Notes on Social Security Reform

Presentations from APPAM session on the challenges of entitlement growth

noreply@blogger.com (Andrew G. Biggs) — Wed, 11 Nov 2009 22:15:00 +0000

On Friday I was lucky enough to moderate a great session at the annual APPAM conference on Aging, Health and the Challenge of Entitlement Growth, featuring a presentation by CBO director Doug Elmendorf and comments by Gene Steuerle of the Urban Institute and Jim Klumpner, a long-time Capitol Hill economist who now teaches at Princeton and George Washington. While nothing can replace the actual presentations and the discussion that followed, which was of course moderated to perfection, I've posted the PowerPoints by Elmendorf, Steuerle and Klumpner. Thanks to CBO's Joyce Manchester for landing the big fish for the session.

New paper: “Marital History, Race, and Social Security Spouse and Widow Benefit Eligibility in the United States”

noreply@blogger.com (Andrew G. Biggs) — Wed, 11 Nov 2009 19:47:00 +0000

SSRN turns up a new paper, "Marital History, Race, and Social Security Spouse and Widow Benefit Eligibility in the United States," by Christopher R. Tamborini, Howard Iams and Kevin Whitman, all of the Social Security Administration. Here's the abstract:

Large-scale changes in American family structures over the past decades have important implications for the retirement experiences of women. In this study, the authors use a restricted-use file of the Marital History Module of the U.S. Census Bureau's Survey of Income and Program Participation to investigate changes in the marital histories of women aged 40 to 69 years between 1990 and 2004, with a focus on outcomes relevant for Social Security spouse and widow benefit eligibility. Multinomial and binary logistic regression analyses show significant changes in women's marital patterns since 1990, with more substantial shifts occurring among recent cohorts. Due to downward trends in marriage, the authors find a modest decline in Social Security spouse and widow benefit eligibility in 2004, particularly among Black women born toward the end of the baby boom generation.

This made me think of two things: first, about the only way to get a truly good return from Social Security going forward is for one member of a household to receive spousal benefits; but second, changes in marital patterns by race could mean that spousal benefits become predominantly for white people. I prepared the chart below from Census data a few years ago and so the data isn't completely up to date, but the changes in black/white marriage rates since the 1950s are pretty extreme.

Back in 1950 blacks had roughly the same marriage rate as whites, but since then patterns have sharply diverged. In 2000 around 25 percent of whites over age 15 had never been married, which is only a few percentage points higher than the 1950 level. But around 44 percent of blacks had never been married in 2000, compared to only around 25 percent in 1950. As a result, fewer and fewer black retirees in the future will tend to be eligible for spousal benefits.

I'm not a huge fan of Social Security's spouse benefits, which seem to reward neither contributions nor need, and – as I'll point out in Friday's sure-to-be-fantastic AEI panel on Social Security's effect on work incentives – impose high marginal tax rates on women's labor. But these racial disparities might be another reason to give spousal benefits the heave-ho.

New paper: Literacy and Financial Sophistication Among Older Americans

noreply@blogger.com (Andrew G. Biggs) — Mon, 09 Nov 2009 14:26:00 +0000

The National Bureau of Economic research has released a new paper, titled "Financial Literacy and Financial Sophistication Among Older Americans" by Annamaria Lusardi, Olivia S. Mitchell and Vilsa Curto. Here's the abstract:

This paper analyzes new data on financial literacy and financial sophistication from the 2008 Health and Retirement Study. We show that financial literacy is lacking among older individuals and for the first time explore additional questions on financial sophistication which proves even scarcer. For this sample of older respondents over the age of 55, we find that people lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees. In view of the fact that individuals are increasingly required to take on responsibility for their own retirement security, this lack of knowledge has serious implications.

Click here to access the NBER page (subscription required, but I believe a free version is available here.)

Upcoming event: Social Security reform and labor force participation of seniors

noreply@blogger.com (Andrew G. Biggs) — Fri, 06 Nov 2009 19:47:00 +0000

On Friday November 13 at AEI we'll be holding a panel discussion titled "Keeping Granny on the Job" looking at the ways in which Social Security and Social Security reform can affect incentives for individuals to delay retirement.

I will present a paper co-authored with David Weaver and Gayle Reznik of SSA titled "Social Security and Marginal Returns to Work Near Retirement" that analyzes the increase in benefits that accompanies an additional year of work for near-retirees. (The short answer is 'not much', but the reasons are interesting.)

The second paper will be presented by Estelle James, a pension consultant and lead author of the World Bank's "Averting the Old Age Crisis." The paper, co-authored with Alejandra Cox Edwards of California State University, Long Beach, is titled "Do Individual Accounts Postpone Retirement: Evidence from Chile." It looks at the labor force participation of individuals under Chile's reformed pension plan, which is generally actuarially neutral with regard to additional work, relative to individuals who remained under the previous defined benefit program.

Jagadeesh Gokhale, senior fellow at the Cato Institute, will provide commentary. It should be an interesting event.

The panel is from 12 to 2 pm; lunch will be provided. Click here to register.

Kristof’s silly health care statistics

noreply@blogger.com (Andrew G. Biggs) — Thu, 05 Nov 2009 18:49:00 +0000

Over at AEI's Enterprise Blog…

Law Review Articles on Social Security

noreply@blogger.com (Andrew G. Biggs) — Wed, 04 Nov 2009 16:54:00 +0000

TaxProf Blog links to comments by Benjamin Templin on an earlier Cornell Law Review article by Neil Buchanan. Buchanan argues that we shouldn't take projections of Social Security's insolvency all too seriously; Templin replies that it makes sense to diversify the Social Security trust fund into stocks, even if we aren't yet sure if/when insolvency will take place. I commented on some of Buchanan's arguments here.

While I enjoyed both articles, it does strike me that there's a qualitative difference between law review articles on Social Security and those in policy or economic journals. There's more footnoting in law review articles, to be sure – I was shocked at how much extra citation work was requested when an article of mine was adapted for a law journal – but overall the presentation of evidence and argument strikes me as generally sloppier than what you'd find in a policy article. Maybe it's because lawyers see themselves as proponents of arguments with less obligation to present contrary evidence – I guess the opposition is supposed to supply that.

For instance, Buchanan notes "the overwhelmingly regressive effect of the Bush tax cuts." Being curious, I checked the cite: it simply references the 2001 and 2003 tax legislation, as if that's enough to establish overwhelming regressivity. Overall it just doesn't seem at the level you'd expect from a good economics or policy article, be the author from the left or the right.

Fall newsletter from Michigan RRC

noreply@blogger.com (Andrew G. Biggs) — Wed, 28 Oct 2009 23:48:00 +0000

The University of Michigan's Retirement Research Center has released its fall newsletter. Here are links to the main stories – check 'em out, wonks (and others).

Top of Form

Director's Corner
The August Retirement Research Consortium (RRC) conference at the National Press Club was well-attended and provided a stimulating exchange of ideas on retirement benefits, disability, Medicare, and health insurance in general...

2009 RRC Conference
The Retirement Research Consortium (RRC) held its 11th annual conference August 10-11, 2009, focusing on "Issues for Retirement Security" at the National Press Club in Washington, DC...

RRC Conference Photo Gallery
Photos of the August RRC conference presenters and attendees...

How Older Americans Are Faring in the Recession
Older Americans have weathered the financial crisis relatively well, although many now expect to work longer than they did just a year ago...

Using Matched Survey and Administrative Data
The July 2009 Social Security Bulletin includes an article titled "Measurement Issues Associated with Using Survey Data Matched with Administrative Data from the Social Security Administration"...

IRS Site Helps Employers Manage Retirement Plan Options
The Internal Revenue Service has launched a site to help employers navigate through tax-favored retirement plan options...

Did You Know?
SSA paid benefits to about 55.8 million people in 2008...

2009 Working Papers Available
The 2009 MRRC Working Papers are now available on our website with Key Findings...

Social Security Holds Compassionate Allowances Hearing on Early-Onset Alzheimer's Disease
On Wednesday, July 29, 2009, Michael J. Astrue, Commissioner of Social Security, hosted the agency's fourth public hearing on Compassionate Allowances...

AARP Offers 'Doughnut Hole' Calculator
Each year, an estimated three million-plus older Americans fall into the "doughnut hole" -- a coverage gap in Medicare's prescription drug program...

MRRC's New Awards
The University of Michigan Retirement Research Center is pleased to announce its research awards for 2009-2010..

Bottom of Form

Bad signs on entitlements

noreply@blogger.com (Andrew G. Biggs) — Wed, 28 Oct 2009 20:03:00 +0000

Over at AEI's Enterprise Blog…

Why is there so much waste in health care?

noreply@blogger.com (Andrew G. Biggs) — Wed, 28 Oct 2009 20:00:00 +0000

My short answer: too many incentives point in that direction. My longer answer is over at the Washington Examiner.

New paper: “Obama’s $250 Bonus Turns Social Security into Welfare”

noreply@blogger.com (Andrew G. Biggs) — Thu, 22 Oct 2009 18:31:00 +0000

The Heritage Foundation has released a new paper by Senior Fellow David John titled "Obama's $250 Bonus Turns Social Security into Welfare." Here's a taste:

Since Social Security recipients will get no cost-of-living adjustment (COLA) next year, President Obama wants to give each of them $250, a move supported in principle by the Republican House and Senate leadership. However, this move is not only unjustified; it makes a fundamental change to Social Security's structure and starts the process of converting the program from an earned benefit funded by a worker's own contributions to a welfare program.

While there will be no Social Security COLA, benefits will not decrease, despite the fact that the cost of living has gone down, thus increasing the amount that recipients can buy with their existing benefits. And the benefit would mean even larger spending in a year with record deficits. This new $250 payment would follow the earlier $250 payment that each Social Security recipient was paid through the stimulus package this year.

Check out the whole paper here.

Savings and Retirement Forum Featuring Mark Warshawsky

noreply@blogger.com (Andrew G. Biggs) — Thu, 22 Oct 2009 17:57:00 +0000

On Monday, October 26th, 2009 the Savings and Retirement Forum will be held at The Brookings Institute: 1775 Massachusetts Ave, NW, Washington, DC 20036, at 8:30am. Mark J. Warshawsky, Ph.D., Director of Retirement Research Watson Wyatt Worldwide will be discussing "TDF Assett Allocations Risk vs Reward Tradeoffs"

The purpose of the Forum is to bring together academics, interested industry professionals, policy wonks, and government staffers who work on issues related to Social Security, pensions, savings, and general retirement issues for a monthly seminar and an annual half-day conference. Our website, www.savingsandretirement.org contains the dates of future meetings, links to relevant papers, and a few miscellaneous links that people doing research on these issues may find useful.

If you plan on coming please RSVP. Coffee, juice, and pastries will be served.

NASI event: Fixing Social Security: Adequate Benefits, Adequate Financing

noreply@blogger.com (Andrew G. Biggs) — Thu, 22 Oct 2009 17:56:00 +0000

Security will be the next big issue in the political forefront. Be ready for the debate. This event will bring you up to speed with policy options from NASI's new report addressing adequacy and solvency of the U.S. Social Security system as well as poll findings on Americans' views on Social Security from the Benenson Strategy Group.

Copies of the reports will be available at the event.

Friday, October 30, 2009, 9:30 – 11:00 am

H-137 Capitol Building, E Capitol St, NE & 1st St, NE, Washington, DC

(Use the Independence Avenue Entrance)

Coffee and Snacks Provided

Panelists:

Janice M. Gregory, National Academy of Social Insurance
Kenneth Apfel, Former Commissioner of the Social Security Administration
Danny Franklin, Benenson Strategy Group
Virginia Reno, National Academy of Social Insurance

For more information and to register, please visit the event page on our website.

Register Now

National Academy of Social Insurance
1776 Massachusetts Avenue, NW • Suite 615 • Washington, DC 20036
Phone: (202) 452-8097 • Fax: (202) 452-8111
www.nasi.org

Watch the Fiscal Wake-Up Tour Online

noreply@blogger.com (Andrew G. Biggs) — Thu, 22 Oct 2009 17:53:00 +0000

Concerned About America's Fiscal Future?
Watch a Live Webcast of the Fiscal Wake-Up Tour

The Fiscal Wake-Up Tour

The Fiscal Wake-Up Tour is rolling into Denver tomorrow, October 22, and you are welcome to watch as national experts discuss how the country can plan for a better economic future in the face of skyrocketing federal debt, an aging population and rapidly rising health care costs. The Wake-Up Tour, which is making its second stop in Denver, has been profiled in "60 Minutes" and the highly acclaimed documentary I.O.U.S.A.. David Walker, President and CEO of the Peter G. Peterson Foundation and the former U.S. Comptroller General, and Robert Bixby, executive director of the Concord Coalition are set to speak — view other speakers and the agenda here.

Thursday, October 22, 2009

7:00 p.m. - 9:00 p.m. MDT (9:00 p.m. - 11:00 p.m. EDT)

To join the live webcast tomorrow, visit http://www.concordcoalition.org.

Paying for America - A Student Summit on the Fiscal Health of America

Also featured in the live webcast is "Paying for America," a student summit presented by the University of Denver and The Concord Coalition as part of Concord's Fiscal Stewardship Project. The summit will give college students an opportunity to learn more about our nation's fiscal and economic difficulties. There will be panel discussions on the causes of these problems, how they could affect the students for the rest of their lives, and potential solutions.

Thursday, October 22, 2009

9:00 a.m. - 4:30 p.m. MDT (11:00 a.m. - 6:30 p.m. EDT)

To join the live webcast tomorrow, visit http://www.concordcoalition.org.

More on the “new Social Security notch”

noreply@blogger.com (Andrew G. Biggs) — Tue, 20 Oct 2009 17:58:00 +0000

I've been meaning to flesh out what I wrote last week in Forbes regarding a new "Social Security notch," in which individuals who turned 62 in 2009 are disadvantaged because – while they did not receive the over-large 5.8 percent COLA paid in January of this year – they will be subject to the "no COLA" years in 2010 and 2011. (See this new AEI paper for details on the COLA.)

This seems to be a good time to discuss it more, since SSA's Chief Actuary Steve Goss has circulated a memo on the Hill (available here) discussing the notch issue. (Steve's been very helpful to me in understanding a really tricky issue.) Since the memo is short I'll paste in the text and then give a quick response.

Social Security Benefits for Those Born in 1947

October 14, 2009

Andrew Biggs recently noted (Forbes Commentary, October 9, 2009) that retired workers who were born in 1947, and will reach age 62 in 2009, did not receive the 5.8 percent cost of living adjustment (COLA) awarded to Social Security beneficiaries eligible in December 2008. This is true. However, the workers born in 1947 did receive a 4.54 percent increase in their benefits through the wage-indexed benefit formula. And this increase will not be applied for retirees born before 1947. Therefore, the difference of about 1.2 percent is the amount by which benefits will be lower for life for a worker 62 in 2009, compared to a similar worker reaching 62 in 2008.

Is this a "notch", and is it unusual? Unfortunately, consumer prices and the average wage level do not rise smoothly over time. The increase in the CPI that caused the 5.8-percent COLA for December 2008 just happened to be bigger than the 4.54-percent increase in the average wage that retired workers age 62 in 2009 will receive instead of the COLA. So yes, this is a small "notch". Is this unusual? Actually, the COLA received by existing beneficiaries has been larger than the average wage increase applied for newly-eligible beneficiaries in 9 of the 30 prior years. And in 5 of these years the difference was greater than it is for 2009. So the 1.2-percent difference between benefits for those age 62 in 2008 and those age 62 in 2009 is neither very large nor very unusual.

Steve Goss, Chief Actuary

Social Security Administration

The first thing to remember is that I didn't argue that a notch existed because individuals in the 1947 cohort would receive lower dollar benefits than individuals in the 1946 cohort (although they may). I argued that unusual changes in prices over the course of 2008, interacting with the benefit formula, mean that individuals aged 61 in 2008 will receive lower benefits than they otherwise would have.

However, comparing two cohorts may nevertheless be useful so long as we bear in mind how Social Security intends benefits to change between cohorts. Social Security is a wage-indexed program, meaning that initial benefits rise from cohort-to-cohort along with average wages. This maintains a roughly constant replacement rate – the ratio of initial benefits to average pre-retirement earnings. (Social Security calculates pre-retirement earnings as the wage-indexed average of the highest 35 earning years.) As a result, we'd expect the 1947 cohort to receive higher benefits than the 1946 cohort, assuming they had higher average lifetime earnings. The fact that benefits are lower is notable.

Typically the replacement rate for a medium wage earner is around 40 percent; since the retirement age isn't currently increasing, let's assume the replacement rate would ordinarily be 40 percent for both the 1946 and 1947 birth cohorts. To make things simpler still, let's think of the numerator and the denominator of the replacement rate separately; in other words, imagine as if a person received a benefit of $40 (say, per day) and had pre-retirement earnings of $100 (again, per day).

OACT's memo points out that a typical person in the 1947 birth cohort received benefits 1.2 percent lower than a similar person in the 1946 birth cohort. So, using our simplified formula, that $40 daily benefit falls to $39.52. The memo also notes average wage growth of 4.54 percent in 2007, the year the 1947 birth cohort turned 60. This, in turn, increases the wage-indexed average of lifetime earnings by around 4.54 percent, since the Social Security benefit formula indexes past earnings to wage growth through age 60. So that $100 daily pre-retirement earnings for the 1946 birth cohort increases to around $104.54 for the 1947 cohort. Divide it out and you get a replacement rate of 37.8 percent.

Now calculate the percentage differences in replacement rates: 1 – 37.8%/40% = 5.5%. In dollar terms, benefits for the 1947 cohort are around 5.5 percent lower than needed to maintain the same replacement rate received by the 1946 cohort. This was the point I attempted to make in the Forbes article.

Now, there are many possible "notches" that can be created by the benefit formula and there are other things going on that might reduce the cut for the 1947 cohort a little. I'll get into them as I write on this more.

Would the Baucus health plan “raid” Social Security?

noreply@blogger.com (Andrew G. Biggs) — Tue, 20 Oct 2009 00:14:00 +0000

I say yes, over at National Review Online.

Baucus Plan Would Raid Social Security

The health legislation sponsored by Senate Finance Committee chairman Max Baucus (D., Mont.) received an apparent boost when the Congressional Budget Office stated it would reduce the budget deficit by $81 billion over the next ten years. Obama administration budget director Peter Orszag crowed that the CBO scoring "demonstrates that we can expand coverage and improve quality while being fiscally responsible."

But the CBO analysis actually leads to a very different conclusion: that in a classic "raid" on Social Security, Baucus's ostensible fiscal responsibility depends on raising Social Security taxes today to paper over new health spending, ignoring that those increased Social Security taxes imply higher benefit costs down the road. This marks yet another gimmick in a health-reform debate defined by contrivances.

Orszag recently outlined the Obama administration's standards for health-care financing, saying that "health care reform must be deficit neutral over the next decade (as well as being deficit neutral in the tenth year alone)." Balancing revenues and costs over the next ten years purportedly addresses short-term deficit concerns, while balancing in the tenth year signals that a plan won't generate longer-term shortfalls. President Obama says he will not sign legislation that fails these tests.

Unlike other congressional proposals, the Baucus legislation appears to meet Obama's criteria. Baucus's plan purportedly would improve the budget balance by $81 billion from 2010 through 2019, and in 2019 itself would cut the deficit by $12 billion. It's no surprise the media treats Baucus's plan as if it belongs to Obama himself.

But the devil is in the details of the CBO memo. CBO breaks down the Baucus plan's budgetary effects into those occurring "on budget" (where the substantive policy changes are) and those "off budget" (meaning through the Social Security program). The Baucus plan's on-budget provisions would reduce the ten-year budget deficit by a tiny $1 billion and in 2019 would increase borrowing by $6 billion. In the real world, where entitlement costs rise faster than projected and Congress fails to implement promised cuts to Medicare spending, the Baucus plan will doubtless generate significant deficits.

Meanwhile, the Baucus plan's fiscal skullduggery takes place off-budget. Social Security revenues would increase by $80 billion over ten years, with an $18 billon increase in 2019 alone. Around 3 million individuals would leave employer-sponsored health coverage — which is exempt from taxes — to purchase insurance through a subsidized "exchange." Leaving employer-sponsored coverage would raise workers' taxable wages and thereby boost Social Security revenues. Millions more would trade a portion of their insurance benefits for higher wages to avoid a new tax on high-cost policies. By skimming the new Social Security taxes, the Baucus plan appears to significantly cut the deficit when, in truth, it balances only by the skin of its teeth.

This is perhaps the clearest example of "raiding the trust fund" on record. Democrats and Republicans have long believed that Social Security surpluses encourage the rest of the budget to run larger deficits, as borrowing from Social Security does not increase the measured budget deficit or the publicly-held national debt. But it's difficult to tell whether any particular legislation comprises a "raid," since the legislation might be passed even in the absence of Social Security surpluses.

In the case of the Baucus proposal, however, it is incontrovertible. The plan does not simply rely on existing Social Security surpluses but creates new ones to offset higher spending on health coverage. Without new Social Security revenues the plan would not balance and, if the president is to be believed, would face a presidential veto. It's that simple: no new Social Security taxes, no new spending.

A health debate that began with earnest claims that we could "bend the cost curve" to cut costs while increasing quality has devolved to a farce in which vastly increased government spending is papered over with implausible spending cuts and dubious bookkeeping.

— Andrew G. Biggs is a resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration.

John Berry on Social Security Politics

noreply@blogger.com (Andrew G. Biggs) — Mon, 19 Oct 2009 17:26:00 +0000

John M. Berry comments for Reuters on the politics of the Social Security COLA:

The White House's knee-jerk reaction to the news that inflation was so low that Social Security beneficiaries won't get a cost-of-living increase next year was a seriously bad omen for long-term control of federal spending.

The problem wasn't the $13 billion cost of another one-time $250 payment to each retiree proposed by President Barack Obama. No, it was the utter disregard of the discipline inherent in indexing payments to changes in consumer prices.

Click here to read the whole article – it's a good history of the policy and politics of COLAs.

How different is inflation for seniors versus working age Americans?

noreply@blogger.com (Andrew G. Biggs) — Mon, 19 Oct 2009 13:12:00 +0000

Over at AEI's The American online magazine.

Now I know why I don’t watch CBS News…

noreply@blogger.com (Andrew G. Biggs) — Sun, 18 Oct 2009 15:24:00 +0000

For what little it's worth, here's how CBS News reported on the COLA controversy.

What's striking is that in a two-and-a-half minute segment – which is in-depth journalism by today's standards – CBS interviewed precisely no one who opposed paying an ad hoc COLA this year, despite ample reason to believe it's unjustified (when both the Wall Street Journal and the Washington Post editorialize against it, you can be pretty sure something's gone wrong).

Come on, people – at least pretend to get both sides of the story.

Do seniors deserve higher Social Security benefits?

noreply@blogger.com (Andrew G. Biggs) — Sun, 18 Oct 2009 14:30:00 +0000

Peter Grier of the Christian Science Monitor weighs in.

US seniors will be able to buy more with their Social Security checks this year, even though they won't be getting extra cash via a cost of living adjustment (COLA), according to some analysts.

That is because the price of goods and services in America has fallen significantly since the period on which the last Social Security benefit increase was based. In addition, for most Social Security recipients, Medicare Part B premiums – which are deducted from their government checks – will be frozen.

The bottom line? The purchasing power of a typical retiree will jump by about $725 next year, according to Andrew Biggs, a former deputy commissioner of Social Security.

That calls into question the necessity of Congress voting seniors a one-time $250 payment, as President Obama has proposed, writes Mr. Biggs, now a scholar at the American Enterprise Institute, in a new analysis.

"An ad hoc COLA payment is unnecessary and could lead to larger costs down the road," writes Biggs.

Check out the whole article.

Social Security benefits haven’t risen in generations. Really?

noreply@blogger.com (Andrew G. Biggs) — Sat, 17 Oct 2009 17:40:00 +0000

A friend brings to my attention an otherwise-interesting post by Kevin Drum discussing the recent Social Security COLA imbroglio. Drum makes the interesting point that annual COLAs give the impression of rising benefits even when the real buying power of benefits stays the same. (Economists call this "money illusion" and it's the source of a number of problems.)

But Drum takes things a bit far. He says that

Technical arguments about CPI calculations aside, the fact is that seniors haven't gotten a benefit increase for decades. It's just not the way the program works. But the fact that their checks keep going up makes it seem like they have.

Now, it's true that for current beneficiaries benefits haven't gone up, unless one pays attention to technical arguments regarding whether the current CPI overstates the rate of inflation. (Of course, if you do pay attention to those technical arguments, then – at least according to Northwester economist professor Robert Gordon – it's possible the that real value of benefits has been rising by 1 percent or more above the rate of inflation.)

But that ignores another point: the real value of benefits for new retirees has been rising consistently. That is, a new retiree this year doesn't get the same benefits as a new retiree last year; rather, he or she receives higher benefits. (Or at least they should; if I'm right about the new Social Security "notch" then they actually get lower benefits, but that's another story…). The chart below shows the real benefit level for new, medium wage retirees in years from 1998 through 2018.

As you can see, benefits increase pretty significantly: a new retiree in 2018 receive benefits around 29 percent higher in real terms than a new retiree in 1998. A prominent reform proposal "price indexing" would arrest this increase: rather than having benefits rise with wages from cohort to cohort, they would rise only with inflation. In effect, price indexing would be an inflation-adjusted freeze on future benefit growth. While this has been proposed, however, it's definitely not what we've seen over the past several decades.

In Semi-Semi-Defense of Obama’s Social Security Pandering

noreply@blogger.com (Andrew G. Biggs) — Fri, 16 Oct 2009 13:14:00 +0000

I discuss Matt Yglesias's semi-defense of President Obama's COLA plan over at AEI's Enterprise Blog.

Republican proposes alternative $250 COLA payment

noreply@blogger.com (Andrew G. Biggs) — Fri, 16 Oct 2009 13:10:00 +0000

A friend informs me that Rep. Ginny Brown-Waite (R-FL) has proposed legislation to make a $250 lump sum payment to all Social Security beneficiaries and veterans, with the payments funded out of unused funds from this year's stimulus legislation. The bill is cosponsored by Reps. Patrick Tiberi (R-OH) and Dave Reichert (R-WA).

My usual objections apply: seniors haven't been disadvantaged by not receiving a COLA; seniors haven't been the hardest hit by the recession; and lump sum payments to retirees probably aren't the best way to stimulate the economy. That said, assuming the legislation is funded out of existing stimulus funds, the lump sum payments are probably better than more cash for clunkers, bike paths and museums of organized crime. For what that's worth.

Obama Nominates Blahous as Social Security Trustee

noreply@blogger.com (Andrew G. Biggs) — Thu, 15 Oct 2009 20:01:00 +0000

In one of his best moves to date, President Obama nominated Chuck Blahous to be one of Social Security's public trustees. Here's the announcement:

THE WHITE HOUSE

Office of the Press Secretary
___________________________________________________________________________
For Immediate Release October 14, 2009

President Obama Announces Intent to Nominate
Charles Blahous as Member of the Board of Trustees
of the Social Security Trust Funds

WASHINGTON – Today, President Barack Obama announced his intent to nominate Charles Blahous as Member of The Board of Trustees of the Social Security Trust Funds.

President Obama announced his intent to nominate the following individual today:

Charles Blahous, Nominee for Member, Board of Trustees of the Social Security Trust Funds

Chuck Blahous is a Senior Fellow at the Hudson Institute, specializing in domestic economic policy. Prior to joining the Hudson Institute, Blahous served as Deputy Director of President Bush's National Economic Council. From 2001-2007, Blahous served as a Special Assistant to the President for Economic Policy, first covering retirement security issues and later also encompassing energy policy. In 2001, Blahous served as the Executive Director of the bipartisan President's Commission to Strengthen Social Security, co-chaired by Dick Parsons and the late U.S. Senator Daniel P. Moynihan (D-NY), which submitted a unanimous report to President Bush in December, 2001. From 2000-01, Blahous led the Alliance for Worker Retirement Security. From 1996-2000, he served as Policy Director for U.S. Senator Judd Gregg (R-NH), staffing the Senator's co-chairmanship of the National Commission on Retirement Policy, as well as the Senator's initiatives in retirement and health care reform. From 1989-96, Blahous served in the office of Senator Alan Simpson (R-WY), first as a Congressional Science Fellow sponsored by the American Physical Society, and in 1994-96 as the Senator's Legislative Director. There, Blahous staffed the Senator on the bipartisan Commission on Entitlement and Tax Reform. Blahous has a Ph.D. in computational quantum chemistry from the University of California/Berkeley, and an A.B. from Princeton University, where he won the McKay Prize in Physical Chemistry.

One small comment: As much as White House officials are often accused of controlling the Social Security Trustees process, this may be the first time that Chuck – perhaps the longest serving economic policy staffer in the Bush White House – will attend a Trustees meeting or truly get involved in the process. It's a very interesting and important process, though, and one which Chuck is suited for and will enjoy.

It’s official: No COLA (justified) next year, but you’ll probably get one anyway…

noreply@blogger.com (Andrew G. Biggs) — Thu, 15 Oct 2009 19:47:00 +0000

The Social Security Administration today officially announced what had long been suspected: that no Cost of Living Adjustment to retirement, disability and survivors benefits will be paid next year. As has been discussed here ad nauseum, the Consumer Price Index dropped rapidly after the last COLA was calculated in October of 2008, so overall prices today are still below that level. Instead of paying a negative COLA, Social Security simply will pay no COLAs until prices rise to match the level as of the fall of last year. Sounds fair to me, but apparently not to others.

Some links and thoughts:

Here's SSA's fact sheet with details of the COLA and other benefit amounts that may or may not change based on the lack of a COLA.
But don't worry, seniors, it seems that President Obama has endorsed proposals to give all seniors a $250 ad hoc payment this year. Wisely, the Obama administration stuck to a theme of helping those in need and stimulating the economy rather than trying to make a substantive inflation-based case for the payment. (That said, seniors are hardly the most in need in the current recession and it's not clear how well these payments work as stimulus. I didn't say it was a good argument, just better than the alternative.)
The payments would cost around $13 billion; no talk of finding ways to actually pay for this, but when you're already $1.4 trillion in the hole I guess they figure there's not much point in being coy.
The Obama policy is less bad than the Republican alternatives from Reps. Walter Jones (NC) and Rodney Alexander (LA). These would have given all beneficiaries a 3 percent increase (2.9 percent in Alexander's proposal; got to be fiscally responsible these days…) but then build future COLAs on top so that benefits would always be 3 percent higher. My guestimate is that these plans could cost close to $200 billion over the long run, so I guess we dodge a bullet on that one.
Interestingly, the SSA itself has endorsed the administration's proposal. It's a little out of the ordinary for the agency to get involved in these things, but since it's probably going to happen anyway probably no harm in jumping on the bandwagon.

New paper: “Case For a Social Security Cost-Of-Living Adjustment in 2010 Is Weak”

noreply@blogger.com (Andrew G. Biggs) — Wed, 14 Oct 2009 19:03:00 +0000

From the Department of Strange Bedfellows, the Center on Budget and Policy Priorities today released an issue brief titled "Case For a Social Security Cost-Of-Living Adjustment in 2010 Is Weak" that examines argument for paying an ad hoc COLA next year.

Under current law, there will be no cost-of-living adjustment (COLA) in Social Security in 2010 — the first time that has happened since automatic cost-of-living adjustments began in 1975. Several bills before Congress would grant a special increase in Social Security payments for 2010.

The inflation data, however, do not support an increase: overall consumer prices have fallen significantly in the past year and are not expected to return to their earlier peak until mid-2011. In addition, when no Social Security COLA is provided, Medicare Part B premiums — which are deducted from Social Security checks — are frozen for most beneficiaries so that the Social Security checks do not drop (see the box on page 5).

If policymakers nevertheless choose to act, they should grant a flat, one-time payment as an economic stimulus measure rather than an across-the-board percentage increase that undermines the mechanics and purpose of Social Security's indexing provisions

Couldn't have said it better myself. It's a very well presented paper.

My own AEI paper on the COLA came to very similar conclusions.