The Center for Retirement Research at Boston College has released a new Issue in Brief: "Pension Participation and Uncovered Workers" by Nadia Karamcheva and Geoffrey Sanzenbacher The brief's key findings are: The brief is available here.
Thursday, August 5, 2010
New paper: “Pension Participation and Uncovered Workers”
Earnings, Not Lack of Social Security, Increased Past Poverty
In an otherwise unremarkable article in the Huffington Post, Edwin D. Hill gives Social Security a little more credit than it is due. Hill, the International President of the International Brotherhood of Electrical Workers (note to self: ask for a title like that at next annual review) says, "In the years before Social Security more than half of the elderly were impoverished." He implies that Social Security fixed all that. But the real reason that half of the elderly lived in poverty before Social Security was that about half of everyone lived in poverty then, for the simple reason that the country was a heck of a lot poorer than it is today. Currently, the average annual wage is around $43,000. In 1935, the average annual wage in inflation-adjusted terms was around $15,000. Remembering that most households of the 1930s were single-earner and most had kids, the poverty threshold for a family of four in today's dollars is around $20,000. Tripling real average earnings can do a lot to reduce poverty. Similarly, one of the Left's favorite factoids is that without Social Security, half of all seniors today would live in poverty. This makes it seem as if the fall in elderly poverty rates from 1935 to today was purely a function of Social Security benefit payments. What they really mean to say, of course, is "without Social Security benefits, but with Social Security taxes." In other words, if we taxed 12.4 percent of Americans' earnings all their lives and paid them nothing in return, yes, poverty would increase. But in the absence of Social Security as a whole—benefits and taxes—Americans would have more income to save and most would save reasonably responsibly for retirement. (See here for some evidence.) Yes, many are pulled out of poverty either by Social Security's progressivity or by the simple fact that without a requirement to save they wouldn't do so on their own. But these are a minority. The important point is that over the long term it's not Social Security or other programs that lift people out of poverty or otherwise give them better lives. It's the growth of the economy, which lifts earnings and standards of living. As we think about potential reforms to Social Security, some of which could present disincentives for people to work and contribute to the economy, we should consider the role of rising incomes in healing social ills.
Monday, August 2, 2010
New York Times: “Social Security Jitters? Better Prepare Now”
The New York Times "…while lawmakers may, in the end, not decide to make drastic changes in Social Security, many of the financial advisers and other experts we talked to said they were erring on the side of caution and were already recommending that their clients start saving more now. "People 50 and below should change their planning now to incorporate a benefit cut," said Laurence J. Kotlikoff, an economics professor at Boston University who ran some numbers for us to see what life would be like if the retirement age were immediately raised to 70. That change would translate into a nearly 20 percent cut in benefits, because you would have to wait an extra three years to get the same amount of money, he added. Several financial planners told us they were assuming that clients in their 30s and 40s might receive just 50 to 80 percent of their full benefits. Or, the advisers say, they may figure that the cost-of-living adjustments applied to benefits won't keep pace with inflation, or some other combination of adjustments. One of the (many) problems with delaying a fix for Social Security is that it needlessly complicates the retirement planning of millions of Americans, who don't know how the inevitable changes to Social Security's taxes and benefits will affect them. Fixing the program today isn't merely the most economically efficient way to do it, as it spreads changes over as many people as possible, it's also just plain fairer to tell people what's going to happen to them.
reports on how individuals can prepare for uncertainty regarding Social Security's financial future:
LA Times: “A 27-year-old's common-sense reform ideas”…are what, exactly?
The LA Times today prints an op-ed from Sam Gill, a DC-based consultant to groups working on retirement issues, discussing what the Times calls "A 27-year-old's common-sense reform ideas." None of his suggestions – better informing younger workers regarding disability and survivors benefits; increasing the age limit on students receiving survivors benefits; educating younger people about personal saving for retirement, and potentially administering savings accounts – are terrible ideas. But there's almost no mention of – you know, what do they call it? That thing... – oh, the fact that Social Security is over $5 trillion short of what it needs to pay the benefits it promises. In other words, to the degree that "reform" implies at least some effort to fix the program we have before expanding it, there are no real reform ideas in the piece, common-sense or otherwise. If Gill were simply a randomly-chosen 27-year old I wouldn't particularly care. But, as Gill's more politically-oriented piece in the Huffington Post shows, his views on Social Security reform are more or less on par with the rest of the left: ignore the problem, don't propose any real funding solutions, then hope to raise taxes at some point. That's fine, at least in an abstract sense, but it seems to me that if you're proposing to expand the program you should also propose how to pay for it. Moreover, while the public may support raising taxes to increase benefits – raising others people's taxes, for the most part – when Social Security is put into the context of the overall federal budget it pretty quickly becomes clear there are limits on how much you can tax high earners. If people want to raise Social Security benefits for certain groups – which I support – they should probably fund it by reducing costs elsewhere in the system.
C-SPAN video for National Chamber Foundation event on public pension reform
On Friday I spoke at an event sponsored by the National Chamber Foundation on prospects for a federal bailout of state employee pension funds, which are significantly underfunded. Unfortunately I can't embed the video, but it's available online at C-SPAN here. It was a good event.
Gokhale dismantles MoveOn’s “myths of Social Security”…
…so I don't have to. Jagadeesh Gokhale of the Cato Institute does a good job of showing how much of what MoveOn.org claims are "myths" about Social Security are, well, actually pretty much true. Some of the other myths seem to be things people on the right don't actually claim, such as that Social Security can "only" be fixed by cutting benefits. You could fix it exclusively by raising taxes, it's just that most on the right think it's not a particularly good idea. Well worth checking out, here.
CBO: Federal Debt and the Risk of a Financial Crisis
The Congressional Budget Office has released a new analysis of how rising federal debt could trigger a financial crisis and what the repercussions of such a crisis might be: "[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors' confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries' experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply." The whole paper is a good primer on where the federal budget is going and what it might mean. I wrote on these issues last year for The American, AEI's online magazine: Who do you think is more reliable—the full faith and credit of the United States backing up Treasury bonds, or the McDonald's Corporation, backed only by "billions and billions served"? By some market measures it is the latter, and for good reason. The price of credit defaults swaps guaranteeing payment on 10-year Treasury bonds has risen by 1000 percent since December 2007, with an implied 12 percent probability of default on government debt over the next decade, according to data from Credit Market Analysis. In the view of the markets, this makes U.S. government bonds a more risky proposition than debt issued by McDonald's. Why? Trillion dollar annual short-term budget deficits due to the recession and financial crisis will soon merge with even larger deficits generated by government entitlement programs like Social Security, Medicare, and Medicaid. While a large short-term deficit to stimulate the economy can be absorbed, large deficits running for decades simply cannot be. Over the next decade, the combined costs of the big three entitlement programs will rise by 2.1 percent of gross domestic product; over the following decade, entitlement costs will increase by an additional 3.1 percent of GDP, with costs continuing to grow thereafter. I haven't seen much in the past year that would give me much faith that we're going to get on top of this problem anytime soon.
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