Senate Finance Committee: “Social Security: Is a Key Foundation of Economic Security Working for Women?”

I missed posting this hearing from before Christmas, but think it’s worth checking out.

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United States Senate Committee on Finance
Tuesday, December 9, 2014, 9:30 AM
215 Dirksen Senate Office Building

Member Statements

Ron Wyden
(D-OR)

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Orrin G. Hatch
(R-UT)

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Witness Testimony

Ms. Barbara Perrin, Beneficiary, Eugene, OR

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Dr. Catherine J. Dodd, Ph.D, RN, Chair of the Board of Directors, National Committee to Preserve Social Security and Medicare, Washington, DC

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Dr. Sita Nataraj Slavov, Ph.D, Professor of Public Policy, George Mason University, Visiting Scholar, American Enterprise Institute, Washington, DC

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Ms. Janet M. Barr, MAAA, ASA, EA, Actuary, on behalf of the American Academy of Actuaries, Chicago, IL

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2015 Dissertation Fellowship Deadline Reminder

The Center for Retirement Research at Boston College is accepting applications for the 2015 Dissertation Fellowship Program.  The program is funded by the U.S. Social Security Administration.

• The Dissertation Fellowships support doctoral candidates writing dissertations on retirement income and policy issues. The program is open to scholars in all academic disciplines.
• Up to three fellowships of $28,000 will be awarded.
• The submission deadline for proposals is Saturday, January 31, 2015. Award recipients will be announced by April 2015.
• The proposal guidelines are available online.

For questions, please contact:
Marina Tsiknis
tsiknis@bc.edu
617-552-1092 Read more!

Will we have to work forever?

Charles Ellis, Alicia Munnell and Andrew Eschtruch of the Center for Retirement Research at Boston College think it’s possible:

Just 30 years ago, most American workers were able to stop working in their early sixties and enjoy a long and comfortable retirement. This “golden age” of retirement security reflected the culmination of efforts that started more than a century ago when employers first set up pensions. Gradually, over decades, we built an effective system with Social Security and Medicare as the universal foundation and traditional pensions—where the employer was responsible for all the saving and investment decisions—providing a solid supplement for about half the workforce. The increasing provision of retirement support allowed people to retire earlier and earlier.

This brief golden age is now over. Because of economic and demographic developments, our retirement income systems are contracting just as our need for retirement income is growing. On the income side, Social Security is replacing less of our preretirement income; traditional defined benefit pension plans have been displaced by 401(k)s with modest balances; and employers are dropping retiree health benefits. On the needs side, longer lifespans, rising health care costs, and low interest rates all require a much bigger nest egg to maintain our standard of living. The result of all these changes is that millions of us will not have enough money for the comfortable retirement that our parents and grandparents enjoyed.

Click here to read the whole article.

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New paper from the Social Science Research Network

"The Employment Effects of Terminating Disability Benefits"
Melbourne Institute Working Paper No. 2/15

TIMOTHY MOORE, George Washington University
Email: tim_moore@gwu.edu

Few Social Security Disability Insurance (DI) beneficiaries return to the labor force, making it hard to assess their likely employment in the absence of benefits. Using administrative data, I examine the employment of individuals who lost DI eligibility after the 1996 removal of drug and alcohol addictions as qualifying conditions. Approximately 22 percent started working at levels that would have disqualified them for DI, an employment response that is large relative to their work histories. Those who received DI for 2-3 years had the largest response, suggesting that a period of public assistance may maximize the employment of some disabled individuals.

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New Working Paper on Social Security Replacement Rates

Back in July, I co-authored a Wall Street Journal article with Syl Schieber, the former chair of the Social Security Advisory Board, in which we raised questions regarding how Social Security’s actuaries calculate “replacement rates,” which measure retirees’ income as a percentage of their pre-retirement earnings. We argued that SSA’s method significantly overstates individuals’ pre-retirement earnings by indexing them to nationwide wage growth, which is even faster than inflation. Overstating their earnings causes their replacement rates to look lower, which make Social Security seem less generous and encourages the view that Americans face a “retirement crisis.” We argued that comparing Social Security benefits to retirees’ inflation-adjusted pre-retirement earnings gives a better measure of how well Social Security lets retirees maintain their pre-retirement standard of living.

These differences matter. For instance, a recent CBO report measured replacement rates both ways. Relative to wage indexed earnings, the average person born in the 1980s will receives a social security replacement rate of 48%. But relative to inflation-adjusted career earnings, Social Security provided a replacement rate of 64%, one-third higher. If you assume that the typical person requires a replacement rate of around 70% -- a common financial advisors benchmark, as well as calculated in some academic studies – these two figures paint very different pictures regarding the adequacy of Social Security benefits and retirement incomes overall.

Our op-ed coincided with the Social Security Trustees’ decision to delete the actuaries’ replacement rate calculations from their annual report. After that, it was game on: Boston College professor Alicia Munnell, whose National Retirement Risk Index uses a method similar to SSA’s actuaries, pushed back hard on our article. As did SSA’s actuaries themselves, publishing a defense of their methods back in July. More recently, the CBO and OECD issued reports that can be taken to support our point of view. I recently spoke to the Social Security Advisory Board regarding this issue, and the Board’s own Technical Panel on Assumptions and Methods – which is chaired by Munnell – took up the replacement rates question at their opening meeting.

To move the debate along, I have a new AEI working paper on replacement rates co-authored with Syl Schieber and Gaobo Pang, an economist at the pension consulting firm Towers Watson. Among the points we make:

• Until recently the Social Security Trustees calculated replacement rates relative to career average earnings indexed to wage growth; SSA’s actuaries continue to do so. This measure effectively compares the benefits paid to new retirees to the earnings of today’s workers, not to retirees’ own pre-retirement earnings. These “wage-indexed replacement rates” understate the ratio of retirees’ benefits to their own real pre-retirement earnings.
• We argue, and recent reports from the CBO and the OECD concur, that calculating replacement rates relative to inflation-adjusted average pre-retirement earnings is a better shorthand representation of the life cycle approach to retirement planning, as well as being more understandable to policymakers and individuals saving for retirement.
• The SSA actuaries’ method of calculating replacement rates for hypothetical worker examples is calibrated to produce a pre-determined result. Prior to 2002, SSA calculated replacement rates using a different method and using different hypothetical workers. But these previous hypothetical workers had very unrealistic earnings patterns, so SSA updated to more realistic stylized earners. But SSA then calibrated its methods to produce the same replacement rates figures as before: it changed its method of calculating replacement rates and increased the earnings of its stylized workers in order to reduce measured replacement rates to its previous value of around 40%. There is no reason these calculations should be given any special importance.
• A recent SSA actuarial study using administrative data concluded that wage-indexed replacement rates closely replicate those calculated relative to final earnings, a common practice for financial advisors. But the SSA OACT study excluded all spousal and widow benefits, thereby reducing measured replacement rates. Over one-third of female retired worker beneficiaries receive auxiliary benefits and, on average, auxiliary benefits increase their monthly payments by 78%. An analysis that included all beneficiaries and all benefits received by them would show higher replacement rates.

There is a lot of new information in our paper about what replacement rates mean and how they have been measured and I believe we add a great deal to the current debate.

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The Coming Congressional War Over Social Security Disability

A good piece from Howard Gleckman at Forbes.

A technical rule change engineered by House Republicans on the first day of the new Congress may signal the beginning of a major battle over the future of the Social Security Disability program—and, more broadly, other federal programs for people with disabilities.

Check it out here.

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New papers from the Social Science Research Network

"Multiemployer Defined Benefit Pension Plans' Liability Spillovers: Important Connections in U.S. Unionized Industries"

BARBARA CHAMBERS, University of Utah
Email: barbara.chambers@utah.edu

A Multiemployer Defined Benefit Pension Plan (MDBP) is a collectively bargained pension plan maintained by two or more employers and a labor union. MDBPs pool risks, contributions, assets and liabilities. Bankruptcy by MDBP firms generally results in essentially constant MDBP total liabilities but a shrinking pool of contributing MDBP employers, thus increasing MDBP liabilities for the remaining MDBP employers and exposing them to “liability spillover risks”. I document the economic magnitudes of public firms’ MDBP liabilities and expected MDBP liability spillovers from other public companies, information relevant to both finance academics and policy makers. I find that nine public companies have MDBP liabilities exceeding 10% of their market value of equity and in a few cases expected liability spillovers are bigger than 30% of a firm’s market value of equity. On average, leverage ratios increase by 6% once MDBP liabilities and expected liability spillovers are consolidated into capital structure.

"Reverse Mortgages: What Homeowners (Don’t) Know and How It Matters"

THOMAS DAVIDOFF, University of British Columbia (UBC) - Sauder School of Business
Email: thomas.davidoff@sauder.ubc.ca
PATRICK GERHARD, Maastricht University
Email: p.gerhard@maastrichtuniversity.nl
THOMAS POST, Maastricht University - School of Business and Economics - Department of Finance, Netspar
Email: T.Post@maastrichtuniversity.nl

Reverse mortgages help elderly homeowners to unlock and consume home equity while continuing residing in their homes. Demand for reverse mortgage is far behind predictions. Based on a representative survey of U.S. homeowners aged 58 we assess the role of product knowledge (literacy) for reverse mortgage demand. We find that awareness of the product is very high while knowledge is fairly low. Lack of product knowledge relates to low demand. Respondents that would benefit most from reverse mortgages (lower income, insufficient savings) are more likely to accept a reverse mortgage. But, those respondents do not have good knowledge about the product. They may not make an informed decision and fail to evaluate alternative retirement planning options. We find no effect of knowledge transfer on reverse mortgage demand. This result suggests that a way to increase reverse mortgage demand might be the reduction of the product’s inherent complexity.

"Do Tax Incentives Increase 401(K) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions"
CRR WP 2014-17

MATTHEW S. RUTLEDGE, Boston College
Email: rutledma@umich.edu
APRIL YANYUAN WU, Boston College - Center for Retirement Research
Email: wuuv@bc.edu
FRANCIS M. VITAGLIANO, Boston College - Center for Retirement Research
Email: vitaglif@bc.edu

The U.S. government subsidizes retirement saving through 401(k) plans with $61.4 billion in tax expenditures annually, but the question of whether these tax incentives are effective in increasing saving remains unanswered. Using longitudinal U.S. Social Security Administration data on tax-deferred earnings linked to the Survey of Income and Program Participation, the project examines whether the “catch-up provision,” which was enacted in 2001 and allows workers over age 50 to contribute more to their 401(k) plans, has been effective in increasing earnings deferrals. Compared with similar workers under age 50, the study finds that contributions increased by $540 more among age-50-plus individuals who had approached the 401(k) tax-deferral limits prior to turning 50, suggesting that the older individuals respond to the expanded tax incentives. For this group, the elasticity of retirement savings to the tax incentive is quite high: a one-dollar increase in the tax-deferred limit leads to an immediate 49-cent increase in 401(k) contributions.

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