New paper: “The Role of Social Security in Overall Retirement Resources: A Distributional Perspective”

The Role of Social Security in Overall Retirement Resources: A Distributional Perspective

Sebastian Devlin-Foltz¹, Alice Henriques, and John Sabelhaus

During recent decades, the US employer-sponsored retirement system has undergone a major shift from primarily defined benefit (DB)-type plans to primarily defined contribution (DC)-type plans. Furthermore, in the past decade, participation in employer retirement plans has fallen, particularly for younger and lower-income families. In light of this, there is growing concern that wealth accumulation through employer-provided pension plans is falling short, especially for the bottom half of the income distribution. However, focusing only on employer-sponsored pensions provides an incomplete picture; it has left the public pension, Social Security, out of the discussion. Social Security provides near universal coverage and calculates benefits progressively, leaving lower-income households with much higher replacement rates relative to their pre-retirement income. Claims to future Social Security benefits are a key component of retirement wealth, and thus failure to include Social Security leads to a biased assessment of the overall distribution of retirement wealth.

Read the whole paper here.

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New papers from the NBER

“A Structural Analysis of the Effects of the Great Recession on Retirement and Working Longer by Members of Two-Earner Households”

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

Abstract:

This paper uses data from the Health and Retirement Study to estimate a structural model of household retirement and saving. It applies that model to analyze the effects of the Great Recession on the work and retirement of older couples who were both employed full-time at the beginning of the recession. We analyze the effects of job loss, changes in wealth and changes in expectations.

The largest overall effects of the Great Recession are observed for 2009 and 2010. In 2009, an additional 2.5 percent of all 55 to 59 year old husbands were not working full-time as result of the Great Recession, amounting to a reduction of 3.2 percent in full-time work. In 2010, 2.8 percent of 55 to 59 year old husbands were not working full-time as a result of the Great Recession, amounting to a 3.8 percent reduction in full-time work. For wives the reductions in full-time work due to the Great Recession were 1.7 percent and 2.2 percent of those who initially held a job, or reductions of full-time work of 2.3 and 3.0 percent respectively. For those 60 to 64, the reductions were 1.2 percent of men and 0.9 percent of women. Having been laid off in the last three years reduces full-time work by 30 percent.

There also are lingering effects of layoff on the probability of working longer. Having been laid off three or more years in the past reduces full-time employment in the current year by about 12 percent. This reflects the reduced work incentives for full-time work arising from lower earnings due to the loss of job tenure with a layoff as well as the additional earnings penalty from a layoff.

The effect on own work of a spouse having been laid off is much smaller. The reason is that, as found in the estimation of our structural model, having one spouse not working increases the value of leisure for the other. In contrast, when one member of the household loses their job, the value of consumption increases relative to leisure. For recent layoffs, these effects are roughly offsetting.

All told, the effects of the Great Recession on retirement seem relatively modest. These findings are consistent with our earlier descriptive analyses.

http://papers.nber.org/papers/w22984?utm_campaign=ntw&utm_medium=email&utm_source=ntw

“The Hidden Resources of Women Working Longer: Evidence from Linked Survey-Administrative Data”

by C. Adam Bee, Joshua Mitchell - #22970 (AG LS PE)

Despite women’s increased labor force attachment over the lifecycle, household surveys such as the Current Population Survey Annual Social and Economic Supplement (CPS ASEC) do not show increases in retirement income (pensions, 401(k)s, IRAs) for women at older ages.

We use linked survey-administrative data to demonstrate that retirement incomes are considerably underreported in the CPS ASEC and that women’s economic progress at older ages has been substantially understated over the last quarter century. Specifically, the CPS ASEC shows median household income for women age 65-69 rose 21 percent since the late 1980s, while the administrative records show an increase of 58 percent. Survey biases in women’s own incomes appear largest for women with the longest work histories.

We also exploit the panel dimension of our data to follow a cohort of women and their spouses (if present) as they transition into retirement in recent years. In contrast to previous work, we find that most women do not experience noticeable drops in income up to five years after claiming social security, with retirement income playing an important role in maintaining their overall standard of living. Our results pose a challenge to the literature on the “retirement consumption puzzle” and suggest total income replacement rates are high for recent retirees.

http://papers.nber.org/papers/w22970?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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CBO Projects Larger Social Security Shortfall

The Congressional Budget Office released updated projections of Social Security's long-term financing, finding an even larger long-term deficit than in the Office’s previous calculations.

The new figures, released December 21, find Social Security’s combined retirement and disability trust funds running out in the year 2029, after which benefits would be cut across the board by 29 percent.

Over the full 75-year measurement period, Social Security is projected to run an actuarial deficit of 4.68 percent of taxable payroll, meaning that Social Security is underfunded by 25 percent over the next 75 years. In the CBO’s previous figures, calculated in late 2015, the 75-year shortfall was 4.4 percent of payroll. Social Security’s trustees and actuaries project a smaller 75-year deficit of 2.66 percent of taxable payroll.

One way to think of the actuarial deficit is the size of the payroll tax rate increase – taking place immediately and staying in effect permanently – that would keep Social Security’s trust fund solvent for 75 years. So, if we immediately raised the payroll tax rate from the current 12.4 percent to 17.08 percent, that would be enough to keep the program solvent for 75 years.

Alternately, we could reduce benefits – again, immediately and permanently – by about 25 percent. Or we could rely upon a range of other policy changes, such as raising or eliminating the $127,200 payroll tax ceiling, increasing the retirement age, lowering Cost of Living Adjustments, and so on. The effects of some of these policies are calculated in CBO’s recent publication on options to reduce the federal deficit.

Many reformers have a difficult time fixing Social Security’s funding gap even under the more forgiving projections from Social Security’s trustees. Using CBO numbers, which show a long-term deficit 75 percent higher than the trustees, the challenge is even greater. One strategy: take all reforms you favor and all the reforms you hate, then put them together. Combined they might fix the problem.

CBO’s new Social Security publication also includes updated figures on the replacement rates paid by Social Security, which measure Social Security benefits as a percentage of pre-retirement earnings. The CBO’s figures find that for an average retiree, Social Security benefits replace 40-45 percent of substantial earnings in the years approaching retirement. As I argue in this recent working paper, the CBO’s approach effectively compares Social Security benefits to an “average of above-average earnings” in the years preceding retirement.

A better approach, I argue, compares Social Security benefits to the inflation-adjusted average of career-long earnings. Luckily, CBO publishes a data appendix that includes these figures; they find that Social Security replaces from 55 to 65 percent of real career-average earnings.

However, both approaches find that replacement rates are rising for lower-earning participants and falling for high earners. The reason is that Social Security benefits are indexed to rise along with national average wages. The poor have seen their wages stagnate, meaning that Social Security benefits will be higher relative to their pre-retirement earnings. The rich, by contrast, have seen faster wage growth. But the growth of Social Security benefits has not kept up, lowering the replacement rates the receive from the program. This change in replacement rates shows how Social Security has partially offset the increased inequality of pre-retirement earnings.

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New paper from the NBER: “Older Peoples' Willingness to Delay Social Security Claiming”

Older Peoples' Willingness to Delay Social Security Claiming

by Raimond Maurer, Olivia S. Mitchell - #22942 (AG LS PE)

Abstract:

We have designed and fielded an experimental module in the 2014 HRS which seeks to measure older persons' willingness to voluntarily defer claiming of Social Security benefits. In addition, we evaluate the stated willingness of older individuals to work longer, depending on the Social Security incentives offered to delay claiming their benefits. Our project extends previous work by analyzing the results from our HRS module and comparing findings from other data sources which included very much smaller samples of older persons. We show that half of the respondents would delay claiming if no work requirement were in place under the status quo, and only slightly fewer, 46%, with a work requirement. We also asked respondents how large a lump sum they would need with or without a work requirement.

In the former case, the average amount needed to induce delayed claiming was about $60,400, while when part-time work was required, the average was $66,700. This implies a low utility value of leisure foregone of only $6,300, or under 20% of average household income.

http://papers.nber.org/papers/w22942?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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New articles from the Social Science Research Network

"The German Statutory Pension Scheme: Balance Sheet, Cross-Sectional Internal Rates of Return and Implicit Tax Rates"
FZG-Discussion Paper No.63, Research Center for Generational Contracts, University of Freiburg

CHRISTOPH METZGER, University of Freiburg - Institute of Public Finance, Research Center for Generational Contract
Email: chrisipissi@hotmail.com

We present a framework for accounting of the German statutory pension scheme and estimate a balance sheet for the years 2005 until 2012. Extending and applying the methodology proposed by Settergren and Mikula (2005), we estimate the cross-sectional internal rates of return of the German pension scheme over this period. We are able to show that the cross-sectional internal rate of return is mainly financed by increasing contributions and by changing the liabilities not backed by assets. Additionally, our results reveal that from an expenditure perspective, the major part of the internal rate of return is resulting from changing longevity rather than indexation of pension entitlements. Finally, we prove that from a cross-sectional perspective the implicit tax of a pension scheme can mainly be interpreted as an “implicit wealth tax” on pension wealth and subsequently present empirical estimates for these cross-sectional implicit tax rates.

"Employment at Older Ages and Social Security Benefit Claiming"
Social Security Bulletin. 76(4): 1-17

PATRICK J. PURCELL, U.S. Social Security Administration
Email: patrick.purcell@ssa.gov

Eligible workers can claim Social Security retirement benefits at age 62, the earliest eligibility age; however, those who claim benefits before attaining full retirement age receive permanently reduced benefits. Working longer and claiming benefits later can result in higher Social Security benefits and greater financial security in retirement. This article presents data on trends in the labor force participation rate of older Americans and the age at which people claim Social Security retired-worker benefits.

"Poverty Status of Social Security Beneficiaries, by Type of Benefit"
Social Security Bulletin. 76(4): 19-50

BENJAMIN BRIDGES, U.S. Social Security Administration
Email: benjamin.bridges@ssa.gov
ROBERT GESUMARIA, Government of the United States of America - Office of Research, Evaluation and Statistics
Email: robert.gesumaria@ssa.gov

This article examines the 2012 poverty status of Social Security adult type of benefit (TOB) groups using both the official poverty measure and the Supplemental Poverty Measure (SPM). For each TOB group the article compares the SPM estimate with the official poverty measure estimate. In addition, it estimates the effects of various features of the SPM on poverty rates, noting why the SPM estimates differ from official estimates. For each poverty measure, the article also compares poverty estimates across groups.

"A Comparison of Free Online Tools for Individuals Deciding When to Claim Social Security Benefits"
Research and Statistics Note No. 2016-03

PATRICIA P. MARTIN, Government of the United States of America - Social Security Administration
Email: Patricia.P.Martin@ssa.gov
DALE KINTZEL, Government of the United States of America - Social Security Administration
Email: dale.kintzel@ssa.gov

When to claim Social Security retirement benefits is one of the most important financial decisions many people make. The Social Security Administration (SSA) provides a variety of online tools and publications to help individuals decide on their own when to claim benefits, but maintains a neutral stance on when a person should claim. Because SSA remains neutral, other government, nonprofit, academic, and for-profit entities have developed tools to assist the public with their claiming decision. This note analyzes the advantages and limitations of six online benefit calculators. Users of these online tools should consider the source of their information and understand that the benefit estimates they produce are based on different underlying assumptions, which can result in different estimated benefit amounts.

"Social Assistance and Minimum Income Benefits: Benefit Levels, Replacement Rates and Policies Across 26 OECD Countries, 1990-2009"
Jinxian Wang and Olaf van Vliet (2016) Social assistance and minimum income benefits: Benefit levels, replacement rates and policies across 26 OECD countries, 1990-2009. European Journal of Social Security, Vol. 18, No. 4, pp. 333-355.

JINXIAN WANG, Leiden University - Department of Tax Law and Economics
Email: j.wang@law.leidenuniv.nl
OLAF VAN VLIET, Leiden University - Leiden Law School, Leiden University - Department of Economics
Email: o.p.van.vliet@law.leidenuniv.nl

Until recently, social assistance and minimum income benefits have received relatively little attention in the comparative welfare state literature. Relying on two new indicators, this paper examines the development of minimum income benefits across 26 EU and other OECD countries. The real benefit level, the first indicator, is relatively easy to interpret, but international comparisons require adjustments for exchange rates and purchasing power, which can introduce variation that is not related to underlying policy changes. In the second indicator, the net minimum income replacement rate, this disadvantage is cancelled out by construction. Our analysis shows that real benefit levels increased in most countries, whilst replacement rates declined on average. A subsequent qualitative analysis of the changes in the benefit levels confirms that the increased benefit levels reflect policy changes and that the lower replacement rates do not reflect benefit cuts, but relatively larger wage increases. Such a widening gap between benefit levels and wages is in line with the policy agenda of ‘making work pay’. Finally, by analysing the extent to which changes in quantitative indicators reflect actual policy changes, this paper seeks to make a methodological contribution to the ongoing debate on the ‘dependent variable problem’ in the welfare state literature.

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Upcoming Event: EBRI's Dec. 15 Policy Forum: Retirement & Health Policy

EBRI's Dec. 15 Policy Forum: Retirement & Health Policy

EBRI will hold its 79th policy forum in Washington, DC, on Thursday, Dec. 15, on the topic: “Retirement and Health Policy Directions in 2017 and Beyond.” The program will run from 8:30 a.m. to 12:45 p.m.
   * The current agenda and list of presenters is online here.
   * You can register for this free event online here.
   * The forum also will be live webcast by the International Foundation of Employee Benefit Plans (IFEBP), online here.

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New Social Security Reform Plan from Rep. Sam Jonson

Over at Forbes, I summarize the new plan from Rep. Sam Johnson (R-TX), which reduces benefits for higher earners, introduces a new minimum benefit for low earners, and establishes new incentives to delay retirement. Check out it here.

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