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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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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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!

“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.

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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.

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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.

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Upcoming event: EBRI Policy Forum, May 11th

On Thursday, May 11^th, the Employee Benefit Research Institute (EBRI) will conduct their 80^th 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 80^th 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.

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