New paper: “When Does It Pay to Delay Social Security?”

The National Bureau of Economic Research has released a new paper by John Shoven of Stanford and my AEI colleague Sita Slavov titled “When Does It Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules.”

Here’s the summary:

“Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. In earlier work (Shoven and Slavov, 2012), we investigated the actuarial fairness of this adjustment for individuals with average life expectancy for their cohort. We found that for current real interest rates, delaying is actuarially advantageous for a large subset of people, particularly for primary earners in married couples. In this paper, we quantify the degree of actuarial advantage or disadvantage for individuals whose mortality differs from the average. We find that at real interest rates close to zero, most households – even those with mortality rates that are twice the average – benefit from some delay, at least for the primary earner. At real interest rates closer to their historical average, however, singles with mortality that is substantially greater than average do not benefit from delay; however, primary earners with high mortality can still improve the present value of the household’s benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy.”

 

Some questions: Do people react to this change in incentives? If so, do they simply delay claiming benefits or do they both delay claiming AND remain in the workforce? If the latter, would increased payroll tax revenues compensate Social Security for offering delayed retirement benefit adjustments that are more than actuarially fair?

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AARP: No more payroll tax cuts

The Washington Post’s Ezra Klein writes that the AARP has drawn the line on payroll tax cuts, which have been extended in an attempt to boost the economy but which, in the view of AARP and others across the spectrum, threaten to undermine Social Security as a self-financing program generating “earned benefits” for participants.

Klein writes:

“When Congress agreed to extend payroll taxes by another year in 2011, it did so by replacing the lost funds with general revenue for the first time in history. That addressed some policymakers’ concerns about the Social Security Trust Fund’s insolvency. But it was a worrisome step for the AARP and other Social Security advocates, who believed it undermined the entitlement program’s protected status, lumping it in with a general budget  that could be subject to future cuts and trade-offs. ”Social Security is a separate, off-budget program, with a dedicated funding source—messing with the formula shouldn’t even be a part of the budget debate,” Certner added. “The promise of this was that it would be temporary. Going beyond two years—you’re going way beyond temporary country.’”

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What’s Your Social Security Rate of Return?

Writing for Reuters, Mark Miller runs through a SSA Office of the Actuary analysis of rates of return paid to different types of people from Social Security. You can check out the SSA study directly here.

Miller states “[The SSA analysis] showed that some workers might beat Social Security's returns in some years if they took risks in the stock market. But over a lifetime, Social Security's consistent, risk-free and inflation-adjusted returns would be very tough to beat.”

I’m not so sure.

One mistake Miller makes is to look at “current law” benefits, which assumes that Social Security can pay full benefits forever without raising taxes. In other words, it overlooks the multi-trillion dollar funding shortfalls that are the main reason we think about Social Security reform.

A more accurate analysis, and one that is truly reflective of current law, assumes that full benefits will be paid through the early 2030s, when the trust fund is projected to run out. Following that, benefits are reduced to the level that can be paid through payroll tax receipts alone, a cut of around one-fifth. That obviously would reduce returns from Social Security.

While there are other (and better) ways to fix Social Security’s finances, no matter how we do it, rates of return paid by Social Security will on average be consistent with this “payable benefits scenario.” We might raise taxes rather than cut benefits, or we might cut benefits gradually rather than all at once, or we might cut benefits for some but not for others, but the net effect on rates of return will on average be the same.

And under this realistic baseline rates of return aren’t exactly staggering. For instance, a typical couple retiring today would receive a return of less than 3.2 percent, which is about what you’d get on government bonds. But considering the political risk of Social Security, my guess is people would consider government bonds to be a better deal. Going forward returns will be lower. And for single individuals or higher-earning couples, returns can be well below the government bond rate.

Is Social Security a terrible deal? For a low-risk investment, no. But is it a good deal? Not really.

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Is Social Security a War on Working Wives?

Over at Real Clear Markets, my AEI colleague Sita Slavov writes on how Social Security treats married women who choose to work:

“We've heard a great deal about the "war on women" lately, mostly in connection with hot-button issues like abortion and birth control. But beyond all this rhetoric, there is in fact a large program whose design reflects antiquated, sexist thinking about women. It's called Social Security.”

“Social Security's spousal and survivor benefit provisions - which date back to 1939 - make the program a terrific deal for spouses who stay out of the labor force. As such, they are unfair to the growing number of two-earner families, and they discourage married women from working outside the home. We will soon need to undertake serious reforms to keep Social Security solvent. Redesigning the program to reflect the changing role of women could be a rare opportunity for bipartisan agreement.”

Check out the whole article.

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Did VP Biden exaggerate his role in 1983 Social Security reforms?

ABC News’ Jake Tapper reports:

Asked about Medicare reform, the vice president said, "Look, I was there when we did that with Social Security in 1983. I was one of eight people sitting in the room that included Tip O'Neill negotiating with President Reagan. We all got together and everybody said, as long as everybody's in the deal, everybody's in the deal, and everybody is making some sacrifice, we can find a way."

So did Biden exaggerate his role in the 1983 reforms? If you can’t already guess the answer to that question, read the full story to find out…

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2013 Social Security COLA to be 1.7%

Today the SSA announced a 1.7% cost-of-living adjustment (COLA) for benefits, payable as of January 2013. Last year the COLA was larger at 3.6%, although no COLAs were paid in 2009 or 2010.

The maximum taxable wage for Social Security also will rise to $113,700, from the 2012 value of $110,100.

Click here for more information from SSA.

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Is it the end for Social Security as a self-financing program?

Writing for the Mercatus Center at George Mason University, Social Security Trustee Chuck Blahous raises concerns that Social Security’s self-funding status – which has help maintain both political support and budget discipline over the years – is at risk.

KEY POINTS

• FDR designed Social Security as a self-financed program to distinguish it from welfare, to impose fiscal discipline within the program, and to ensure all working people had a sense of having earned their benefits—all of which worked together to protect benefits from political pressure and budgetary competition.
• Since its inception, Social Security has enjoyed a unique level of political support because it was structured on the self-financing principle. With relatively minor exceptions, there remained a strong bipartisan consensus through the mid 1990s to preserve this structure.
• Over the past several years, commitment to this practice has progressively weakened as lawmakers have become less willing to tax workers, particularly lower-income workers, at the level required to finance rising benefit costs.
• While several policies had already been enacted to shift Social Security financing burdens tacitly from individual payroll tax payers to the general government fund, the self-financing link remained formally intact until the payroll tax cut was enacted in 2010 and made effective for 2011–12.
• In 2010, President Obama and Congress formally severed the Social Security program’s contribution-benefit link with the enactment of the payroll tax cut, which included a provision to tap general revenues to subsidize Social Security benefit payments. 
• If Social Security’s contribution-benefit link continues to deteriorate, it could transform public perceptions of the program into something more akin to welfare.

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