Upcoming event: “The retirement crisis: A statistical mirage?”

The retirement crisis: A statistical mirage?

Friday, February 21, 2014 | 8:30 a.m. – 10:00 a.m.

American Enterprise Institute

Twelfth Floor
1150 Seventeenth Street, NW
Washington, DC 20036

RSVP

About This Event

There is a widespread perception that many Americans are inadequately prepared for retirement. Some even call this a crisis. Policymakers have responded with proposals to expand the Social Security program and reduce or eliminate tax incentives for 401(k) and Individual Retirement Account (IRA) plans that many believe have served Americans poorly.

But some analysts question this perceived retirement crisis, arguing that official statistics significantly understate the benefits that retirees receive from 401(k) plans and IRAs. At this event, retirement experts will discuss how proposed policy changes to Social Security or private pensions may be ill-considered.

Agenda

8:15 AM
Continental Breakfast and Registration
8:30 AM
Presenter:
Sylvester J. Schieber, Former Chairman of the Social Security Advisory Board
Discussant:
John Sabelhaus, Board of Governors of the Federal Reserve System
Moderator:
Andrew G. Biggs, AEI
10:00 AM
Adjournment

Event Contact Information

For more information, please contact Kelly Funderburk at Kelly.Funderburk@aei.org, 202.862.5920.

Media Contact Information

For media inquiries, please contact MediaServices@aei.org, 202.862.5829.

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Brown: Think Twice About State-Run Retirement Plans

University of Illinois economist Jeffrey Brown writes for Forbes on proposals to have state or federal governments run retirement plans designed to supplement Social Security. Brown, an expert on the public employee plans that governments already do run, argues that we should think carefully regarding both how much these plans are needed and how well they might be run.

Check out his article here.

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Pensions and labor supply in the OECD

From the National Center for Policy Analysis

February 12, 2014

The employment rate among the older segments of Organization for Economic Cooperation and Development (OECD) populations have decreased significantly over the last 50 years, says Gabriel Heller Sahlgren, a research fellow at the Institute of Economic Affairs (U.K.).

As employment rates for older generations have fallen, more pressure has been put on state pension systems to fund their retirement, leaving fewer people to fund larger groups of pensioners.

• The male employment rate for ages 55 to 59 in OECD countries decreased from above 90 percent to less than 70 percent between 1968 and the end of the 1900s. In 2008, that number was at 80 percent.
• By 2040, the ratio of dependency supporting pensions is expected to increase by 17 percent relative to 2008.

Evidence suggests that this drop in employment is tied directly to the financial incentives of state pension systems.

• One simulation found that delaying eligibility for pensions by just three years would increase labor force participation by 36 percent among men aged 56-65.
• Looking across countries, one study found that an increase in 10 percent in public pension wealth leads to a decrease in the average retirement age by 1.5 percent.
• Italy has such strong incentives in place that reaching pension eligibility increases a person's likelihood of retirement by 30 percentage points.
• Conversely, a Swiss study found that permanently reducing retirement benefits by 3.4 percent would result in a 50 percent decline in retirement probability.

Sahlgren suggests linking the pension age with life expectancy in order to encourage labor force participation. He also argues for a private pension system that gives workers more control over their own retirement savings and encourages them to bear the costs of their own retirement.

Lastly, evidence suggests that workers use unemployment benefits and disability insurance as "alternative" retirement plans. Those programs should be reformed to discourage such behavior. When the United Kingdom recently undertook such reforms and provided incentives for disability insurance recipients to return to work, the country saw a response in higher employment rates.

Source: Gabriel Heller Sahlgren, "Income From Work -- the Fourth Pillar of Income Provision in Old Age," Institute of Economic Affairs (U.K.), January 2014.

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Samuelson: Retirees are better off than we think

The Washington Post’s Robert Samuelson discusses the state of retirement income today, including a reference to my recent Wall Street Journal piece with Syl Schieber. We argued that common references to retirees’ well-being, including SSA’s Income of the Aged series, undercount retirement income because their datasource, the Current Population Survey, doesn’t count most withdrawals from IRAs or 401ks as income.

I thought this table, which Samuelson draws from CBO data, to be interesting:

Average Incomes of Older Americans, 2010

Poorest fifth: $19,900

Second fifth: $34,400

Middle fifth: $55,100

Fourth fifth: $82,100

Richest fifth:$219,500

There’s a lot more you need to know in order to judge the severity of any retirement crisis Americans are facing, but getting a better view of retirees’ incomes is a good start.

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Social Security Outlook Worsens Again

Investors Business Daily’s Jed Graham reports on the CBO’s new projections for Social Security, which have been overshadowed by the agency’s estimate that the Affordable Care Act will reduce employment in future years. But the two are at least partially related: CBO’s projections of larger cash deficits for Social Security are mostly driven by forecasts of a weaker economy and lower tax revenues. The ACA’s disincentives to work account for part of the growing revenue gap, though other macro factors appear to play a larger role.

Check out Jed’s story here.

 

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New paper: “Social Security Reform Could Benefit All Workers”

From the National Center for Policy Analysis:

Congress is once again considering changes to Social Security in an attempt to "save" the program. Social Security benefit payments have exceeded tax revenues since 2010; the funding deficit is growing and, barring reform, will continue to grow indefinitely. Higher tax revenues are necessary to fund benefits as they are currently calculated, say Liqun Liu, a research scientist, Andrew J. Rettenmaier, executive associate director, and Thomas R. Saving, director, at the Private Enterprise Research Center at Texas A&M University.

The system is financed on a pay-as-you-go basis where current tax payments are transferred to current retirees. Changing demographics have resulted in a reduction in the number of workers supporting each retiree and a corresponding need for higher tax rates. Retaining the current benefit structure will require an immediate and permanent increase in the Social Security payroll tax of 3.3 percentage points.

In contrast, a long-run balanced budget for Social Security could also be achieved by retaining the current tax rate, but making the following two benefit reforms.

• Gradually raising the retirement age for workers who become eligible for benefits in 2023 and after.
• Making the benefit formula less generous for higher earning workers through progressive price indexing.

Both the current program with the taxes necessary to close its financing gap (the baseline) and the reformed program produce comparable net results for workers across birth years and across income classes.

• With the baseline program, average-earning men born in 1985 will have to pay 13.5 percent of their lifetime income in taxes and receive benefits equal to 9.6 percent of their income.
• However, the same workers in the reformed program would pay a lower tax rate of 10.2 percent to receive reformed benefits of 8.2 percent.

If the baseline and reformed program are comparable in terms of net lifetime tax rates within income classes and birth years, is there a reason to prefer one to the other? Liu, Rettenmaier and Saving suggest that the smaller reformed program is preferable, primarily for the following reasons:

• Given current debt levels along with ongoing and forecast budget challenges, reducing the size of federal spending is critical in the long run.
• Collecting the higher tax revenues necessary to retain the current benefit formula inevitably produces welfare losses.
• Reducing the scope of a pay-as-you-go financed retirement program will result in the real prepayment of retirement benefits, leading to greater investment and higher national income.
• The reformed program can be complemented with voluntary, individually directed personal retirement accounts.

Source: Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving, "Social Security Reform Could Benefit All Workers," National Center for Policy Analysis, February 2014.

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New paper: “How Financial Incentives Induce Disability Insurance Recipients to Return to Work”

How Financial Incentives Induce Disability Insurance Recipients to Return to Work

Andreas Ravndal Kostol and Magne Mogstad

Using a local randomized experiment that arises from a sharp discontinuity in Disability Insurance (DI) policy in Norway, we provide transparent and credible identification of how financial incentives induce DI recipients to return to work. We find that many DI recipients have considerable capacity to work that can be effectively induced by providing financial work incentives. We further show that providing work incentives to DI recipients may both increase their disposable income and reduce program costs. Our findings also suggest that targeted policies may be the most effective in encouraging DI recipients to return to work.

Full-Text Access | Supplementary Materials

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