Monday, September 18, 2017

Did the Social Security Deficit Sneak Up On Us?

Writing for MarketWatch, Alicia Munnell of Boston College explains why the long-term Social Security deficit has been increasing, arguing that it’s not that Social Security’s financing has been worsening so much as that the way we’re measuring Social Security’s finances will naturally lead to a larger deficit over time.

“In 1983 — the last year for any major legislation — the Trustees projected was a small surplus over the 75-year period (1983-2057). Almost immediately after that legislation, however, deficits appeared and increased markedly in the early 1990s, then dipped for a while, and then rose to around 2.7% where it has remained in the last six years.”

“The question is why the program moved from a 75-year surplus of 0.02% of taxable payroll in 1983 to today’s 75-year deficit of 2.83%. As shown in the table below, the major reason for this swing is the impact of changing the valuation period. That is, the 1983 report looked at the system’s finances over the period 1983-2057; the projection period for the 2017 report is 2017-2091. Since Social Security costs are rising with the retirement of the baby boomers, each time the valuation period moves out one year it picks up a year with a large negative balance. This moving the period forward is responsible for the bulk of today’s deficit — 1.97 of the 2.83% of taxable payroll.”

Munnell is correct, but I think she misses an important point. Policy analysts have long been aware of this “measurement window” problem: if you measure Social Security’s finances over the next 75 years, then with every passing year you’ll be picking up a new 75th year. And since those distant years are ones with big deficits, each year the 75-year Social Security deficit will increase. So in that sense, a rising Social Security deficit is entirely predictable.

The problem is that we don’t have to measure Social Security’s finances over only 75 years. Beginning in 2003, Social Security’s Trustees included in their report a measurement of the program’s finances over the “infinite horizon.” This found a substantially larger long-term long-term deficit – 3.5% of payroll in the 2004 Trustees Report, versus 1.8% over 75-years.

But the infinite horizon actuarial balance has the advantage of not rising simply due to the passage of time. So the current infinite horizon shortfall of 4.2% measured in the 2017 Trustees Report represents changes not to the measurement period, meaning either negative experiences since 2004 or more pessimistic assumptions about future economic or demographic variables.

So why don’t policymakers rely principally on the infinite horizon measure? It’s mainly not because it’s less accurate: most of the supposedly “infinite" funding shortfall is actually accounted for by things that already have happened or are predicted to occur during the next 75 years. The main reason policymakers don’t use the infinite horizon figure is that it makes the Social Security funding problem seem larger, and a larger problem is harder to solve. And elected officials don’t like hard problems.

Read more!

Monday, September 11, 2017

CRFB: “Are Today's Seniors Facing a ‘Retirement Crisis?’”

The Committee for a Responsible Federal Budget has a nice write-up of a recent AEI event on retirement incomes, which showed that retirees of all income levels are substantially better off and have lower poverty rates than you’d guess by reading official U.S. government statistics.

An event last Wednesday at the American Enterprise Institute showcased two new studies that use actual tax data from the IRS—rather than flawed survey data—to  get a better idea of how retirees are doing financially.

The first paper, authored by economists at the Investment Company Institute and the IRS, used data from a large sample of taxpayers to examine what happened to individuals’ inflation-adjusted disposable income up to three years after they claim Social Security retirement benefits. On average, individuals’ work-related income (wages, Social Security benefits, and retirement income from pensions, annuities and savings accounts) net of federal taxes stays roughly constant in three years after they claim Social Security; gross work-related income drops about 10 percent, but lower federal income and payroll taxes offset about 80 percent of this decline.

In fact, mean net incomes actually rise slightly for the lowest income groups, and are basically maintained for all but the highest-earners (who still enjoy sizeable incomes). This is true even among individuals who are no longer working.

Click here to read the whole article – it’s a great summary of what’s going on with retirement incomes.

Read more!

Smith: “How Would Dismantling Obamacare Impact Social Security?”

Writing at Newsmax.com, Brenton Smith looks at how repealing the Affordable Care Act might impact Social Security:

Why? The ACA added about $1 trillion of projected revenue to the program in 2010 (see the comments for details). At the time, economists believed that this legislation would cause paychecks to rise as healthcare costs are reduced. This sequence is great for Social Security because compensation will shift from healthcare premiums that are exempt from payroll taxes to wages that are taxable.

I am not saying that the ACA was smart legislation, nor that laws by themselves will control the cost of healthcare. The point here is that the Trustees assume that it would push the cost of health insurance down and consequently the paychecks of workers higher.

I agree with the theory. I’ve argued in the past that rising employer health costs have eaten away at employee wages, especially for low and middle earners, thereby reducing the wages taxed by Social Security. If we can reduce employer health costs, that should increase wages and tax revenues.

Obviously, whether the ACT actually will reduce health costs, and by how much, isn’t really known. But if Congress repealed the ACA, you could expect the Social Security Trustees to project a somewhat larger long-term deficit. 

Read more!

Upcoming event: RAND Behavioral Finance Forum 2017

RAND Behavioral Finance Forum 2017

Promoting Consumer Competence in Financial Decision-Making

Tuesday, October 24, 2017, 8:30 a.m. – 5:15 p.m. ET

Location:
The Pew Charitable Trusts
901 E Conference Center
901 E Street, NW
Washington, D.C.

REGISTER TO ATTEND

The RAND Behavioral Finance (BeFi) Forum brings together academic, financial, and government leaders to share cutting-edge behavioral research in financial decision making and related topics through an annual conference and webinar series.

This year's forum will focus on financial decision-making as it relates to aging, debt and credit, retirement planning, and investments and disclosure. Presentations include a mix of studies from academics, policy makers, and industry working to better understand financial decisions.

BeFi Forum Program

Agenda is subject to change. All times are Eastern.

CONTINENTAL BREAKFAST

8:30 - 9:00 a.m.

WELCOME

RAND Corporation and the Pew Charitable Trusts

9:00 - 9:15 a.m.

KEYNOTE ADDRESS

9:15 - 10:15 a.m.

Aging and Decision-Making Competence
Wändi Bruine de Bruin, Leeds University Business School

BREAK

10:15 - 10:30 a.m.

SESSION I

Using Behavioral Insights to Support Retirement Planning

10:30 - 11:45 a.m.

Costly Zero Bias in Target Retirement Fund Choice
Xiao Liu, New York University

A Community Based Randomized Controlled Trial on an Educational Intervention “YoPlaneoMiRetiro” to Promote Retirement Saving Among Hispanics
Luisa Blanco, Pepperdine University

Improving engagement with pension decisions: evidence from a randomised controlled trial
Elisabeth Costa, The Behavioral Insights Team

BREAK

11:45 - 12:15 p.m.

LUNCH SPEAKER

12:15 - 1:00 p.m.

Borrowing to Save? The Impact of Automatic Enrollment on Debt
Brigitte Madrian, Harvard Kennedy School

SESSION II

Consumer Credit Behavior

1:00 - 2:15 p.m.

Status Goods: Experimental Evidence from Platinum Credit Cards
Martin Kanz, World Bank

Do Prize-Linked Incentives Promote Positive Financial Behavior? Evidence from a Debt Reduction Intervention
Jeremy Burke University of Southern California

Don't Watch Me Read: Effects of Mandatory Waiting Periods and Observer Presence on Consumer Responses to Disclosures
Alycia Chin, Consumer Financial Protection Bureau

BREAK

2:15 - 2:30 p.m.

SESSION III

Providing Information to Investors

2:30 - 3:45 p.m.

Does Changing How Fees Are Displayed Nudge Investors Away From Overpriced Index ETFs?: Evidence from Two Experiments
Ray Sin, Morningstar, Inc.

Can Financial Disclosures Be More Effective If They Are Interactive?
TBD, New York University

Learning and Confirmation Bias: How First Impressions and Ambiguous Signals Influence Perceptions of Financial Ad
Julie Agnew, College of William and Mary

BREAK

3:45 - 4:00 p.m.

SESSION IV

The Impact of Peers on Financial Decisions

4:00 - 5:15 p.m.

Peer Advice on Financial Decisions: A case of the blind leading the blind?
Sandro Ambuehl, University of Toronto

Raising Anchor for Behavioral Interventions: Evidence in Favor of Peer Effects
Pieter Verhallen, Maastricht University

Prompting Savings Behavior through Social Comparison
Martina Raue, Massachusetts Institute of Technology

CLOSING REMARKS

5:15 p.m.

Register for this Program

Please register for this event online.

Read more!

Friday, September 8, 2017

New papers from the Social Science Research Network

"Hispanics’ Understanding of Social Security and the Implications for Retirement Security: A Qualitative Study" Free Download
Social Security Bulletin: 77(3): 1-14 (2017)

LILA RABINOVICH, Center for Economic and Social Research (CESR)
Email: lilarabi@usc.edu
JANICE PETERSON, California State University
Email: jlpeterson@hotmail.com
BARBARA A. SMITH, Government of the United States of America, Social Security Administration, Office of Retirement Policy
Email: barbara.a.smith@ssa.gov

This article discusses why effective outreach to Hispanics is important to improve their understanding of Social Security and enhance their retirement security. It examines Social Security literacy and preferred ways of receiving information about the program by using focus groups of three ancestries (Mexican, Puerto Rican, and Cuban) and of English and Spanish speakers. This article is one of the first to research between-group differences and discuss their implications.

"The Rotten Deal: Managed Mutual Funds and Retirement Income" Free Download

DAVID W. RASMUSSEN, Pepper Institute on Aging and Public Policy
Email: dwrasmussen@fsu.edu

About 70 percent of mutual fund assets are in managed funds. These funds seek to earn an above average return for investors but, because of the up-front loads, fees and other costs, they generally earn less than the low cost index funds that only seek to get a return equal to that of the stock market. Investors can expect their retirement savings to be reduced by 25 percent or more by favoring managed funds over index funds. The costs imposed on investors in managed funds result in tens of billions of dollars in profit for the industry. Compromised retirement savings is of public concern if government programs are going to support elderly households in need. Two policy options are explored. One is focused on educating investors about the rotten deal offered by managed funds while the other is to impose a fiduciary responsibility on the industry that requires them to act in the best interests of its clients. There is ample evidence that the industry will vigorously combat such efforts.

Read more!

Thursday, September 7, 2017

Ways and Means Hearing on Disability Backlogs

On September 6, the Social Security Subcommittee of he House Ways and Means Committee held a hearing titled

“Determining Eligibility for Disability Benefits: Challenges Facing the Social Security Administration.”

The hearing video is available at the Subcommittee’s webpage, while you can download the written testimony below.

Witness List

Bea Disman
Acting Chief of Staff, Social Security Administration
Testimony

Kathryn Larin
Director of Education, Workforce, and Income Security Issues, Government Accountability Office
Testimony

Elizabeth McLaren
Bureau Chief, Iowa Disability Determination Services on behalf of National Council of Disability Determination Directors
Testimony

Marilyn Zahm
President, Association of Administrative Law Judges
Testimony

Lisa Ekman
Director of Government Affairs, National Organization of Social Security Claimants’ Representatives on behalf of the Consortium for Citizens with Disabilities Social Security Task Force
Testimony

Read more!

Tuesday, September 5, 2017

Social Security Advisory Board Releases Annual Report

Social Security Advisory Board

Board releases 2016 annual report

The Board is pleased to release the 19th Annual Report of the Social Security Advisory Board. The annual report is also available on the Board’s website (www.ssab.gov). It chronicles the events and activities in which the Board engaged in during 2016.

The Board continued its study of representative payees and published the report A Call to Action outlining the growing need for payees and a thorough review of Social Security Administration (SSA) policy and procedures. In its Supplemental Security Income (SSI) statement (published in SSA’s Annual Report of the SSI Program), the Board continued discussing payee issues and concerns, highlighting growing awareness of a model that supports, rather than replaces, a person’s financial decision making authority.

Following the Board sponsored report of the 2015 Technical Panel on Assumptions and Methods, the Board decided to explore in more detail how the Social Security trustees project labor force participation and the effect of those projections on trust fund finances. In the spring of 2016, the Board commissioned an independent technical panel of five eminent labor economists to focus on explaining trends in labor force participation and the methods used to project participation rates into the future. The panel’s completed report was issued in 2017.

The passage of the 2015 Bipartisan Budget Act included a requirement for SSA to field a  demonstration project to study the effects on earnings of a voluntary offset of disability benefits  offered to beneficiaries who attempt work. The Board commissioned a report to differentiate and discuss the new demonstration project with an earlier demonstration project. The independent report was released in the spring of 2016.

In July, the Board held a public forum to discuss some of the complexity inherent in the SSI program. The event, held in Washington, D.C., brought together experts in the field to discuss resource limits and in-kind support and maintenance rules as well as the experiences of young recipients navigating the program. The forum generated some surprising bipartisanship around the need for a less complex program, automatic cost of living increases and stronger incentives for both youth and adult recipients to attempt work and earnings.

Throughout the year, the Board met month-by-month in furtherance of its mission to understand and report on the administrative challenges facing the agency and how those challenges impact program beneficiaries and the public writ large. The Board met with the Acting Commissioner of Social Security, SSA executives, and staff, with policymakers on Capitol Hill, and advocates. The Board traveled to San Francisco for meetings with regional management and employees from the field, hearing office and processing center operations as well as local stakeholders to learn firsthand how policy made in Washington and Baltimore translates on the ground and in the lives of real people.

The Board saw significant changes in its membership in 2016, as Dorcas Hardy and Alan Cohen finished their terms, and Kim Hildred joined the Board in September. The Board is grateful to Alan and Dorcas for their service and innumerable contributions to the work of the Board. 

The Board is proud of its bipartisan work and looks forward to continued efforts to improve Social Security programs for the American people. 

Read more!

Friday, September 1, 2017

New paper: “Social Security Claiming Decisions: Survey Evidence”

Social Security Claiming Decisions: Survey Evidence

John B. Shoven, Sita Nataraj Slavov, David A. Wise

NBER Working Paper No. 23729
Issued in August 2017
NBER Program(s):   AG PE

While research shows that there are large gains in lifetime wealth from delaying claiming Social Security, most people claim at or before full retirement age. We fielded an original, nationally representative survey to gain insight into people’s rationales for their Social Security claiming decisions, their satisfaction with their past claiming decisions, and how they financed any gap between retirement and claiming. Common rationales for claiming Social Security before full retirement age include stopping work, liquidity, poor health, and concerns about future benefit cuts due to policy changes. Claiming upon stopping work and claiming at full retirement age appear to be viewed as social norms. But while Social Security claiming is strongly associated with stopping work, the roughly quarter of the sample who have a gap of two or more years between retirement and claiming used employer-sponsored pensions and other saving to finance the delay. Individuals who claimed at full retirement age are more satisfied with their claiming decisions than individuals who claimed early or delayed. There is little evidence that claiming decisions and rationales for claiming are correlated with financial literacy or knowledge of Social Security rules.

http://www.nber.org/papers/w23729

Read more!

Friday, August 25, 2017

Memo to Trump: There Is No Looming ‘Retirement Crisis’

I have a piece in today’s Wall Street Journal looking at new research showing that retiree’s incomes are substantially higher than previously thought. I’ve argued in other pieces that household surveys, in which respondents are asked how much income they receive from various sources, significantly underestimate the incomes retirees receive from private retirement plans like DB pensions and 401(k)s. As a result, incomes seem lower, poverty rates higher, and retirees more dependent on Social Security benefits.

But new research from two Census Bureau economists instead uses IRS tax data, which is much more accurate. They find a number of very interesting facts with regard to retirement incomes:

  • Incomes are substantially higher you’d think from relying on the usual household survey data.
  • The percentage of Americans who are receiving private retirement plans benefits is increasing, and those benefits are rising.
  • Most retirees have incomes that very closely match their pre-retirement incomes, far exceeding the 70% “replacement rate” that financial advisors recommend.

You can find some of the article here at AEI’s webpage; the full piece will be posted there in a few days.

Read more!

New papers from the Social Science Research Network

"Welfare Implications of a Flexible Retirement Policy"

ZHENHUA FENG, Tsinghua University - Institute of Economics
Email: fengzhh.13@sem.tsinghua.edu.cn
JAIMIE W. LIEN, The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics
Email: jaimie.academic@gmail.com
JIE ZHENG, Tsinghua University - School of Economics & Management
Email: jie.academic@gmail.com

Facing lengthening lifespans and economic concerns, workers and governments are increasingly considering the possibility of delayed retirement ages. However, the postponement of retirement may not be universally feasible, since not all workers may be willing and able to continue working past the standard retirement age, due to health status and other factors. We model this uncertain retirement problem in an overlapping generations general equilibrium framework with flexible retirement, where members of the older generation continue working with some probability, and otherwise retire. Comparing the policies of flexible retirement and mandatory retirement, we find that the consumption and welfare consequences depend largely on the labor intensity of the production function. Higher labor intensity of production tends to yield favorable social welfare results for the flexible retirement policy compared to the mandatory policy. We discuss policy insights and possible implications in China and other demographically shifting countries.

"Funding Life Insurance Contracts with Guarantees: How Can We Optimally Respond to the Policyholder's Needs?"

AN CHEN, University of Ulm
Email: an.chen@uni-ulm.de
PETER HIEBER, University of Ulm - Department of Mathematics and Economics
Email: peter.hieber@uni-ulm.de
THAI NGUYEN, University of Ulm - Institute of Insurance Science
Email: thai.nguyen@uni-ulm.de

Due to the increasing solvency requirements for return guarantees and a general decrease in interest rate levels, the attractiveness of equity-linked life insurance contracts with guarantee has recently substantially decreased. To regain competitiveness for these products, insurance companies need to be more flexible in their contract design and think of tailor-made retirement products that still satisfy the policyholder's needs. One such possibility is to adapt the investment strategy of the premium pool according to the policyholder's preferences. In this article, we determine the investment strategy that maximizes the expected utility of the policyholder's insurance contract payoff. Taking into account that retirement products are usually tax-privileged, we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility than asset investments.

"What Happens When Investors Have More Choices?"

CLAIRE YURONG HONG, Hong Kong University of Science & Technology (HKUST) - Department of Finance
Email: clairehong.ust@outlook.com

This paper studies pension funds' responses when investors are given more choices. Hong Kong launched the Employee Choice Arrangement in November 2012, which dramatically expanded investors' choice set. I find that funds charge lower fees, exhibit lower fee dispersion, and are less active after the reform. Further analysis suggests that a fund's decision to reduce fee or be active is driven by investors' demand – funds cater to investors by reducing fees when flows are less sensitive to activeness but more sensitive to fee. Importantly, a larger investor choice set improves investors' wealth mainly indirectly through endogenous fund responses, rather than through participants' better capital allocations.

"Human Capital, Social Security, and Asset Allocation"

GORDON IRLAM, Independent
Email: gordoni@gordoni.com

Numerical stochastic dynamic programming is used to explore the effects of stochastic human capital and Social Security on optimal asset allocation and consumption decisions over the lifecycle for typical individuals. Optimal asset allocations are very stock heavy pre-retirement, and quite stock heavy post retirement. Individuals should adopt declining equity allocations while employed, and level to slightly rising equity allocations during a stochastic retirement. Early in the working years almost the entire income should be consumed. Consumption should typically continue to increase until late in retirement, when it will be forced to fall.

Read more!

Wednesday, August 23, 2017

New papers from the Social Security Bulletin

Hispanics' Understanding of Social Security and the Implications for Retirement Security: A Qualitative Study

by Lila Rabinovich, Janice Peterson, and Barbara A. Smith

This article discusses why effective outreach to Hispanics is important to improve their understanding of Social Security and enhance their retirement security. It examines Social Security literacy and preferred ways of receiving information about the program by using focus groups of three ancestries (Mexican, Puerto Rican, and Cuban) and of English and Spanish speakers. This article is one of the first to research between-group differences and discuss their implications.

Exits from the Disability Insurance Rolls: Estimates from a Competing-Risks Model

by Lakshmi K. Raut

This article explores the causes of growth in the number of disabled workers on the Social Security Disability Insurance (DI) rolls from 1980 through 2010 by estimating the probability of a DI beneficiary's program exit because of recovery, death, or conversion to retired-worker beneficiary. The author uses Social Security administrative data and a competing-risks model to estimate DI exit probabilities by cause and beneficiary sex, age, and disability type. Cumulative exit probabilities are calculated for beneficiaries over their first 9 years on the DI rolls. The author also examines possible changes over time by comparing outcomes for the 1980s with those for the 1990s.

Read more!

Tuesday, August 22, 2017

New paper: “Nudging Retirement Savings: A Field Experiment on Supplemental Plans”

Nudging Retirement Savings: A Field Experiment on Supplemental
Plans

by Robert L. Clark, Robert G. Hammond, Melinda Sandler Morrill, Christelle Khalaf  -  #23679 (AG)

Abstract:

Although supplemental saving plans can be an important part of an
individual's financial security in retirement, contribution rates
remain low, particularly among those with lower salaries and less
education.  We report findings from a field experiment that
distributed an informational nudge containing information on key
aspects of the employer-provided supplemental saving plans of older
public employees in North Carolina.  Among workers participating in a
supplemental plan, individuals who received an informational nudge
increased their contributions in the months following the
intervention relative to the control group.  Moreover, those that
received the nudge reported in a subsequent survey that they were
more likely to have developed a retirement plan and report more
confidence in their retirement preparedness.  In contrast,
individuals who were not enrolled in a retirement saving plan were
not moved to begin contributing to a supplemental plan.


http://papers.nber.org/papers/w23679?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Read more!

Monday, August 14, 2017

New paper: "Debt and Financial Vulnerability on the Verge of Retirement"

Debt and Financial Vulnerability on the Verge of Retirement
by Annamaria Lusardi, Olivia S. Mitchell, Noemi Oggero  -  #23664 (AG)

Abstract:

We analyze older individuals' debt and financial vulnerability using
data from the Health and Retirement Study (HRS) and the National
Financial Capability Study (NFCS).  Specifically, in the HRS we
examine three different cohorts (individuals age 56-61) in 1992,
2004, and 2010 to evaluate cross-cohort changes in debt over time. 
We also use two waves of the NFCS (2012 and 2015) to gain additional
insights into debt management and older individuals' capacity to
shield themselves against shocks.  We show that recent cohorts have
taken on more debt and face more financial insecurity, mostly due to
having purchased more expensive homes with smaller down payments.

http://papers.nber.org/papers/w23664?utm_campaign=ntw&utm_medium=email&utm_source=ntw Read more!

Monday, July 24, 2017

New working paper: “The Relative Effects of Economic and Non-Economic Factors on Taxpayers’ Preferences Between Front-Loaded and Back-Loaded Retirement Savings Plans”

The Center for Retirement Research at Boston College has published a new working paper, “The Relative Effects of Economic and Non-Economic Factors on Taxpayers’ Preferences Between Front-Loaded and Back-Loaded Retirement Savings Plans,” by Andrew D. Cuccia, Marcus M. Doxey and Shane R. Stinson

Abstract

To understand the potential impact of tax incentives on individual retirement saving, we must understand how individuals make decisions about saving. We examine individual taxpayers’ choices between front-loaded (e.g., traditional) and back-loaded (e.g., Roth) defined contribution retirement savings plans, as well as their saving levels and investment style choices within a plan. To do so, we conduct a series of experiments that allow us to consider individual-specific expectations regarding the economic factors that normatively drive retirement saving decisions, as well as non-economic attitudes and preferences that may also impact these decisions. Overall, we find that participants generally prefer back-loaded retirement plans to front-loaded plans. We find mixed evidence regarding whether individuals appropriately weight expected tax rate changes in their plan choices, despite the fact that these tax rate changes are the primary factor driving the relative after-tax returns of front- and back-loaded plans. Conversely, we find evidence that plan attributes related to individuals’ non-economic attitudes and preferences consistently influence plan choice. Saving levels, while idiosyncratic and difficult to predict, are negatively associated with preference for back-loaded plans and may be influenced by tax-related contextual variables as well. Investment risk is also negatively associated with preferences for back-loaded plans.

The paper found that:

  • Taxpayers prefer back-loaded plans over front-loaded plans.
  • Individuals may not systematically rely on their beliefs regarding their relative tax rates when making plan choices. At least part of that failure is due to a lack of awareness and/or understanding.
  • Individual saving levels and investment selections, while largely idiosyncratic and difficult to predict, are negatively associated with a preference for back-loaded plans and may be influenced by tax-related contextual variables as well.
Read more!

Social Security’s Financial Outlook: The 2017 Update in Perspective

The Center for Retirement Research at Boston College has published a new issue brief, “Social Security’s Financial Outlook: The 2017 Update in Perspective,” by Alicia H. Munnell

The brief’s key findings are:
  • The 2017 Trustees Report shows very little change:
    • Social Security’s 75-year deficit rose slightly from 2.66 percent to 2.83 percent of payroll.
    • The deficit as a percentage of GDP remains at 0.9 percent.
    • Trust fund exhaustion is still 2034, after which payroll taxes still cover about three quarters of promised benefits.
  • The shortfall is manageable, but action should be taken soon to equitably share the burden among cohorts, restore public confidence, and give people time to adjust.
  • Proposed solutions range from “all benefit cuts” to “all tax increases.” For action to occur, policymakers need guidance from the public on the desired mix.
Read more!

Smith: “Social Security Needs More Independent Oversight”

Writing at FedSmith.com, Brenton Smith argues that the vacant positions for Social Security’s two public trustees undermines confidence in the program.

The Public Trustee is supposed to be independent of the forces of politics. Each of these trustees enjoys a term that is defined by law rather than by job title. Thus, these individuals cannot be dismissed by the President, nor terminated by the politics of Congress.

As such, these individuals insert visible independent oversight of the numbers which govern the discussion of this critical program. If we have any hope of finding a middle ground in developing reforms, it will come from data on which all sides can agree on the size and scope of any financial challenges.

Click here to read the whole article.

Read more!

Event video: “What’s in store for Social Security? Experts discuss the 2017 Social Security Trustees Report”

Over at AEI’s website you can watch video from the July 19 event, “What’s in store for Social Security? Experts discuss the 2017 Social Security Trustees Report,” which featured Stephen C. Goss, Chief Actuary of the Social Security program; Paul Van de Water, a former Social Security Administration official now at the Center on Budget and Policy Priorities; and Andrew G. Biggs, also formerly of Social Security and now a Resident Scholar at the American Enterprise Institute.

You can watch the full event here.

Read more!

Another Year, Another Decline in Social Security's Financial Health

Over at Forbes, I look at the results of the 2017 Social Security Trustees Report:

Yesterday, Social Security’s Trustees released their annual report on the program’s finances. There were no breathtaking changes, just a continuation of the slow and steady decline in the financial health of the federal government's largest spending program and the largest source of income for most retirees. With Social Security, no news usually equals bad news. The response from progressives is mostly to downplay the need for reform, stressing that there are another 17 years until Social Security’s trust funds become insolvent. The response from conservatives is mostly silence, since – after the failure of President George W. Bush’s reform efforts in 2005 – the right doesn’t have a clear idea of what they want to do about Social Security. Neither response should be encouraging for the public.

Check out the whole article here.

Read more!

Monday, July 10, 2017

Upcoming event: “Hearing on Social Security’s Solvency Challenge: Status of the Social Security Trust Funds”

Chairman Johnson Announces Hearing on Social Security’s Solvency
Challenge: Status of the Social Security Trust Funds House Ways and Means

Social Security Subcommittee Chairman Sam Johnson (R-TX) announced today that the Subcommittee will hold a hearing entitled “Social Security’s Solvency Challenge: Status of the Social Security Trust Funds.” The hearing will focus on the status of the Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) Trust Funds and the effects of delaying action to address Social Security’s future insolvency.

The hearing will take place on Friday, July 14, 2017 in 2020 Rayburn House Office Building, beginning at 9:00 AM.

Click here for more details.

Read more!

Friday, June 23, 2017

Savings and Retirement Forum with Mark Warshawsky

Join us June 28 For a Lunch Meeting with Guest Speaker:

Mark Warshawsky

Senior Fellow, Mercatus Center

Who will discuss his new paper:
Retire on the House
The Possible Use of Reverse Mortgages to Enhance Retirement Security
June 28, 2017
Noon-1:00 p.m.
RSVP
Location: 
The Tax Foundation
9th Floor
1325 G St. NW
Washington, DC
(Lunch will be provided)

Mark Warshawsky is a Senior Research Fellow at the Mercatus Center of George Mason University.  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).  From 2006 to 2013 he was director of retirement research at Towers Watson, a global human capital consulting firm.   He was a member of the Social Security Advisory Board from 2006 through 2012 and was vice chairman of the federal Commission on Long-Term Care in 2013.  Warshawsky received a PhD in economics from Harvard University and a BA with highest distinction from Northwestern University.

RSVP to: savingsandretirement@gmail.com

Read more!

Thursday, June 22, 2017

CRFB: Trump Budget Includes Meaningful SSDI Reforms

The Committee for a Responsible Federal Budget gives a run-down of the Social Security disability reforms included as part of the Trump administration's budget proposal. While the CRFB isn’t positive on Trump’s overall budget or even the parts limited to disability, they argue that policymakers shouldn’t dismiss the disability proposals out of hand.

The budget includes a number of proposals for changing SSDI's benefits and eligibility process aimed at reducing inequities and possible overlapping payments. The budget also calls for testing several new strategies aimed at improving the labor force participation of SSDI beneficiaries. Altogether, these reforms would likely close one-quarter to one-half of SSDI's long-term funding gap.

Check out the whole article here.

Read more!

New paper: “The Upcoming Social Security and Medicare Trustees’ Reports: A Preview

Writing for the Bipartisan Policy Center, Charles Blahous and Robert Reischauer – who were until last year the two public trustees of the Social Security and Medicare programs – discuss the upcoming Trustees Reports for Social Security and Medicare:

The Social Security Act requires that the boards of trustees of the several Social Security and Medicare trust funds report annually to the Congress on the recent and future operations of the trust funds. More specifically, the act requires that the trustees report on the “operation and status” of the trust funds during the preceding fiscal year as well as the next few years. The act also requires that the reports contain statements of the actuarial status of the trust funds, which the trustees have traditionally measured over a seventy-five year projection period. With respect to Social Security, the trustees are also required to issue a finding as to whether its trust funds are in “close actuarial balance.” The 2016 reports found that both the Social Security Federal Disability Insurance (DI) trust fund and the Medicare Federal Hospital Insurance (HI) trust fund failed the trustees’ test of short-range financial adequacy while Social Security’s Federal Old-Age and Survivors Insurance (OASI) trust fund failed their test of long-term adequacy. In short, the trust funds will eventually be depleted if lawmakers do not take corrective action.

Check out the whole article here.

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Tuesday, June 13, 2017

New papers from the NBER

Social Security and Saving: An Update by Sita Slavov, Devon Gorry, Aspen Gorry, Frank N. Caliendo - #23506 (AG PE)

Abstract:

Typical neoclassical life-cycle models predict that Social Security has a large and negative effect on private savings. We review this theoretical literature by constructing a model where individuals face uninsurable longevity risk and differ by wage earnings, while Social Security provides benefits as a life annuity with higher replacement rates for the poor. We use the model to generate numerical examples that confirm the standard result. Using several benefit and tax changes from the 1970s and 1980s as natural experiments, we investigate the empirical relationship between Social Security and private savings and find little to support the strong predictions from the theoretical model. We explore possible reasons for the divergence between theoretical predictions and empirical findings.

http://papers.nber.org/papers/w23506?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Planning for Retirement? The Importance of Time Preferences

by Robert L. Clark, Robert G. Hammond, Christelle Khalaf, Melinda Sandler Morrill - #23501 (AG)

Abstract:

Ensuring retirement income security is a priority for individuals, employers, and policymakers. Using merged administrative and survey data for public sector workers in North Carolina, we explore how workers' characteristics and preferences are associated with planning and saving for retirement. We then assess the "quality" of a retirement plan and whether retirement behavior is consistent with

these plans. The findings indicate that the way that individuals

discount future consumption is associated with the extent of their retirement planning and preparedness. We find that individuals who engage in retirement planning are better prepared to meet their retirement goals upon leaving their career jobs.

http://papers.nber.org/papers/w23501?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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Wednesday, June 7, 2017

Upcoming event: “Using Tontines for Retirement Income”

Jonathan Forman
Alfred P. Murrah Professor of Law
University of Oklahoma

Who will discuss his paper:
“Using Tontines for Retirement Income”
Wednesday June 21, 2017
Noon-1:00 p.m.
RSVP
Location: Cato Institute
1000 Massachusetts Ave, NW
Washington, DC 20001-5403
(Lunch will be provided)

Forman (“Jon”) is the Alfred P. Murrah Professor of Law at the University of Oklahoma, where he teaches courses on tax and pension law and writes about retirement policy. 

Background on Tontines

In a simple tontine, a group of investors pool their money together to buy a portfolio of investments, and, as investors die, their shares are forfeited, often with the entire fund going to the last surviving member.  For example, in an episode of the TV show M*A*S*H, Colonel Sherman T. Potter, as the last survivor of his World War I unit, got to open the bottle of cognac that he and his buddies brought home from France (and share it with his Korean War compatriots).
The ttontine principle—“that the share of each, at her death, is enjoyed by the survivors” —can be used to design financial products that would benefit multiple survivors, not just the last survivor. Unlike traditional defined benefit plans, these tontines would always be fully funded; and, unlike annuities, these tontines could be run by low-cost mutual funds rather than high-cost insurance companies.

Click here to RVSP.


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Thursday, June 1, 2017

Upcoming Event: “Small Businesses & Retirement Readiness: Vermont Embraces a Multiple Employer Plan Approach”

View this email in your browser

Join us for a free webinar:

Small Businesses & Retirement Readiness:
Vermont Embraces a Multiple Employer Plan Approach

DATE: Wednesday, June 7, 2017
TIME: 1:00 PM – 2:00 PM ET

States are leading the way by developing innovative new approaches to helping more small businesses and private sector workers save for retirement. One of these approaches is through the establishment of a multiple employer plan (MEP). Vermont will be the first state to offer a MEP to small businesses and workers as an option to help increase retirement savings.
But what is a MEP? What are the advantages of a MEP?
During this one hour webinar, panelists will provide an overview of the challenges facing small businesses today, why Vermont has chosen to establish a MEP, and some of the considerations for the design and operation of a state-facilitated MEP.

Our Panel:

  • The Honorable Beth Pearce, Treasurer, State of Vermont
  • Matt Birong, Owner, 3 Squares Café, Vergennes, Vermont
  • David Morse, Partner, K&L Gates LLP
  • Wendy Young Carter, Vice-President, Public Sector, Segal
  • Barb Van Zomeren, Senior-Vice President, Ascensus

Moderator:

  • Angela M. Antonelli, Executive Director, Georgetown Center for Retirement Initiatives

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Upcoming Event: “Reviewing the Evidence: What Works in Disability Employment Services”

Reviewing the Evidence: What Works in Disability Employment Services

Jun 22, 2017 12:00 p.m. - 1:30 p.m.

The growing evidence base on disability employment services has given policymakers and administrators an opportunity to either scale up and replicate services that work or to stop supporting those that do not. On June 22, from 12:00 p.m. to 1:30 p.m., Eastern Daylight Time,Mathematica’s Center for Studying Disability Policy (CSDP) will host a live webinar featuring a panel of experts from Mathematica who will discuss the emerging evidence on promising employment interventions. Our speakers will present findings from recent studies of the following:

  • Support from state vocational rehabilitation agencies for the postsecondary education of transition-age youth with mental health conditions
  • The Job Corps program’s potential to (1) improve employment outcomes for adults with disabilities who participated in the program when they were young and (2) reduce their reliance on disability benefits
  • Early impacts of a state vocational agency intervention on Social Security Disability Insurance beneficiaries

Presenters:

  • Craig Thornton, Moderator
  • Priyanka Anand
  • Heinrich Hock
  • Gina Livermore
  • David Stapleton, Discussant

Click here to register.

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Friday, May 26, 2017

New papers from the Social Science Research Network

"Contributory Retirement Saving Plans: Differences across Earnings Groups and Implications for Retirement Security"
Social Security Bulletin, Vol. 77(2), p. 13-24, 2017

IRENA DUSHI, U.S. Social Security Administration
Email: irenad1@gmail.com
HOWARD IAMS, U.S. Social Security Administration
Email: Howard.m.iams@ssa.gov
CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
Email: Chris.Tamborini@ssa.gov

This article examines how savings in defined contribution (DC) retirement plans vary across the earnings distribution. Specifically, the authors investigate the extent of an earnings gradient in access to, participation in, and levels of contribution to DC plans. Using a nationally representative sample of Survey of Income and Program Participation respondents to data from their W-2 tax records, the authors find that DC plan access, participation, and contributions increase as earnings increase, even after controlling for key socioeconomic and labor-market covariates. They also find that, despite changing economic conditions, the earnings gradient changed little between 2006 and 2012.

"An Experimental Analysis of Modifications to the Survivor Benefit Information within the Social Security Statement"
CRR WP 2017-5, May 2017

JEFFREY DIEBOLD, North Carolina State University - School of Public and International Affairs
Email: jcdiebol@unity.ncsu.edu
SUSAN E. CAMILLERI, North Carolina State University
Email: secamill@ncsu.edu

This paper examines the effect of modifications to the survivor benefit information in the Social Security Statement on the benefit knowledge and the expected claiming behavior of married men using an experimental survey of workers from the RAND American Life Panel (ALP). Critical components of this analysis include modifications to the survivor benefit information in the Statement’s benefit table and a “special insert” that explains the survivor benefit provisions. The key limitations of this study include the limited generalizability of the results due to the sampling frame (i.e., men) and the self-selection of ALP panel members into the study. Second, a worker’s claiming decision is likely the result of a more complicated decision-making process than was allowed for in this experiment. Our study assumes, for example, that married workers evaluate their benefit information and make a decision about when to claim independent of input from their spouse. While the occurrence and scope of such deliberations will vary by household, given the financial implications of this decision for each spouse, the assumption that married workers make this decision unilaterally is somewhat tenuous.
The paper found that:
• Providing individuals with comprehensive and complex survivor benefit information improved their awareness and understanding of these provisions.
• When workers are compelled to consider the effect that their claim age has on their survivor benefit, they appear to incorporate this into deciding when to claim. Each modification increased the expected claim ages of respondents by roughly one year relative to the control.
• While it is possible to foster a deeper understanding of the complex interaction among survivor benefit provisions through an informational insert, this level of comprehension does not appear necessary to induce prosocial claiming behavior. Instead, it was sufficient for respondents to merely see that their spouse would receive a lower survivor benefit at lower claim ages.
• The fade-out of the effects of the modifications considered in this analysis was rapid.
The policy implications of the findings are:
• Respondents in this study were not well informed about the survivor benefit, suggesting that more detailed information may help married workers prepare financially for retirement and the transition into widowhood.
• The finding that workers exposed to survivor benefit information were more likely to adjust their expected claim age suggests that they may not have already factored this information into their expectations and that it has value.
• The rapid fade-out of the improvements in benefit knowledge and expected claiming behavior evident in this study has important practical implications and suggests that workers may benefit most if online information and mailed paper statements were treated as complements as opposed to substitutes.

"Actuarial Inputs and the Valuation of Public Pension Liabilities and Contribution Requirements: A Simulation Approach"
CRR WP 2017-4 May 2017

GANG CHEN, State University of New York (SUNY) - Rockefeller College of Public Affairs & Policy
Email: gchen3@albany.edu
DAVID S. T. MATKIN, SUNY University at Albany, SUNY University at Albany
Email: dmatkin@albany.edu

This paper uses a simulated public pension system to examine the sensitivity of actuarial input changes on funding ratios and contribution requirements. We examine instantaneous and lagged effects, marginal and interactive effects, and effects under different funding conditions and demographic profiles. The findings emphasize the difficulty of conducting cross-sectional analyses of public pension systems and point to several important considerations for future research.
The paper found that:
• Discount rates, salary growth rates, cost methods, and mortality tables all influence funding ratios and contribution requirements. Without considering these effects, comparisons of funding ratios across pension systems will produce biased results.
• The discount rate assumption is the most influential actuarial input on funding ratios and contribution requirements. We show that a plan can postpone required contributions by raising its discount rate assumption, but its funding condition deteriorates in the long run. In contrast, if a plan reduces its discount rate by one percentage point, and its investment returns continue at the level that was previously assumed, it will take approximately seven years for the funding ratio to return to its original level and an even longer time period for the ARC to return to its original level (though the exact length of time depends on investment returns and the baseline discount rate assumption).
• The effects of actuarial inputs greatly depend on plan characteristics such as demographic profiles and asset levels, and also interactions with other actuarial inputs. Because of the interactive effects, it is difficult to standardize funding ratios or pension obligations by only controlling for a single actuarial input. With better data on plan characteristics (such as information on mortality tables and age distributions), simulations could be used to standardize pension liabilities. In the absence of that information, improved consistency in financial reporting (such as requiring a single cost method) is an effective way to facilitate better comparisons of financial conditions across pension plans.
The policy implications of the findings are:
• The valuation (or measurement) of public pension liabilities and contribution requirements is highly sensitive to the choice of several actuarial assumptions, which should be considered when assessing the financial condition of public pension systems.
• The sensitivity of liability and contribution requirement valuations to actuarial assumptions and methods depends on the demographic profile of pension participants.
• Making more optimistic assumptions reduces the liability and contribution valuations in the short term, but, over time, more optimistic assumptions can have substantive and harmful effects on pension liabilities and contribution requirements.

"Interactions between Financial Incentives and Health in the Early Retirement Decision"

PILAR GARCIA-GOMEZ, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Email: garciagomez@ese.eur.nl
TITUS J. GALAMA, USC Center for Economic and Social Research, The RAND Corporation
Email: galama@usc.edu
EDDY VAN DOORSLAER, Erasmus University Rotterdam (EUR) - Institute of Health Policy and Management
ANGEL LOPEZ NICOLAS, Technical University of Cartagena (UPCT)
Email: angel.lopeznicolas@gmail.com

We present a theory of the relation between health and retirement that generates testable predictions regarding the interaction of health, wealth and financial incentives in retirement decisions. The theory predicts (i) that wealthier individuals (compared to poorer individuals) are more likely to retire for health reasons (affordability proposition), and (ii) that health problems make older workers more responsive to financial incentives encouraging retirement (reinforcement proposition). We test these predictions using administrative data on older employees in the Dutch healthcare sector for whom we link adverse health events, proxied by unanticipated hospitalizations, to information on retirement decisions and actual incentives from administrative records of the pension funds. Exploiting unexpected health shocks and quasi-exogenous variation in financial incentives for retirement due to reforms, we account for the endogeneity of health and financial incentives. Making use of the actual individual pension rights diminishes downward bias in estimates of the effect of pension incentives. We find support for our affordability and reinforcement propositions. Both propositions require the benefits function to be convex, as in our data. Our theory and empirical findings highlight the importance of assessing financial incentives for their potential reinforcement of health shocks and point to the possibility that differences in responses to financial incentives and health shocks across countries may relate to whether the benefit function is concave or convex.

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Thursday, May 25, 2017

Retirement Research Consortium Annual Meeting: August 3-4, 2017

Retirement Research Consortium Annual Meeting: August 3-4, 2017

 
 

The 19th annual meeting of the Retirement Research Consortium will take place
at the National Press Club in Washington, DC on August 3-4, 2017. 

The event is open to the public and free of charge, but registration is required.

The agenda and registration form are available here.

 

The meeting is jointly funded by the Center for Retirement Research at Boston College,
the NBER Retirement Research Center, the University of Michigan Retirement Research Center,
and the U.S. Social Security Administration.

 

Center for Retirement Research at Boston College
258 Hammond Street, Chestnut Hill, MA 02467
(617) 552-1762 | fax: (617) 552-0191 | crr.bc.edu

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Tuesday, May 16, 2017

Charles Schwab: Cut Payroll, Income Taxes on Retirees

Writing in the Wall Street Journal, investment guru Charles Schwab argues for lowering Social Security payroll taxes on older Americans as a way to encourage them to work more, while also lowering the income taxes that retirees pay on their Social Security benefits:

As deliberations about tax reform begin in earnest, Congress should consider a simple fix to help millions of older Americans: Eliminate Social Security and Medicare payroll taxes after age 65 on the first $50,000 of earned income. These Americans have already contributed to the two programs over a lifetime. Yet even after they hit the retirement age, they continue to pay Social Security and Medicare taxes on income they earn.

This reform could significantly benefit seniors with modest incomes. Nearly 20% of people 65 and over are still working—more than eight million in all—according to the Bureau of Labor Statistics. Of people 65 and older who reported income in 2014, about 80% took in less than $50,000, according to the Administration on Aging. The median was just over $22,000. This proposal would boost their spending power significantly.

Take a 70-year-old woman who earns $25,000 a year in California. Today the combined Social Security and Medicare tax on that income is approximately $1,900. Federal and state taxes further reduce her take-home pay to roughly $21,000. Exempting her from Social Security and Medicare taxes effectively would increase her spending power by more than 9%. She is likely to put that additional $1,900 toward day-to-day living expenses. It’s enough to have a real positive effect on her quality of life.

I’ve written extensively, including in the Wall Street Journal, about cutting payroll taxes on older workers as a way to encourage delayed retirement. You can check out one of those articles here. Read more!