

The Philadelphia Inquirer writes on Wharton Prof. Olivia Mitchell’s idea to encourage longer work lives by paying retirees a lump sum Social Security bonus check. Under current law, anyone who delays claiming Social Security benefits past age 62 receives a higher benefit, of about 7% per year they choose to delay. Under Mitchell’s proposal, workers who delayed retirement could instead opt to receive their extra lifetime benefits as a one-time, lump sum payment. If people prefer lump sums to income streams – and there is reason to believe that they do – then this approach could encourage longer work lives.

This idea is getting a lot of publicity, so read all about it here.

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Agenda for Pension Research Council 2016 Conference

2016 Symposium: Financial Decision Making and Retirement Security in an Aging World
May 5-6

About the Conference

By the end of the next decade, the number of older Americans will have grown rapidly, but half if not more of the elderly will suffer from cognitive deficits after the age of 80. Our 2016 Pension Research Council symposium will explore how financial decision-making changes at older ages, how and when financial advice can be useful for the older population, and what solutions and opportunities are needed to resolve the likely problems that will arise.

Conference Agenda

Thursday, May 5, 2016

Introductory Remarks: Olivia S. Mitchell, The Wharton School

Session I: The Aging Brain and Financial Decision Making

• "Aging and Decision-Making Competence"
  Wandi Bruine de Bruin, Leeds University Business School
  • Download Conference Paper (conference registration login required)
• "Aging and Financial Decision Making"
  Keith Jacks Gamble, DePaul University
• Discussant: Michael Orszag, Willis Towers Watson
• "Risky Choices, Aging, and Financial Decision Making"
  Gregory R. Samanez-Larkin, Yale University
• "Retirement and Cognitive Function"
  Raquel Fonseca, UQAM; Arie Kapteyn, RAND; and Gema Zamarro, University of Arkansas
  • Download Conference Paper (conference registration login required)
• Discussant: Fredrick Axsater, State Street Global Advisors

Keynote Speaker: Ursula Staudinger, Columbia University

Session II: Financial Advice and Retirement Planning

• "Seven Life Priorities in Retirement"
  Surya Kolluri and Cynthia Hutchins, Bank of America Merrill Lynch
  • Download Conference Paper (conference registration login required)
• "When to Delegate? A Life Cycle Analysis of Financial Advice"
  Hugh Hoikwang Kim, Sungkyunkwan University; Raimond Maurer, Goethe University; and Olivia S. Mitchell, the Wharton School
  • Download Conference Paper (conference registration login required)
• Discussant: David Richardson, TIAA Institute
• "Approaching Retirement: The Categories, Timing and Correlates of Advice Seeking"
  Gordon L. Clark, Maurizio Fiaschetti, and Peter Tufano, Oxford University
  • Download Conference Paper (conference registration login required)
• "Annuity Options in Public Pension Plans"
  Robert Clark, North Carolina State University and Janet Cowell, North Carolina State Department of the Treasurer
  • Download Conference Paper (conference registration login required)
• Discussant: Briggette Miksa, Allianz Asset Management AG

Keynote Speaker: Nora Dowd Eisenhower, Consumer Financial Protection Bureau

Friday, May 6, 2016

Session III: Solutions and Opportunities

• "Aging and Exploitation: How Should the Financial Service Industry Respond?"
  Martha Deevy and Marti DeLiema, Stanford University Center on Longevity
  • Download Conference Paper (conference registration login required)
• "The Financial Landscape for Older Adults"
  Ryan Wilson, Law Offices of T. Ryan Wilson
• "Understanding and Combating Investment Fraud"
  Christine Kieffer and Gary Mottola, FINRA
  • Download Conference Paper (conference registration login required)
• Discussant: Clint Zweifel, Missouri State Treasurer

Session VI: Roundtable

John Phillips, Social Security Administration - Moderator
Alexa von Tobel, LearnVest
Steve Utkus, Vanguard
Matt Fellowes, HelloWallet

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