A Social Security Reform Plan That Could Pass

Over at National Review, I write about the politics of the flat-benefit Social Security reform plan that I first wrote about for NRO a few weeks ago.

The article provides more details, but here’s the short story: the flat benefit plan is far simpler for reformers to explain; does not renege on the benefits participants already have earned; and would provide benefit increases and payroll tax reductions for current and near-retirees.

Does that guarantee success? NOTHING guarantees success in entitlement reforms. But there’s a better chance of success with this approach than with conventional reforms, which are a very tough sell.

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New papers from the Social Science Research Network

"Retirement Incomes – Issues and Next Steps"
Australian Journal of Actuarial Practice, 3, 93-97, 2015

ANTHONY ASHER, University of New South Wales (UNSW) - School of Actuarial Studies, Centre for International Finance and Regulation (CIFR)
Email: a.asher@unsw.edu.au

The Actuaries Institute has made the development of an appropriate retirement incomes market a major policy priority. It is therefore pleasing to see how the issue has been picked up by the Financial Systems Inquiry (FSI) Final Report, and by many others in government and industry. As the FSI summarises: The superannuation drawdown phase of Australia’s retirement income system provides limited choice for managing risk in retirement. It also gives little guidance to retirees in navigating complex and important financial decisions. Retirees do not efficiently convert superannuation benefits into income streams in retirement. This note mentions some recent developments, and sets out a view on priorities for the years ahead. Although I am convenor of the Institute’s Retirement Incomes Working Group (RIWG), the views expressed here are personal.

"Final Report on Connecticut's State Employees Retirement System and Teachers' Retirement System"

JEAN-PIERRE AUBRY, Boston College - Center for Retirement Research
Email: aubryj@bc.edu
ALICIA H. MUNNELL, Boston College - Carroll School of Management
Email: crr4381@bc.edu

The report’s key findings are:
• Connecticut’s pension systems for state employees and teachers face large unfunded liabilities, despite recent efforts by the State to fund.
• A significant source of the problem is the "legacy debt" built up before the State began pre-funding its pensions in the 1970s.
• Since pre-funding began, inadequate contributions from the State and low investment returns have added to the problem.
• One way to address the problem is through a two-step approach:
1. separately finance the legacy debt over multiple generations; and
2. fund ongoing benefits using a level-dollar amortization method over a reasonable rolling period; and reduce the long-term assumed return.

"Sustainability of Pension Systems in Europe – The Demographic Challenge"
Australian Journal of Actuarial Practice, 2, 55-61, 2014

CHRIS DAYKIN, Independent
Email: chris@daykinactuary.co.uk

Fiscal sustainability of pensions is a serious issue in Europe because of the ageing of the population but there is also concern that reformed pensions may not be adequate. Actuaries have always been seen as major players in employer-sponsored pension schemes and insured pensions but have often not been very visible in commenting on public policy issues concerning the pension system as a whole. This article introduces the work being done by the Actuarial Association of Europe to raise the profile of actuaries with European institutions on the broader policy issues.

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New issue brief: “The Affordable Care Act, Medicare Costs, and Retirement Security”

The Center for Retirement Research at Boston College has released a new Issue in Brief:

“The Affordable Care Act, Medicare Costs, and Retirement Security”

by Alicia H. Munnell and Anqi Chen

The brief’s key findings are:

• The 2010 Affordable Care Act (ACA) included roughly 165 provisions to improve Medicare’s finances.
• The Medicare Trustees Report, which reflects the ACA provisions, shows dramatically lower cost projections for Medicare in the future.
• The Medicare actuaries also produce alternative projections assuming that the legislated restraints on growth in payments to health providers are not feasible.
• A review of both sets of projections over the past six years shows that the gap between them is narrowing due to declines in the alternative cost projections.
• However, a significant gap still remains, which underscores the inherent uncertainty involved in long-range projections.

This brief is available here. Read more!

Simple Truths on Social Security

Writing in U.S. News & World Report, I argue that the technical side of Social Security reform should wait until we consider some of the broader issues on what we want a social insurance program to accomplish and how different households react to government plans offering retirement benefits.

First, we must recognize that while Social Security is a progressive program and does help reduce poverty in old age, most benefits don't go to poor households. In fact, the highest-earning fifth of the population receives about one-third of total Social Security benefits, and the next fifth receives almost another third. Social Security doesn't pay benefits to middle- and high-earning households because those households can't save on their own. It pays those benefits based on a political calculation, dating from the time of Social Security's founding, that middle- and higher-earning Americans wouldn't support a program that benefits the poor unless they themselves received a benefit from it. But paying generous benefits to middle- and high-earning households gets very expensive as the population ages and the workforce paying into Social Security shrinks.

And second, there is plenty of evidence that middle- and high-earning households treat Social Security and personal saving as substitutes. That is, if you increase Social Security benefits, these households will save less on their own. If Social Security benefits are lower, middle- and high-earning households tend to save more to make up the difference. Research from the U.S., United Kingdom, Canada and Poland finds similar results: If future Social Security benefits are lowered, middle- and upper-income workers save more. But if future benefits are made more generous, working-age households will save less. The result of the Democratic candidates' plans to expand Social Security benefits would very likely be less individual retirement saving by middle- and upper-income Americans.

Click here to read the whole article.

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Smith: “What should Social Security do?”

Writing in The Hill, Brenton Smith asks what I think is an important question: “What should Social Security do?”

Depending upon which part of the debate about Social Security reform that you follow, the program is either welfare, forced savings, or old-age insurance.  We pay for the benefits with revenue that is either called taxes or insurance premiums. The program contributes to our deficit, depending upon what definition of deficit is used.  

We should be asking what Social Security should do before we look for ways to pay for what it is doing. Andrew Biggs notes in his article in National Review, "Social Security needs a new paradigm for how individuals and government programs contribute to retirement security."

He argues that Social Security needs a new charter, poverty prevention. Biggs provides ample evidence that Social Security is horribly inefficient at poverty prevention.  His solution would replace the purpose of Social Security which is old-age insurance with a basic income payment.

If you want Social Security to serve as a program to end poverty in the elderly, the answer is simple. Just end the program, and transfer the resources to a program such as the Supplemental Security Income program that actually serves to eliminate of poverty, probably better than Social Security ever will.

While I don’t think the solution Smith suggests in his final paragraph is feasible – a strong means-tested guarantee against poverty in retirement probably requires forced saving, as in Australia – I strongly endorse Smith’s argument that we think about what we want Social Security to accomplish before we start on the technical changes needed to get Social Security to long-term solvency.

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A flat benefit plan for Social Security reform

Over at National Review online, I outline what I’ve called the “flat benefit plan” to reform Social Security. It’s modeled after the retirement systems of New Zealand and the U.K., with some nods to Australia and Canada as well.

Read the article, but the main outline is:

• Beginning immediately, institute a minimum social security benefit for all long-term U.S. residents set at the single, over-65 poverty threshold (about $950). This would increase access to Social Security and raise benefits for about the bottom third of retirees.
• The minimum benefit would be paid regardless of work history and earnings. Other than current law’s taxation of benefits, it would not be means-tested. The poverty-level minimum would be indexed over time with wages.
• Over several decades, gradually reduce the maximum social security benefit so that eventually everyone receives the same flat dollar amount. 
• Expand personal retirement saving through universal auto-enrollment in 401k plans, auto-escalation of contributions, and regulatory relief to make it less costly for small employers to offer retirement plans.

In addition, there are several other provisions to the plan that I don’t discuss much in the NRO article.

• Immediately eliminate the 12.4% Social Security payroll tax for workers 62 and over.
• Gradually raise the early retirement age from 62 back up to its original level of 65.
• Pay COLAs on a progressive basis, so that current retirees receiving a sub-poverty level benefit receive an above-inflation COLA, those with mid-level benefits receive the CPI-W, and those with higher benefits receive COLAs base on the Chained CPI.

The plan would be solvent over 75 years and thereafter.

Take a look at the article and let me know what you think.

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New paper: “The Potential Effect of Offering Lump Sums in the Social Security Program”

Authors: Raimond Maurer, PhD; Olivia S. Mitchell, PhD; Ralph Rogalla, PhD; and Tatjana Schimetschek, MSc

SUMMARY:

• Political debate has focused on the question of whether Social Security solvency should be achieved by larger benefit cuts or higher taxes, which in effect asks which people—current or future generations—should bear the greater burden of fixing the system.
• But new research reframes this debate, offering a budget-neutral, actuarially fair lump sum payment, instead of the current delayed retirement credit, as a way to encourage people to delay claiming their Social Security benefits and work longer.
• Under one of the lump sum alternatives presented here, survey participants indicated a willingness to delay claiming Social Security by up to eight months, on average, compared to the status quo, and to continue working for four of them.
• Delayed claiming would mean additional months or years of Social Security payroll tax contributions, which could modestly improve the program’s solvency. Other benefits are possible as well: improved physical and mental health among the elderly from extended labor force participation, which could reduce the strain on health care programs like Medicare and Medicaid and help offset the macroeconomic costs of an aging population.

Click here to read the whole paper.

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