Notes on Social Security Reform

Chuck Blahous on how NOT to make public policy

noreply@blogger.com (Andrew G. Biggs) — Fri, 17 Feb 2012 20:01:00 +0000

Over at e21, Chuck Blahous – of the Hoover Institution and a public trustee of the Social Security program – argues that the payroll tax cut undermines Social Security in a wide variety of ways. Check it out here.

That damn Obama…

noreply@blogger.com (Andrew G. Biggs) — Fri, 17 Feb 2012 19:43:00 +0000

That’s not me talking, that’s FDR! Or so Jeffrey Brown of the University of Illinois thinks FDR might react to the current payroll tax cut. Check it out at Jeff’s Forbes blog.

Why target date funds might work for you

noreply@blogger.com (Andrew G. Biggs) — Fri, 17 Feb 2012 19:25:00 +0000

The Financial Security Project at Boston College has generated several user-friendly guides to target data funds, which automatically shift from stocks to bonds as you grow closer to retirement age. It has really useful discussions of the risk of different assets and the importance of keeping investment fees low. You can check it out here.

Can Congress Ever Raise the Payroll Tax Back?

noreply@blogger.com (Andrew G. Biggs) — Thu, 16 Feb 2012 14:26:00 +0000

NPR’s Alan Greenblatt talks to a number of social security experts from across the spectrum (including me). There’s a surprising level of consensus that, once cut, “uncutting” payroll taxes will prove tougher to do.

Tanner: Social Security Accounts “Still a Better Deal.”

noreply@blogger.com (Andrew G. Biggs) — Wed, 15 Feb 2012 19:21:00 +0000

Over at the Cato Institute, Mike Tanner writes that

“If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.”

I’ve made similar calculations and they’re right. That said, these kinds of analyses need to better account for:

a) Market risk: we really don’t know a lot about long-term market returns because we have so few non-overlapping periods of data from which to sample. If we’ve got good data since, say, around 1870, that means that for 30-year holding periods we have a sample of four. Not much to go on. If we look at the risk of single-year returns and then extrapolate over longer periods, we’ve got a much bigger sample – and the potential downside risk looks a lot worse; and

b) Transition costs: Grandma’s benefits aren’t going to pay themselves, and they’re going to get paid at all if I take my payroll taxes out of the system. So we need to put in extra money during that transition period as accounts are built up. Mike is right that financing the transition with spending cuts is better than with tax increases. But does it really make a difference? If we cut spending and I get to keep the proceeds, I’m better off (assuming that the spending is wasteful). But if we cut spending and it’s used to finance the transition, I’m not better off. In any case, it’s really the spending cuts, not the accounts, that are doing the leg-work here.

New papers from the NBER

noreply@blogger.com (Andrew G. Biggs) — Mon, 13 Feb 2012 13:21:00 +0000

Numeracy, financial literacy, and financial decision-making by Annamaria Lusardi - #17821 (AG)

Abstract:

Financial decisions, be they related to asset building or debt management, require the capacity to do calculations, including some complex ones. But how numerate are individuals, in particular when it comes to calculations related to financial decisions? Studies and surveys implemented in both the United States and in other countries that are described in this paper show the level of numeracy among the population to be very low. Moreover, lack of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment. This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions. Now more than ever, numeracy and financial literacy are lifetime skills necessary to succeed in today's complex economic environment.

http://papers.nber.org/papers/W17821

Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts by James M. Poterba, Steven F. Venti, David A. Wise - #17824 (AG)

Abstract:

Many analysts have considered whether households approaching retirement age have accumulated enough assets to be well prepared for retirement. In this paper, we shift from studying household finances at the start of the retirement period, an ex ante measure of retirement preparation, to studying the asset holdings of households in their last years of life. The analysis is based on Health and Retirement Study with special attention to Asset and Health Dynamics Among the Oldest Old (AHEAD) cohort that was first surveyed in 1993.

We consider the level of assets that households hold in the last survey wave preceding their death. We study how assets at the end of life depend on three family status pathways prior to death-- (1) original one-person households in 1993, (2) persons in two-person household in 1993 with a deceased spouse in the last year observed, and (3) persons in two-person households in 1993 with the spouse alive when last observed. We find that a substantial fraction of persons die with virtually no financial assets--46.1 percent with less than $10,000--and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support. In addition this group is disproportionately in poor health. Based on a replacement rate comparison, many of these households may be deemed to have been well-prepared for retirement, in the sense that their income in their final years was not substantially lower than their income in their late 50s or early 60s.

Yet with such low asset levels, they would have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities. This raises a question of whether the replacement ratio is a sufficient statistic for the "adequacy" of retirement preparation.

http://papers.nber.org/papers/W17824

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Wed, 08 Feb 2012 12:59:00 +0000

"How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study?"
Michigan Retirement Research Center Research Paper No. 2011-253

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu
NAHID TABATABAI, Dartmouth College - Department of Economics
Email: nahid.tabatabai@dartmouth.edu

This paper uses asset and labor market data from the Health and Retirement Study (HRS) to investigate how the recent "Great Recession" has affected the wealth and retirement of those in the population who were just approaching retirement age at the beginning of the recession, a potentially vulnerable segment of the working age population. The retirement wealth held by those ages 53 to 58 before the onset of the recession in 2006 declined by a relatively modest 2.8 percentage points by 2010. In more normal times, their wealth would have increased over these four years. Members of older cohorts accumulated an additional 5 percent of wealth over the same age span. To be sure, a part of that accumulation was the result of the upside of the housing bubble. The wealth holdings of poorer households were least affected by the recession. Relative losses are greatest for those who initially had the highest wealth when the recession began.
The adverse labor market effects of the Great Recession are more modest. Although there is an increase in unemployment, that increase is not mirrored in the rate of flow out of full-time work or partial retirement. All told, the retirement behavior of the Early Boomer cohort looks similar, at least so far, to the behavior observed for members of older cohorts at comparable ages.
Very few in the population nearing retirement age have experienced multiple adverse events. Although most of the loss in wealth is due to a fall in the net value of housing, because very few in this cohort have found their housing wealth under water, and housing is the one asset this cohort is not likely to cash in for another decade or two, there is time for their losses in housing wealth to recover.

"An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans"
Upjohn Institute Working Paper No. 12-179

NANCY MOHAN, University of Dayton
Email: MOHAN@UDAYTON.EDU
TING ZHANG, University of Dayton - School of Business Administration
Email: tzhang1@udayton.edu

This paper investigates the determinants of public pension plan risk-taking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and beta. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing financial constraints allocate more assets to equity and have higher pension asset betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds. Finally, the results offer mild support of a public union effect.

"Why Has the Crisis Been Bad for Private Pensions, But Good for the Flat Tax? The Sustainability of ‘Neoliberal’ Reforms in the New EU Member States"
Centre for European Policy Working Paper No. 356

MIROSLAV BEBLAVÝ, Centre for European Policy Studies (CEPS)

This paper examines two questions related to the sustainability of the major neoliberal, economic and social reforms in the new EU member states, namely the flat income tax and private pension pillars. First, we look at the relationship between the political consensus/controversy at the time major policy reforms were passed and the future sustainability of these reforms after a change of government. Second, we explore what we call a paradox of reverse sustainability, whereby the flat income tax has been more politically resilient during the global financial and economic crisis than private pensions, even though ex ante expectations and the literature would lead us to expect the opposite.
The paper shows that controversy at the time the reforms were passed had no effect on subsequent sustainability, and the levels of partisanship and public support with regard to a specific reform seem less important than the political costs and benefits. We also find that despite their apparent neoliberal bent, the two policies are versatile enough to be shaped towards a variety of policy goals, allowing their introduction and retention in a variety of economic and social circumstances. In other words, even though private pensions and particularly the flat tax have powerful political connotations, they are by no means policy straitjackets.
While both reforms could sustain themselves throughout the ‘good’ times before the global crisis, their fates diverged during the crisis. Neither public support nor the large constituency of savers could fully protect private pensions from a policy reversal during a period of exceptional fiscal pressure. That is because a reversal was associated with significant, short-term fiscal gains and the states where these reversals took place also took a range of other decisions that were politically extraordinarily difficult. On the other hand, we demonstrate that the introduction or potential reversal of the flat tax was not associated with significant, short-term revenue gains. It is the relatively ‘cheap’ nature of the flat tax that distinguishes it from private pensions, because it sends a highly cost-effective signal in terms of revenues lost owing to its existence.

"Racial and Ethnic Differences in the Retirement Prospects of Divorced Women in the Baby Boom and Generation X Cohorts"
Social Security Bulletin, Vol. 72, No. 1, pp. 23-36, 2012

BARBARA A. BUTRICA, The Urban Institute
Email: bbutrica@ui.urban.org
KAREN E. SMITH, Urban Institute
Email: ksmith@ui.urban.org

Blacks, Hispanics, and divorced women have historically experienced double-digit poverty rates in retirement, and divorce and other demographic trends will increase their representation in future retiree populations. For these reasons, we might expect an increase in the proportion of economically vulnerable divorced women in the future. This article uses the Social Security Administration’s Modeling Income in the Near Term (version 6) to describe the likely characteristics, work experience, Social Security benefit status, and economic well-being of future divorced women at age 70 by race and ethnicity. Factors associated with higher retirement incomes include having a college degree; having a strong history of labor force attachment; receiving Social Security benefits; and having pensions, retirement accounts, or assets, regardless of race and ethnicity. However, because divorced black and Hispanic women are less likely than divorced white women to have these attributes, income sources, or assets, their projected average retirement incomes are lower than those of divorced white women.

New papers from the Center for Retirement Research

noreply@blogger.com (Andrew G. Biggs) — Tue, 07 Feb 2012 16:53:00 +0000

The Center for Retirement Research at Boston College has released seven new working papers:

The Changing Causes and Consequences of Not Working Before Age 62

by Barbara A. Butrica and Nadia Karamcheva

The Impact of Temporary Assistance Programs on Disability Rolls and Re-Employment

by Stephan Lindner and Austin Nichols

Understanding the Growth in Federal Disability Programs: Who are the Marginal Beneficiaries and How Much Do They Cost?

by Adele Kirk

What Explains State Variation in SSDI Application Rates?

by Norma B. Coe, Kelly Haverstick, Alicia H. Munnell, and Anthony Webb

How Do Subjective Mortality Beliefs Affect the Value of Social Security and the Optimal Claiming Age?

by Wei Sun and Anthony Webb

How Does the Personal Income Tax Affect the Progressivity of OASI Benefits?

by Norma B. Coe, Zhenya Karamcheva, Richard Kopcke, and Alicia H. Munnell

The Pension Protection Act of 2006 and Diversification of Employer Stock in
Defined Contribution Plans

by Gary V. Engelhardt

Trust fund falling short?

noreply@blogger.com (Andrew G. Biggs) — Fri, 03 Feb 2012 16:31:00 +0000

Over at Investors Business Daily, Jed Graham writes that "The outlook for Social Security's trust fund has deteriorated to an astonishing degree over the past year, new Congressional Budget Office projections show.”

“The nonpartisan budget scorekeeper now expects the trust fund to peak in 2018 and decline to $2.7 trillion in 2022 — a full $1 trillion less than Social Security's own actuaries were expecting last year.”

“The new trajectory suggests that the trust fund's current depletion date of 2036 may jump ahead several years when Social Security's trustees release their annual report this spring, making the retirement program more central to the 2012 election.”

Debating rising disability costs

noreply@blogger.com (Andrew G. Biggs) — Fri, 03 Feb 2012 16:17:00 +0000

The USA Today editorial page hosts contrasting views on rising beneficiary rolls for the Social Security disability program. The editors argue for a number of possibilities – including tightening eligibility standards and increasing employer incentives to keep workers with disabilities on the job – as a way to restrain rising costs for the program.

Charles Martin, president of the National Organization of Social Security Claimants' Representatives, counters the rising disability rolls are a function of the aging of the population and increased female labor force participation, which makes more women eligible for DI benefits.

Last month I testified at the House Ways and Means Social Security Subcommittee on rising disability costs and strategies disabled workers on the job.

Can Americans work past 65? Should they?

noreply@blogger.com (Andrew G. Biggs) — Wed, 01 Feb 2012 15:02:00 +0000

Diane Lim Rogers discusses the pros and cons in her latest Christian Science Monitor column.

How Social Security Really Began

noreply@blogger.com (Andrew G. Biggs) — Wed, 01 Feb 2012 15:00:00 +0000

Over at Bloomberg, Kristin Aguilera, the deputy director of the Museum of American Finance and the editor of Financial History magazine, has a nice discussion of Social Security’s history, including the note that it was another Roosevelt – Teddy – who first proposed a social insurance program to protect against poverty in old age.

Event: “Can Boomer Women Afford to Retire?”

noreply@blogger.com (Andrew G. Biggs) — Wed, 01 Feb 2012 14:36:00 +0000

The Urban Institute, Tuesday, February 7, 2012 • Noon-1:30 p.m. ET

To attend in person in Washington, D.C., register at:

http://www.eventbrite.com/event/2834761849. (Registration is required.)

To watch the video webcast or a recording, go to

http://www.ustream.tv/channel/urban-institute-events. (No registration is necessary.)

Panelists:

Barbara Bovbjerg, managing director for education, workforce, and income security issues, Government Accountability Office

Mary Beth Franklin, contributing editor, InvestmentNews (moderator)

Heidi Hartmann, president, Institute for Women’s Policy Research

Richard Johnson, director, Program on Retirement Policy, Urban Institute

Jack VanDerhei, research director, Employee Benefit Research Institute

Many boomers, the 77 million or so Americans born between 1946 and 1964, face daunting retirement challenges. Traditional employer-sponsored pensions have been disappearing, replaced by 401(k)-type plans whose payouts depend on unpredictable investment returns. The 2008 stock market crash wiped out trillions of dollars in retirement savings, and the worst housing slump since the Great Depression has suppressed home equity values. Rising health care costs and potential Social Security cutbacks add to boomers’ concerns.

The outlook for women is more uncertain. They still earn less than men, and poverty rates will likely remain high among older widows. Yet, boomer women have worked and earned more than ever before, boosting their retirement wealth. The shift toward 401(k) plans helps women with spotty employment histories, who don’t benefit much from traditional pensions. And men’s growing longevity is reducing the number of widows.

Join our panel of experts as they answer such questions as

- How will boomer women’s retirement incomes compare to those of previous generations?

- How many will see their living standards fall when they retire?

- Will medical and long-term care costs undermine retirement income security?

- How vulnerable are boomer women to potential changes in Social Security and Medicare?

At the Urban Institute: 2100 M Street N.W., 5th Floor, Washington, D.C.

Lunch will be provided at 11:30 a.m. The forum begins promptly at noon.

New issue brief: “Do Income Taxes Affect the Progressivity of Social Security?”

noreply@blogger.com (Andrew G. Biggs) — Tue, 31 Jan 2012 16:35:00 +0000

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

"Do Income Taxes Affect the Progressivity of Social Security?" by Norma B. Coe, Zhenya Karamcheva, Richard Kopcke, and Alicia H. Munnell

The brief’s key findings are:

Low earners receive much more in Social Security benefits than they pay in Social Security taxes, reflecting the program’s progressive design.

The interaction between Social Security provisions and income taxes has little net effect on the program’s progressivity:
- the exemption of employers’ Social Security contributions from workers’ income taxes makes the system less progressive, but
- the income taxation of retirees’ Social Security benefits makes the system more progressive.

Over time, the income tax effects will add to progressivity because an increasing percentage of retirees will pay taxes on their benefits.

The brief is available here.

A practical solution for Social Security may need both sugar and medicine…

noreply@blogger.com (Andrew G. Biggs) — Fri, 27 Jan 2012 14:09:00 +0000

But the GOP candidates so far are giving us only one or the other, says Jed Graham at Investors Business Daily:

“[Romney and Gingrich’s] vastly different proposals for the direction of Social Security — long seen as the third rail of American politics — may be their sharpest policy dispute of all.”

“Romney has proposed erasing the program's financing gap with a hike in the official retirement age and other income-based cuts. Gingrich has expressly disavowed "an austerity path" that cuts Social Security benefits. Instead, he favors reforming the system by allowing people to deposit their 6.2% payroll tax contribution in personal investment accounts.”

You can read the whole article here.

Will the payroll tax cut alter how we view Social Security?

noreply@blogger.com (Andrew G. Biggs) — Fri, 27 Jan 2012 14:07:00 +0000

Bill Shipman says yes, in this Washington Times op-ed:

“It may be difficult to stop this train because both parties, for different reasons, want it to keep chugging along. This may embolden them to extend or lower the payroll tax further, exacerbating the delinking. If this happens, the government could then argue that workers are only entitled to lower Social Security benefits because they’re provided by the now lower payroll tax. Another outcome may be means-testing benefits, thus morphing Social Security into a welfare program. A third may be to finance Social Security benefits largely or entirely through the income tax, resulting in a significant redistribution of wealth.”

Check it out here.

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Wed, 25 Jan 2012 15:31:00 +0000

"Pensions, Privatization and Poverty: The Gendered Impact"
Canadian Journal of Women and the Law, Vol. 23, No. 2, pp. 661-685, 2011

CLAIRE YOUNG, University of British Columbia - Faculty of Law
Email: young@law.ubc.ca

This article focuses on the disparate impact of Canadian pension policy on women as compared to men, which in turn contributes to the poverty experienced by elderly women in retirement. The major contributing factor is the increasing privatization of the responsibility for economic security in Canada, with a preference for reliance on the private market or private family rather than on the state to provide for the welfare of its citizens. The article discusses the negative impact on women of issues such as the trend towards the establishment of defined contribution workplace pension plans rather than defined contributions plans, the increasing use of tax expenditures to encourage private retirement savings, and pension income splitting. The analysis takes place against the backdrop of the socio-economic realities of women’s lives and concludes that public pensions such as the Old Age Security pension and the Canada Pension Plan must be strengthened if women’s economic inequality in retirement is to be redressed.

"I Do...Want to Save: Marriage and Retirement Savings in Young Households"
Journal of Marriage and Family, Vol. 74, pp. 86-100, 2012

MELISSA KNOLL, Social Security Administration - Office of Retirement Policy
Email: melissa.knoll@ssa.gov
CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
Email: Chris.Tamborini@ssa.gov
KEVIN WHITMAN, U.S. Social Security Administration
Email: Kevin.Whitman@ssa.gov

Increased policy and academic attention has been placed on promoting retirement savings early in the life course. This study investigates the extent to which retirement savings behavior among young persons, a population for which retirement savings is important but typically low, differs by marital status. We draw national survey data on young adult households (ages 22–35; N = 3,894) from the U.S. Federal Reserve Board's Survey of Consumer Finances (SCF). Results reveal considerable differences by marital status. Controlling for important characteristics, young adults who were married were more likely than all other groups (including cohabitors) to perceive retirement as an important savings goal and to have an individual retirement account. Married persons were more likely than their single counterparts to participate in a defined contribution pension plan. Single women fared particularly poorly on retirement savings outcomes. A range of possible theoretical links between marriage and retirement savings at young adulthood are discussed.

"Portfolio Restriction to Impose on Defined Benefit Pension Plans"

KATARZYNA ROMANIUK, Université de Paris 1 Panthéon-Sorbonne, Universidad de Santiago de Chile
Email: romaniuk@univ-paris1.fr

When a firm sponsoring a defined benefit pension plan approaches financial distress, the Pension Benefit Guaranty Corporation (PBGC) insurance effect materializes and the optimal pension portfolio policy becomes aggressive. In this configuration, a regulation restricting the pension investment strategy is needed. We suggest that the restriction imposed should follow asset-liability management principles. A low risk investment policy, as defined by the preference-independent liability hedge only, should be the regulator's benchmark. We recommend that the risky asset proportion maximum limit is fixed at 30%.

New paper: "Understanding the Growth in Federal Disability Programs”

noreply@blogger.com (Andrew G. Biggs) — Mon, 23 Jan 2012 16:55:00 +0000

"Understanding the Growth in Federal Disability Programs: Who are the Marginal Beneficiaries and How Much Do They Cost?"
Center for Retirement Research at Boston College Working Paper No. 2012-1

ADELE KIRK, University of Maryland, Baltimore County
Email: amkirl@ucla.edu

SSI and SSDI, the two work disability programs administered by the Social Security Administration (SSA), have been marked by concerns about target efficiency since their inception. This study uses SSA administrative data linked with National Health Interview Survey data (NHIS) to examine health status, labor force participation at time of NHIS interview, and linked mortality data to examine mortality during the period following NHIS interview. The self-reported health status data present two strong and consistent patterns: denied applicants report being in considerably worse health than non-applicants, and beneficiaries appear to be sicker yet. In logit models among disability beneficiaries, women are significantly less likely to report excellent/very good health, but race has no significant effect. While being female decreased the probability of good health, it has no significant effect on the probability of reporting no work limitation at time of interview among beneficiaries. Although race was not significant in the model of self-reported health, both Hispanics and non-Hispanic blacks are significantly more likely to report no work limitation at time of interview. This study has important limitations. NHIS respondents who link to the SSA administrative data may not be representative of all individuals with disability application histories. In addition, individuals must live long enough after disability determination to be drawn into an NHIS sample, and these results reflect the experience of that subsample of disability applicants who do not die during the determination process or soon thereafter.

New issue brief: “Why Do State Disability Application Rates Vary Over Time?”

noreply@blogger.com (Andrew G. Biggs) — Wed, 18 Jan 2012 16:54:00 +0000

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

Why Do State Disability Application Rates Vary Over Time? by Norma B. Coe, Kelly Haverstick, Alicia H. Munnell, and Anthony Webb

The brief’s key findings are:

Application rates for federal Disability Insurance (DI) have risen since the late-1990s.

The economy is a key driver: rising unemployment and declining labor force participation lead to higher DI application rates.

Interestingly, states with strict health insurance regulations have lower application rates, a finding that merits further exploration.

The brief is available here.

Jennifer Rubin on the Gingrich-Santorum debate

noreply@blogger.com (Andrew G. Biggs) — Wed, 18 Jan 2012 13:55:00 +0000

Washington Post political blogger Jennifer Rubin weighs in on the confrontation over Social Security reform in the other night’s GOP presidential debate. In it, Santorum criticized Gingrich’s “big account” reform plan for Social Security – which would allow individuals to divert roughly half their payroll taxes to personal accounts – as a budget buster, given that Social Security is no longer running surpluses and the rest of the budget is in deficit.

Rubin notes:

“Gingrich had two responses, neither of which was credible. First, he promised to “take 185 different federal bureaucracies that deal with low-income Americans. Think about this, there are 185 separate bureaucracies with separate regulations, all dealing with low-income Americans. We can consolidate them into a single block grant.” That’s gong to pay for a huge outflow from Social Security? It’s preposterous. Next, he claimed that in the long run, “if you have a personal savings account model, you increase the size of the economy by $7 to $8 trillion over a generation because of the massive reinvestment.” Perhaps that is true, but we have a huge, nagging debt right now and he’s going to make it worse with his plan. And while Santorum was certainly right on substance, Gingrich’s glibness may have successfully concealed how really silly is his policy proposal.”

I agree, and this highlights one of the interesting differences between Gingrich and Gov. Mitt Romney.

Gingrich is heavy on vision, on historical sweep and on fundamental change. GOP voters like that, and I think that in many ways public policy needs that. Gov. Romney, by contrast, sometimes comes across as something of a bean-counter.

On the other hand, though, when you pick through some of Gingrich’s proposals – in particular his Social Security plan – it seems to me that the beans haven’t been counted. This is where I think Romney would have an advantage in office, of getting his ducks in a row and making sure that the numbers actually, you know, add up.

Three views of Social Security reform in GOP debate

noreply@blogger.com (Andrew G. Biggs) — Tue, 17 Jan 2012 21:46:00 +0000

Writing for Forbes, University of Illinois finance professor Jeffrey Brown reviews the discussion of social security reform in last night’s GOP presidential debate in Myrtle Beach, SC.

“In response to a question by Gerald Seib of Wall Street Journal, three of the candidates weighed in on Social Security reform. Their responses revealed strikingly different approaches to economic policy.”

Mitt Romney, Rick Santorum and New Gingrich all have ideas on how to fix Social Security. Romney takes a more conservative (small C) approach, looking at incremental ways to fix the current system. Gingrich wants a complete overhaul and shift to personal retirement accounts, though with the government backing things up if the accounts fall short. Santorum pointed out that there’s no money to fund Gingrich’s plan, then argued for means-testing benefits for high earners. All had their points. See what Jeff had to say over at Forbes.

CFRB: Raising Eligibility Ages Is Good for the Budget...and the Economy

noreply@blogger.com (Andrew G. Biggs) — Thu, 12 Jan 2012 20:16:00 +0000

The Committee for Responsible Federal Budget weighs in on yesterday’s CBO report on raising the Social Security and Medicare retirement ages:

“Over the past couple of years, we've been arguing that raising the Social Security and Medicare ages could be an important part of a fiscal reform agenda. In prior posts, we've showed that increasing the Medicare age would protect--and indeed increase benefits -- for the most vulnerable, increasing the Social Security normal retirement age is actually somewhat progressive, and increasing the Social Security early retirement age can help increase benefits for older workers. We've also shown that these policies could lead to substantial budgetary savings and could help grow the economy by encouraging work and savings.”

Read the whole discussion here.

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Wed, 11 Jan 2012 14:27:00 +0000

"Retirement Age Expectations of Older Americans Between 2006 and 2010"
EBRI Notes, Vol. 32, No. 12, December 2011

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)
Email: banerjee@ebri.org

This paper examines how the retirement strategies of older (age 50 or older) Americans have changed over the period of 2006-2010. The data used for this study come from the University of Michigan’s Health and Retirement Study (HRS), sponsored by the National Institute on Aging and the most comprehensive national survey of older Americans. HRS asks individuals at what age they plan to stop working and what their chances are of working past ages 62 and 65. The survey retains a panel structure (where an individual is observed over several years), which makes it possible to study how these individuals’ plans to retire have changed over time. This study examines what percentage of the working population (age 50 or older) plans to retire at the traditional U.S. ages of retirement (62 and 65) and beyond. Then it examines how this expected retirement age has changed over the two-year periods of 2006-2008 and 2008-2010 and also the four-year period of 2006-2010. It also examines the trends in self-reported probability of working past ages 62 and 65 and how these probabilities have changed over the two-year periods of 2006-2008 and 2008-2010. Data from the HRS show a clear trend that workers age 50 or over are expecting to work longer, which is correlated with the financial crisis of 2007-2009. In 2006 (just before the recent recession), 11.2 percent expected to retire at age 70, and by 2010 (after it had officially ended) that had increased to 14.8 percent. Even at higher ages, the expected retirement has jumped: Just 1.7 percent of workers age 50 or over planned to retire at age 80 in 2006, which more than tripled to 5.2 percent in 2010. Expected retirement at ages 62 and 65 steadily declined over this four-year period. In 2008, during the recession, 22.4 percent of the workers age 50 or over said they plan to never retire. That declined to 16.3 percent in 2010 after the recession. Over the 2006-2010 period (before, during, and after the recession), another 14-18 percent of workers said they don’t know when they will retire.
The PDF for the above title, published in the December 2011 issue of EBRI Notes, also contains the fulltext of another December 2011 EBRI Notes article abstracted on SSRN: “Variation in Public Opinion on the Future of Employment-Based Health Benefits: Findings From the 2011 Health Confidence Survey.”

"Did You Really Save so Little for Your Retirement? An Analysis of Retirement Savings and Unconventional Retirement Accounts"
Netspar Discussion Paper No. 12/2011-094

MAURO MASTROGIACOMO, CPB Netherlands Bureau of Economic Policy Research, Tinbergen Institute
Email: mauro@gridline.nl
ROB J.M. ALESSIE, University of Groningen, Netspar, Tinbergen Institute, Tilburg University - Center for Economic Research (CentER), University of Utrecht - Utrecht University School of Economics
Email: r.j.m.alessie@rug.nl

We use a confirmatory factor analysis to study the relation between the importance of a broad spectrum of saving motives, such as saving for retirement, and saving behavior. Survey data show that many respondents save for retirement in unconventional retirement accounts, such as investments in real estate. We show that finding the retirement motive important does not directly translate in additional retirement savings. We show that the annuity stream generated by conventional and unconventional accounts from age 65 onwards is small and that most savings are residual and are not being put aside for a specific motive. Also self-employed retirement savings are low, even though this group has generally no occupational pension.

"Do Older Workers Develop a Short-Timer's Attitude Prior to Retirement? Evidence from a Panel Study"
Netspar Discussion Paper No. 12/2011-095

MARLEEN DAMMAN, Netherlands Interdisciplinary Demographic Institute (NIDI)
Email: damman@nidi.nl
KENE HENKENS, Netherlands Interdisciplinary Demographic Institute
Email: HENKENS@NIDI.NL
MATTHIJS KALMIJN, Tilburg University
Email: m.kalmijn@uvt.nl

Objectives: Even though in retirement and career theories reference is made to a pre-retirement work disengagement process among older workers, quantitative empirical knowledge about this process is limited. The aim of this study is to improve our understanding of work disengagement in the pre-retirement period, by examining the impact of proximity to planned retirement (anticipated future) and work, educational, and health experiences (lived past) on pre-retirement work disengagement.
Methods: Using panel data of Dutch older workers, a scale was developed to measure the hypothesized reductions in work investments, activities, and motivation (i.e., disengagement) in pre-retirement years. We estimated linear regression models (cross-sectional analyses; N=1634) and conditional change models (panel analyses; N=652) to examine the pre-retirement work disengagement process.
Results: In line with the notion of the pre-retirement disengagement process, this study shows that many older employees disengage more from work when getting closer to their planned retirement age. Career experiences of promotion and employer change slow down the disengagement process. Declining health, in contrast, accelerates the process.
Discussion: For achieving a comprehensive understanding of the retirement process, not only past and present experiences, but also the anticipated future (i.e., expected time-left in the current state) should be taken into account.

"401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010" EBRI Issue Brief, No. 366, December 2011

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)
Email: vanderhei@ebri.org
SARAH HOLDEN, Investment Company Institute
Email: sholden@ici.org
LUIS ALONSO, Employee Benefit Research Institute (EBRI)
Email: alonso@ebri.org
STEVEN BASS, Investment Company Institute
Email: sbass@ici.org

This paper is an update of the Employee Benefit Research Institute and the Investment Company Institute’s ongoing research into 401(k) plan participants’ activity through year-end 2010. The report is divided into four sections: The first describes the EBRI/ICI 401(k) database; the second presents a snapshot of participant account balances at year-end 2010; the third looks at participants’ asset allocations, including analysis of 401(k) participants’ use of target-date, or lifecycle, funds; and the fourth focuses on participants’ 401(k) loan activity. On average, at year-end 2010, 62 percent of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Thirty-three percent were in fixed-income securities such as stable-value investments and bond and money funds. At year-end 2010, 11 percent of the assets in the EBRI/ICI 401(k) database were invested in target-date funds and 36 percent of 401(k) participants held target-date funds. Also known as lifecycle funds, they are designed to offer a diversified portfolio that automatically rebalances to be more focused on income over time. At year-end 2010, 44 percent of the account balances of recently hired participants in their 20s were invested in balanced funds, compared with 42 percent in 2009, and about 7 percent in 1998. A significant subset of that balanced fund category is target-date funds. At year-end 2010, 35 percent of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 31 percent at year-end 2009. The share of 401(k) accounts invested in company stock continued to shrink, falling by more than a percentage point (to 8 percent) in 2010, continuing a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend: They tended to be less likely to hold employer stock. In 2010, 21 percent of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from year-end 2009, and up from 18 percent at year-end 2008. Loans outstanding amounted to 14 percent of the remaining account balance, on average, at year-end 2010, compared with 15 percent at year-end 2009. Loan amounts outstanding declined slightly from those in the past few years. To understand changes in 401(k) participants’ average account balances, it is important to analyze a sample of consistent participants. As with previous EBRI/ICI updates, analysis of a sample of consistent 401(k) participants (those that have been in the same plan since 2003) is expected to be published in 2012.

"Risk Sharing in Defined-Contribution Funded Pension System"
Netspar Discussion Paper No. 11/2011-093

ROEL M. W. J. BEETSMA, University of Amsterdam - Research Institute in Economics & Econometrics (RESAM), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Tinbergen Institute - Tinbergen Institute Amsterdam (TIA), Netspar
Email: r.m.w.j.beetsma@uva.nl
ALESSANDRO BUCCIOL, University of Verona - Department of Economics, University of Amsterdam - Amsterdam School of Economics (ASE)
Email: a.bucciol@uva.nl

This paper explores the introduction of collective risk-sharing elements in defined contribution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equivalent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductibility of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses.

CBO Brief on Raising Social Security/Medicare

noreply@blogger.com (Andrew G. Biggs) — Tue, 10 Jan 2012 19:36:00 +0000

The Congressional Budget Office has released a new report on the impact of increasing the Social Security and Medicare retirement ages:

Raising the ages at which people can collect Medicare and Social Security would reduce federal spending and increase federal revenues by inducing some people to work longer. However, raising the eligibility ages for those programs also would reduce people's lifetime Social Security benefits and cause many of the people who would otherwise have enrolled in Medicare to face higher premiums for health insurance, higher out-of-pocket costs for health care, or both. This issue brief reviews how ages of eligibility affect beneficiaries under current law and how delaying eligibility would affect beneficiaries, the federal budget, and the economy.

It’s an interesting piece in that it not only looks at the impact for beneficiaries and the program’s finances, but also considers how longer work lives encouraged by higher retirement ages could affect the budget – through higher taxes paid – and the economy as a whole.

How will the payroll tax cuts affect Social Security?

noreply@blogger.com (Andrew G. Biggs) — Wed, 07 Dec 2011 19:00:00 +0000

Differing opinions in a report from National Public Radio.