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.

Read more!

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

Read more!

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!

Friday, May 12, 2017

“The Democrats’ Social Security Plan Means Much Higher Taxes”

I have a new piece in the Wall Street Journal looking at the Social Security 2100 Act, authored by Rep. John Larson (D-MN) but co-sponsored by 83% of House Democrats. That’s much more consensus than any reform plan had during the GOP heyday of personal accounts. But is the plan any good?

The article is still behind the Journal’s paywall, but I believe non-subscribers can access the full article at the Journal’s Twitter account.

Social Security may be the “third rail” of U.S. politics, but congressional Democrats are suddenly eager to risk touching it. Over a remarkably short time they have embraced an ambitious but flawed policy of expanding the program’s benefits via tax increases on all workers, including doubling payroll taxes on high earners.

Since its release on April 5, Rep. John Larson’s Social Security 2100 Act has accrued 160 co-sponsors, more than any other reform proposal in recent history. With support from 80% of House Democrats, Mr. Larson’s legislation can fairly be called the Democrats’ Social Security plan.

Democrats have always been reluctant to cut Social Security benefits, favoring tax increases to fix the troubled program’s long-term deficit of more than $10 trillion. But today’s Democrats have gone further, embracing an expanded Social Security program to address what they claim is inadequate retirement saving outside the government-run system.

For subscribers, the full article is available here.

Read more!

New paper: "The Importance of Social Security Benefits to the Income of the Aged Population"

"The Importance of Social Security Benefits to the Income of the Aged Population"
Social Security Bulletin, Vol. 77(2), p. 1-12, 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
BRAD TRENKAMP, Government of the United States of America - Social Security Administration
Email: Brad.Trenkamp@ssa.gov

Social Security benefits comprise the most important source of income for people aged 65 and over. However, changes in the last decades in employer-provided pensions, Social Security program, and societal changes may have altered the composition of income sources among the elderly. Some researchers have argued that the Current Population Survey (CPS ASEC) doesn’t properly measure income from retirement accounts and thus overestimate importance of Social Security and underestimate reliance on income from pensions. Given changes to the CPS, we focus on reliance on Social Security benefits among the elderly, using data from the 2015 CPS, and validate the CPS estimates with those from the Survey of Income and Program Participation and the Health and Retirement Study. Despite differences across the three surveys, estimates are quite similar regarding the share of income from Social Security. Findings suggest that about half of elderly receive at least 50% of their family income from Social Security benefits, whereas for a quarter of elderly Social Security benefits comprise at least 90% of their family income.

Editorial note: Ideally, a paper like this would rely on IRS data, which better captures retirement account income (e.g., Bee and Mitchell, 2016). Lacking that, as a check, this paper could sum the incomes of retirees in the CPS, SIPP and HRS and check them against publicly-available IRS data. If total incomes fall short – which they will with the IRS and SIPP (less sure about the HRS) then these datasets will overestimate dependency on Social Security benefits.

Read more!

Monday, May 8, 2017

New papers from the SSRN

"Rising Inequality in Life Expectancy by Socioeconomic Status"
Center for Retirement Research at Boston College WP No. 2017-2

GEOFFREY SANZENBACHER, Boston College Economics Department
Email: geoffrey.sanzenbacher.1@bc.edu
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu
CANDACE M. COSGROVE, U.S. Census Bureau
Email: candace.m.cosgrove@census.gov
NATALIA ORLOVA, Boston College, Center for Retirement Research
Email: nataliyaorlova@mail.ru

Inequality in life expectancy is growing in the United States, but evidence is mixed regarding how much it has grown. Some studies have found that life expectancies have decreased for those with the lowest socioeconomic status (SES). Other studies have found that while inequality is rising, there have been life expectancy gains across the board. A primary difference in these studies is how SES is measured. Some studies use an absolute measure, such as years of school completed, while others use relative measures, such as a person’s ranking of years of school completed compared to others born at the same time. This study uses regression analysis to assign people a relative education ranking and, in doing so, attempts to isolate the changing relationship between SES and mortality from the fact that certain education-based groups, especially high school dropouts, actually have a lower SES level today than in the past. The study finds that when SES is defined in this way – relatively – inequality in mortality by SES is increasing but life expectancies have also increased across SES groups. The study also finds that white women in the bottom of the education distribution have experienced the least improvement of any group. This research suggests efforts to improve the finances of Social Security through higher retirement ages will have to reckon with the distributional effects of increasing inequality in mortality, but not with increases in mortality for large segments of the population.

"Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test"
Kelley School of Business Research Paper No. 17-39

ALEXANDER GELBER, National Bureau of Economic Research (NBER), University of California, Berkeley
Email: agelber@nber.org
DAMON JONES, University of Chicago - Irving B. Harris Graduate School of Public Policy Studies
Email: damonjones@uchicago.edu
DANIEL W. SACKS, Indiana University - Kelley School of Business - Department of Business Economics & Public Policy
Email: dansacks@indiana.edu
JAE SONG, U.S. Social Security Administration
Email: jae.song@ssa.gov

We develop a method for estimating the effect of a kinked budget set on workers' employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting elasticity point estimate for the AET is at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.

"Disarming Puerto Rico's Pension Time Bomb"
Law360, April 19, 2017

RICHARD J. COOPER, Cleary Gottlieb Steen & Hamilton LLP - New York Office
Email: rcooper@cgsh.com
LUKE A. BAREFOOT, Cleary Gottlieb Steen & Hamilton LLP - New York Office
Email: lbarefoot@cgsh.com
DANIEL J. SOLTMAN, Cleary Gottlieb Steen & Hamilton LLP
Email: dsoltman@cgsh.com
ANTONIO PIETRANTONI, Cleary Gottlieb Steen & Hamilton LLP - New York Office
Email: apietranton@cgsh.com

With the long-delayed commencement of negotiations between the new government of the Commonwealth of Puerto Rico (the “Commonwealth”) and its financial creditors finally underway, and the expiration of the existing stay on creditor actions looming, much of the financial press’ attention over the next several weeks will undoubtedly be focused on whether the government of Puerto Rico can reach an out of-court settlement with its financial creditors. One issue that has received less attention in the financial press, but which is of paramount importance to a financially secure local economy, is the challenge Puerto Rico confronts in reforming its multiple pension systems. This article identifies the two legal mechanisms available to the Commonwealth government to reform its public pension systems — namely, legislative action or implementation of reforms through one or more Title III proceeding(s) under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). Focusing on the central government’s Employee Retirement System, which is the largest of the Commonwealth’s public pension systems, we analyze the key considerations that will undoubtedly influence the decision of how to proceed.

"Social Security is Fair to All Generations: Demystifying the Trust Fund, Solvency, and the Promise to Younger Americans"

NEIL H. BUCHANAN, George Washington University Law School
Email: nbuchanan@law.gwu.edu

The Social Security system has come under attack for having illegitimately transferred wealth from younger generations to the Baby Boom generation. This claim is incorrect, because it fails to understand how the system was altered in order to force the Baby Boomers to finance their own benefits in retirement. Any challenges that Social Security now faces are not caused by the pay-as-you-go structure of the system but because of Baby Boomers’ other policy errors, especially the emergence of extreme economic inequality since 1980. Attempting to fix the wrong problem all but guarantees a solution that will make matters worse.

"Extending the 'Social Safety Net': Female Labor Supply and Pension Eligibility"

BENJAMIN THOMPSON, University of Michigan at Ann Arbor, Students , University of Michigan at Ann Arbor - Population Studies Center
Email: bpthomp@umich.edu

A 1991 legal change extended the coverage of pensions in rural Brazil to include large numbers of previously uncovered women, conditional on subjective work requirements. This change was accompanied by an increase in female employment, in particular among newly covered women. This paper analyzes the extent to which a causal relationship existed between these two phenomena; specifically, the extent to which women increased their labor supply in response to future pension eligibility. Using a differences-in-differences approach, I find evidence that pension eligibility increased the labor supply of rural women in two ways. First, I find that rural women made immediately eligible by age temporarily increased labor supply, and second, I find that at least some cohorts of younger rural women eligible in the future also increased labor supply, presumably as an anticipatory response. These results shed light on the capacity of elderly workers to respond to financial incentives for old-age labor supply participation, in addition to the extent to which younger workers might be forward-looking in their responses to retirement incentives.

Read more!

Sunday, May 7, 2017

Upcoming event: EBRI Policy Forum, May 11th

EBRI 80th Policy Forum

On Thursday, May 11th, the Employee Benefit Research Institute (EBRI) will conduct their 80th Policy Forum, sponsored by the EBRI Education and Research Fund (ERF). Hosted at the 20 F Street, NW Conference Center, the Forum is scheduled from 8:30am to 12:30pm.

Please visit here for the full agenda. To register, please visit here.

The 80th EBRI-ERF Policy Forum’s theme is “Retirement Policy Directions in 2017 and Beyond” and takes on critical retirement policy issues, moderated by an all-star lineup of speakers, including:

    • Retirement Plan Portability & Public Policy (Jack VanDerhei, EBRI Research Director and Spencer Williams, Retirement Clearinghouse President & CEO)
    • The Lillywhite Award (Olivia S. Mitchell, Economist and International Foundation of Employee Benefit Plans Professor at The Wharton School)
    • What’s Enough? A Conceptual and Empirical Investigation of Retirement Adequacy (Peter J. Brady, Senior Economist, Retirement and Investor Research Division, Investment Company Institute)
    • Fixing the Saver’s Credit and Other Ways to Help At-Risk Workers (Catherine Collison, President, Transamerica Institute and Transamerica Center for Retirement Studies)
    • EBRI Research – Update (Jack VanDerhei, EBRI Research Director, Craig Copeland, Senior Research Associate and Sudipto Banerjee, Research Associate)

Whether you’re an EBRI sponsor, congressional or executive branch staff, a benefits expert, a representative from academia, or affiliated with an interest group, the Policy Forum is an ideal opportunity to examine public policy issues, supported by the latest in EBRI research.

Read more!

Saturday, April 29, 2017

Upcoming event: “The Real Retirement Crisis: Not the One You Think,” featuring Andrew Biggs

 

 

Guest Speaker
Andrew Biggs
on
"The Real Retirement Crisis: Not the One You Think"
Thursday, May 4th, 2017
12:00 p.m. - 1:00 p.m.
RSVP


  Location:  
The Tax Foundation
1325 G St NW
Suite 950
Washington, DC 2000

Featured Guest:

Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits. Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President’s Commission to Strengthen Social Security. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future. In 2014, Institutional Investor Magazine named him one of the 40 most influential people in the retirement world. In 2016, he was appointed by President Obama to be a member of the financial control board overseeing reforms to Puerto Rico’s budget and the restructuring of the island’s debts.

Biggs holds a bachelor’s degree from Queen’s University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

Andrew Biggs
Resident Scholar
AEI

 

Savings & Retirement Foundation

2012 Wyoming Avenue, Northwest

#301

Washington, DC 20009

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Tuesday, April 25, 2017

Upcoming event: “The Personal Finance Index (P-Fin Index): A New Measure of Financial Literacy”

Click here for more information.

Read more!

New paper: “Who Contributes to Individual Retirement Accounts?”

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

“Who Contributes to Individual Retirement Accounts?

by Anqi Chen and Alicia H. Munnell

The brief’s key findings are:

  • IRAs were intended to give those without an employer plan access to a tax-deferred savings vehicle.
  • Today, IRAs hold nearly half of all private retirement assets, but most of these funds are rollovers from 401(k)s, rather than contributions.
  • The 14 percent of households who do contribute to IRAs include:
    • higher-income dual-earners who also save in a 401(k);
    • moderate-income singles or one-earner couples, often with a 401(k); and
    • higher-income entrepreneurs with no current 401(k).
  • One way to turn IRAs back into an active savings vehicle – one used more for contributions – is to auto-enroll all workers without an employer plan in an IRA.

This brief is available here. Read more!

Monday, April 24, 2017

Is There a Retirement Crisis? A Wall Street Journal Online Debate

In today’s Wall Street Journal I “debate” Alicia Munnell of the Center for Retirement Research on whether Americans face a “crisis” of inadequate retirement saving. I think both sides make good points and readers will have to judge for themselves.

But I think a graphic featured in the story makes some of my point for me. The right-hand side of the graphic shows the Center for Retirement Research’s estimates of the percentage of households who are at risk of an inadequate retirement income. The left-hand side shows total retirement savings as a percentage of GDP, from the Federal Reserve’s flow of funds database.

image

But here’s the thing: only one of these two charts shows data. The Fed figures are based on tabulations of balances in IRA, 401(k) and other savings accounts, along with the benefits accrued by participants in defined benefit pension plans. These show that retirement savings have roughly tripled as a percentage of GDP since 401(k)s were introduced in 1979.

The right-hand figure isn’t data. It’s the CRR’s interpretation of how many households have inadequate retirement savings, based both upon data (mostly from the Survey of Consumer Finances) and the CRR’s interpretation of what counts as an adequate retirement income.

So to make these figures consistent, the CRR has to hold that there are other factors that more than offset a tripling of retirement savings. I talk about some of these factors in this National Affairs article from 2014, but the short story is that I don’t buy it. Sure, life spans have gone up a bit and the Social Security retirement age has increased by a year. But Americans are also retiring 2 years later than they used to. And again, there’s that tripling of retirement savings.

Maybe Americans still aren’t saving enough, even if they’re saving more than they used to. I doubt it, given that most current retirees say that they’re doing just fine. But still, I think it’s hard to make the case that tomorrow’s retirees will be significantly worse off than today’s are. 

Read more!

New paper: “35 Years of Reforms: A Panel Analysis of the Incidence of, and Employee and Employer Responses to, Social Security Contributions in the UK”

35 Years of Reforms: A Panel Analysis of the Incidence of, and Employee and Employer Responses to, Social Security Contributions in the UK

Stuart Adam, David Phillips, Barra Roantree

NBER Working Paper No. 23336
Issued in April 2017
NBER Program(s):   LS PE

We exploit variation in National Insurance contributions (NICs) – the UK’s system of social security contributions – and a large panel dataset to examine the effects of 35 years of employee and employer NICs reforms on labour cost (gross earnings plus employer NICs), hours of work and labour cost per hour, both immediately (0–6 months) after reforms are implemented and in the slightly longer term (12–18 months). We consider assumptions under which the estimated coefficients on net-of-marginal and net-of-average tax rates in a panel regression can be interpreted as behavioural elasticities or as reflecting incidence. We find a compensated elasticity of taxable earnings with respect to the marginal rate of employee NICs of about 0.2–0.3, operating largely through hours of work, while that with respect to the marginal rate of employer NICs is not statistically significantly different from zero.

We also find that labour cost falls by a much larger amount when the average rate of employer NICs is reduced than when the average rate of employee NICs is reduced, which is consistent with the economic incidence of NICs being strongly affected by its formal legal incidence. Estimates from the hours and hourly labour cost regressions provide further support to this interpretation of the findings, and also suggest the presence of substantial income effects – though also, after 1999, a puzzling effect of average employer NICs rates on hours of work. Each of these results remains true after 12–18 months (if anything, coefficients on lagged changes in NICs rates strengthen these findings), implying that any shifting of employer NICs changes to the individual employees concerned (and vice versa for employee NICs) does not begin over this time horizon. These results are similar to those found by Lehmann et al. (2013) for France but represent an extension of that work by considering hours as well as labour cost responses and second-year as well as immediate effects.

Click here to access the paper.

Read more!

Thursday, April 20, 2017

New paper: “Why Are U.S. Households Claiming Social Security Later?

Why Are U.S. Households Claiming Social Security Later?”

by Wenliang Hou,Alicia H. Munnell,Geoffrey T. Sanzenbacher and Yinji Li

Over the past two decades, the share of individuals claiming Social Security at the Early Eligibility Age has dropped and the average retirement age has increased.  At the same time, Social Security rules have changed substantially, employer-sponsored retirement plans have shifted from defined benefit (DB) to defined contribution (DC), health has improved, and mortality has decreased.  In theory, all of these changes could lead to a trend towards later claiming.  Disentangling the effect of any one change is difficult because they have been occurring simultaneously.  This paper uses the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931-1941 birth years) of the Health and Retirement Study (HRS).  The predicted behavior is then compared to the actual retirements of the Early Baby Boomer cohort (1948-1953 birth years) to see how much of the later cohort’s delayed claiming and retirement can be explained by these changes.

This paper found that:

  • The Early Baby Boomer cohort was less likely to be fully retired than the HRS cohort at both age 62 (36.7 percent vs. 44.0 percent) and age 64 (49.5 percent vs. 53.9 percent).
  • The model suggests that the shift from DB towards DC plans was the biggest contributor to these declines, followed by better health.
  • Changes to Social Security rules and improvements in mortality played smaller roles.
  • Taken together, the four changes explain about 60 percent of the drop in full retirement at 62 – the remaining could be due to changes in preferences or other changes not simulated like the rising cost of health care.

The policy implications of this paper are:

  • As DB plans continue to fade in the private-sector, claiming will likely be further delayed.
  • If health continues to improve, claiming could be moderately delayed.
  • The resumption of the increase in the Full Retirement Age is not likely to lead to substantial delays in claiming.
Read more!

Monday, April 17, 2017

At National Affairs: An Agenda for Retirement Security

In the new issue of National Affairs I have a long article outlining a conservative agenda for retirement security, which both debunks some myths about retirement saving and proposes some ideas that could help those who need to save more for retirement to do so.

The truth is, increased Social Security benefits and other progressive reforms would actually aid the highest earners the most, fail to make the program solvent or pay for higher benefits, and prompt Americans to reduce their retirement savings. Another progressive approach, retirement plans run by state governments, risks lowering private saving and forcing Americans to rely on public officials with poor track records of delivering on the benefits they promise. The overall result would be future retirees receiving a substantially greater share of their total income from the government, which has shown itself to be a poor steward of citizens' money. 

This is an unacceptable outcome for conservatives who care about America's tradition of limited government and personal responsibility. Too often in the past, however, conservatives have failed to articulate a compelling vision for Social Security reform that would gain political support. They have treated reform as merely an accounting exercise requiring tax-and-benefit adjustments, rather than as an opportunity to truly strengthen the program and America's private retirement-savings system.

You can check out the whole article here.

Read more!

New papers from the Social Science Research Network

"Closing the Retirement Savings Gap: Are State Automatic Enrollment IRAs the Answer?"
George Mason Law Review, Vol. 24, No. 1, 2016-2017

KATHRYN L. MOORE, University of Kentucky College of Law
Email: kmoore@pop.uky.edu

Drawing on insights from behavioral law and economics, automatic enrollment IRAs are intended to address the nation’s retirement savings gap by taking advantage of workers’ inertia. Although automatic enrollment IRAs were initially intended to apply at the federal level, they have gained little traction at the federal level, and states have begun to step into the breach. Between September 2012 and June 2016, five states enacted state automatic enrollment IRA programs.
Studies have uniformly shown that workers are more likely to participate in an automatic enrollment 401(k) plan than in a traditional opt-in 401(k) plan. Proponents of state automatic enrollment IRAs point to this experience to contend that state automatic enrollment IRAs are an answer, or at least a partial answer, to increasing retirement savings in this country. The efficacy of such programs, however, raises more complicated and nuanced questions. This article identifies the fundamental as well subsidiary and sometimes overlapping questions they raise. It then offers important insights on how to address the many issues these questions implicate.

"Life Cycle Investing and Smart Beta Strategies"

BILL CARSON, BlackRock, Inc
Email: bill.carson@blackrock.com
SARA SHORES, BlackRock
Email: sara.shores@blackrock.com
NICHOLAS NEFOUSE, BlackRock, Inc
Email: Nick.Nefouse@BlackRock.com

In traditional life cycle models, the equity-bond glide path shifts investment allocation from riskier assets to relatively safer assets as investors approach retirement. In this paper, we develop a smart beta glide path which seeks to take advantage of broad, persistent patterns within asset classes to identify securities with higher risk-adjusted returns than the market. Within equities, investors can shift from return-enhancing strategies — like value, momentum, size, and quality — to risk-reducing strategies like minimum volatility as they move through their life cycles. Adopting smart beta glide paths may improve Sharpe ratios by up to 20% over a standard equity-bond glide path.

Read more!

Should Social Security’s Funding Source be Changed?

There’s a proposal associated with tax reform that would fund Social Security from general tax revenues rather than from the program’s own dedicated payroll tax. What should we think about this?

Brenton Smith is against. He argues that the Social Security payroll tax was set up for a reason, which is to establish a link between taxes and benefits that will strengthen Social Security politically by distinguishing it form a “welfare” program.

All that is true. But as I argued at Forbes,the link between taxes and benefits – which creates the perception that Social Security is an “earned benefit” – can be unhelpful when it comes to reforms, especially reforms that would restrain benefits for middle and upper income Americans and focus a smaller, more affordable program on preventing poverty in old age.

Read more!

Should Social Security Invest in the Stock Market?

That’s the question. And here are a bunch of answers.

Starting with a pro/con in the Wall Street Journal between Alicia Munnell of the Center for Retirement Research and Mike Tanner of the Cato Institute.

I followed up at Forbes with some thoughts that Munnell and Tanner hadn’t hit on. Namely, that while stock investment is kind of a nothing – higher expected returns, but higher risk to match – people who propose it do so instead of full-solvency reforms rather than in addition to them. So stock market investment could encourage Congress to further delay real reforms.

And here’s another write-up from Alicia Munnell at Marketwatch.

Read more!

Monday, April 10, 2017

Retirement Policy Analyst Job Opening at CRS

The Congressional Research Service has an opening for an Analyst in Income Security 

From the job description:

The analyst will prepare objective, non-partisan analytical studies and descriptive and background reports on retirement policy; provide personal consultation and assistance to congressional committees, Members, and staff on such policies throughout the legislative process; and participate in or lead team research projects and seminars.

This work requires knowledge of the history, trends, and current status of retirement policy; measurement of retirement income and wealth; economic and health shocks in retirement; the role of defined benefit plans, defined contribution plans, and Social Security in retirement savings; decumulation of retirement wealth, including options for annuitization; insights from behavioral economics on retirement income security; and labor force issues related to older workers. The analyst is also expected to develop over time the skills necessary to provide legislative analysis and consultation to congressional committees, Members, and staff at increasingly sophisticated levels.

The ideal candidate would have a background in economics, demography, mathematics, statistics, or a related field and have applied these skills to public policy analysis. Strong research, analytical, writing, and presentation skills are essential.

The job is posted at the GS-12 level ($79,720 per year in Washington DC). The application deadline is April 26, 2017 and the complete job listing is available here: https://www.usajobs.gov/GetJob/ViewDetails/466768700/ .

Read more!

Monday, March 27, 2017

Upcoming event: "Using Tax Panel Data to Examine the Transition to Retirement"


Please Join us for a meeting of the Savings and Retirement Foundation with Guest Speaker
Peter Brady
discussing his new paper on

"Using Tax Panel Data to Examine the Transition to Retirement"

Tuesday, March 28th, 2017

12:00 p.m. - 1:00 p.m.

RSVP


  Location:
Tax Foundation
1325 G St. NW
Suite 950
Washington, DC 20005


Lunch will be provided.
This is a widely attended event.

Featured Guest:
Peter Brady is is a Senior Economist in the Retirement and Investor Research Division at the Investment Company Institute (ICI). At the Institute, Mr. Brady focuses on pensions, retirement savings, and the taxation of capital income. Peter’s current research is focused on measuring changes in income in retirement and the tax treatment of retirement savings. His prior research includes work on retirement adequacy, replacement rates, pension coverage, and trends in pension income. Mr. Brady is currently President of the National Tax Association and is a member of the SOI Consultants Panel (for the Internal Revenue Service, Statistics of Income Division). Prior to joining the Institute, Mr. Brady worked as a financial economist in the Office of Tax Analysis at the U.S. Department of Treasury and, prior to working at the Treasury Department, as a staff economist in the Research Division at the Federal Reserve Board. Mr. Brady is a graduate of St. Lawrence University and holds a Ph.D. in economics from the University of Wisconsin.
Peter Brady
Senior Economist
Investment Company Institute


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