Notes on Social Security Reform

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.

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Wed, 07 Dec 2011 14:05:00 +0000

"First-Round Impacts of the 2008 Chilean Pension System Reform"
Michigan Retirement Research Center Research Paper No. WP 2011-245

JERE R. BEHRMAN, University of Pennsylvania - Department of Economics
Email: jbehrman@econ.upenn.edu
MARIA CECILIA CALDERON, affiliation not provided to SSRN
Email: ceciliacalderon@sinectis.com.ar
OLIVIA S. MITCHELL, University of Pennsylvania - Insurance & Risk Management Department, National Bureau of Economic Research (NBER), University of Pennsylvania - Business & Public Policy Department
Email: mitchelo@wharton.upenn.edu
JAVIERA VASQUEZ, affiliation not provided to SSRN
Email: Javiera.vasquez@gmail.com
DAVID BRAVO, University of Chile
Email: dbravo@decon.facea.uchile.cl

Chile's innovative privatized pension system has been lauded as possible model for Social Security system overhauls in other countries, yet it has also been critiqued for not including a strong safety net for the uncovered sector. In response, the Bachelet government in 2008 implemented reforms to rectify this shortcoming. Here we offer the first systematic effort to directly evaluate the reform's impacts, focusing on the new Basic Solidarity Pension for poor households with at least one person age 65. Using the Social Protection Survey, we show that targeted poor households received about 2.4 percent more household annual income, with little evidence of crowding-out of private transfers. We also suggest that recipient household welfare probably increased due to slightly higher expenditures on basic consumption including healthcare, more leisure hours, and improved self-reported health. While measured short-run effects are small, follow-ups will be essential to gauge longer-run outcomes.

"Differences in Portfolios Across Countries: Economic Environment Versus Household Characteristics"
Review of Economics and Statistics, Forthcoming

DIMITRIS CHRISTELIS, Centre for Studies in Economics and Finance (CSEF), University of Naples Federico II, Center for Financial Studies (CFS)
Email: dimitris.christelis@gmail.com
DIMITRIS GEORGARAKOS, University of Frankfurt, Center for Financial Studies (CFS)
Email: Georgarakos@wiwi.uni-frankfurt.de
MICHAEL HALIASSOS, Goethe University Frankfurt - Faculty of Economics and Business Administration, Goethe University Frankfurt - Center for Financial Studies (CFS), CEPR, Goethe University Frankfurt - House of Finance
Email: Haliassos@wiwi.uni-frankfurt.de

We use cross-country micro-data and counterfactual methods to document international differences in ownership and holdings of stocks, private businesses, homes, and mortgages among older households in thirteen countries. We decompose these differences into two parts, related to population characteristics and economic environments. Shortly prior to the recent financial crisis, US households tended to invest more in stocks and less in homes, and to have larger mortgages than Europeans of similar characteristics. Differences in ownership and amounts are primarily linked to differences in economic environments that are more pronounced among European countries than among US regions, suggesting considerable potential for harmonization.

"German Private Pension Law: Current State and Future Directions"
IMAGINING THE IDEAL PENSION SYSTEM: INTERNATIONAL PERSPECTIVES, Dana M. Muir and John A. Turner, eds., Upjohn Institute, 2011

MARKUS ROTH, University of Marburg - Faculty of Law
Email: markus.roth@staff.uni-marburg.de

Germany's occupational pension system should provide employees with investment choices and encourage higher participation rates. The latter goal should be realized through automatic enrollment in occupational pension schemes, giving employees the possibility to opt-out. Incentives for automatic enrollment should be set by the Occupation Pensions Act or by tax law, at least with regard to large employers. Cost-effective individual choices for employees should be promoted through including defined contribution pensions in the German Occupational Pensions Act. Offering investment alternatives with different risk profiles would allow employees to find solutions corresponding with their individual risk preferences. In light of typical German saving behavior and the corresponding expectations of beneficiaries, a traditional insurance product should be chosen as the default investment product.

"Social Security Benefits: Windfall Elimination Provision"
Orange County Lawyer, Vol. 35, No. 12, p. 30, December 2011

FRANCINE J. LIPMAN, University of Nevada, Las Vegas - William S. Boyd School of Law
Email: lipman@chapman.edu
JAMES E. WILLIAMSON, San Diego State University - College of Business Administration
Email: james.williamson@sdsu.edu

Twenty-five percent of all public employees, or more than five million state and local workers as well as one million federal workers, participate in alternative plans to Social Security. These employers and employees do not pay Social Security taxes or receive Social Security credit for their wages. These non-Social Security pension benefits can supplement and diversify a retirement income portfolio that includes Social Security benefits if the worker can structure his career to otherwise qualify for Social Security benefits. Not surprisingly the interplay of Social Security with alternative pensions can be confusing and does have traps for the unwary, including the windfall elimination provision, but rewards for strategic planners. This article will describe this interplay and demonstrate undue hardships in the existing structure and suggest strategies for maximizing aggregate retirement income benefits.

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Tue, 29 Nov 2011 15:06:00 +0000

"Tax Reform Options: Promoting Retirement Security"
EBRI Issue Brief, No. 364, November 2011

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)
Email: vanderhei@ebri.org

This paper analyzes two recent proposals to change the existing tax treatment of 401(k) retirement plans and is based on EBRI's proprietary Retirement Security Projection Model.™ Currently, the combination of worker and employer contributions in a defined contribution plan is capped by the federal tax code at the lesser of $49,000 per year or 100 percent of a worker's compensation (participants over age 50 can make additional "catch-up" contributions). As part of the effort to lower the federal deficit and reduce federal "tax expenditures," two major reform proposals have surfaced that would change current tax policy toward retirement savings: (1) a plan that would end the existing tax deductions for 401(k) contributions and replace them with a flat-rate refundable credit that serves as a matching contribution into a retirement savings account; (2) the so-called "20/20 cap," included by the National Commission on Fiscal Responsibility and Reform in their December 2010 report, "The Moment of Truth," which would limit the sum of employer and worker annual contributions to the lower of $20,000 or 20 percent of income, the so-called "20/20 cap." If the current exclusion of worker contributions for retirement savings plans were ended in 2012 and the total match remains constant, the average reductions in 401(k) accounts at Social Security normal retirement age would range from a low of 11.2 percent for workers currently ages 26-35 in the highest-income groups, to a high of 24.2 percent for workers in that age range in the lowest-income group. Earlier EBRI analysis of enacting the 20/20 cap starting in 2012 showed it would, as expected, most affect those with high income. However, EBRI also found the cap would cause a significant reduction in retirement savings by the lowest-income workers as well, and younger cohorts would experience larger reductions given their increased exposure to the proposal. A key factor in future retirement income security is whether a worker has access to a retirement plan at work. EBRI has found that voluntary enrollment in 401(k) plans under the current set of tax incentives has the potential to generate a sum that, when combined with Social Security benefits, would replace a sizeable portion of a worker's preretirement income, and that auto-enrollment could produce even larger retirement accumulations. The potential increase of at-risk percentages resulting from (1) employer modifications to existing plans, and (2) a substantial portion of low-income households decreasing or eliminating future contributions to savings plans as a reaction to the proposed elimination of the exclusion of employee contributions for retirement savings plans from taxable income, needs to be analyzed carefully when considering the overall impact of proposals to change existing tax incentives for retirement savings.

"How Prepared are State and Local Workers for Retirement?"

JEAN-PIERRE AUBRY, Center for Retirement Research at Boston College
Email: aubryj@bc.edu
LAURA QUINBY, Boston College - Center for Retirement Research
Email: quinbyl@bc.edu
ALICIA MUNNELL, Boston College - Center for Retirement Research
Email: MUNNELL@BC.EDU
JOSH HURWITZ, affiliation not provided to SSRN

A widespread perception is that state-local government workers receive high pension benefits which, combined with Social Security, provide more than adequate retirement income. This study uses the Health and Retirement Study (HRS) and actuarial reports to test this hypothesis. The major finding from the HRS analysis is that most households with state-local employment end up with replacement rates that, while on average higher than those in the private sector, are well below the 80 percent needed to maintain pre-retirement living standards. Even those households with a long-service state-local worker – those who spend more than half of their careers in public employment – have a median replacement rate, including Social Security, of only 72 percent. And this group accounts for less than 30 percent of state-local households. The remaining 70 percent of households with a short- or medium-tenure state-local worker have replacement rates of 48 percent and 57 percent, respectively. Adding income from financial assets still leaves most state-local households short of the target.

"Do Couples Self-Insure? The Effect of Informal Care on a Couple's Labor Supply"

NORMA B. COE, Boston College - Center for Retirement Research
Email: norma.coe.1@bc.edu
MEGHAN SKIRA, Boston College - Center for Retirement Research
Email: skira@bc.edu
COURTNEY VAN HOUTVEN, Duke University
Email: courtney.vanhoutven@duke.edu

How does informal care provision to an elderly parent affect the labor supply outcomes of a couple? Previous work examines the relationship between caregiving and the labor market decisions of the care provider, but ignores any labor supply response of the spouse to such decisions. Using data from the Health and Retirement Survey, we examine how informal care provision affects the labor supply of both members of a couple, at both the intensive and extensive margins. Such analysis is especially important for evaluating informal care's potential effect on retirement timing and household wealth accumulation. We find that providing personal care to an elderly parent reduces a married man's chance of working by 3.2 percentage points, but providing such care does not affect a married woman's chance of working. Additionally, male labor force decisions remain inelastic in response to the wife's caregiving behavior. Working married women do adjust their hours of work in response to caregiving, but in the opposite direction that within-couple insurance would suggest. Instead, the woman increases her work by one hour a week if she is the only care provider, and decreases her work when the husband is the only care provider. When both members of the couple provide informal care these effects cancel out.

"Spending Flexibility and Safe Withdrawal Rates"

MICHAEL S. FINKE, Texas Tech University, University of Missouri at Columbia - Department of Finance
Email: michael.finke@ttu.edu
WADE PFAU, National Graduate Institute for Policy Studies (GRIPS)
Email: wpfau@grips.ac.jp
DUNCAN WILLIAMS, affiliation not provided to SSRN
Email: Duncan.Williams@ttu.edu

Shortfall risk retirement income analyses offer little insight into how much risk is optimal, and how risk tolerance affects retirement income decisions. This study models retirement income risk in a manner consistent with risk tolerance in portfolio selection in order to estimate optimal asset allocations and withdrawal rates for retirees with different risk attitudes. We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk averse clients with moderate guaranteed income sources. The ability to accept greater shortfall probabilities means that risk tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio. A risk tolerant client may prefer a withdrawal rate of between 5 and 7 percent with a guaranteed income of $20,000. The optimal retirement portfolio allocation to stock increases by between 10 and 30 percentage points and the optimal withdrawal rate increases by between 1 and 2 percentage points for clients with a guaranteed income of $60,000 instead of $20,000.

"The Demand for Social Insurance: Does Culture Matter?"
University of Zurich Department of Economics Working Paper No. 41

BEATRIX BRÜGGER, University of Lausanne
Email: beatrix.bruegger@unil.ch
RAFAEL LALIVE, University of Lausanne - Department of Economics (DEEP), Institute for the Study of Labor (IZA), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: Rafael.Lalive@unil.ch
ANDREAS STEINHAUER, University of Zurich
Email: steinhauer@iew.uzh.ch
JOSEF ZWEIMUELLER, University of Zurich - Department of Economics, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Institute for the Study of Labor (IZA)
Email: zweim@iew.unizh.ch

Can different social groups develop different demands for social insurance of risks to health and work? We study this issue across language groups in Switzerland. Language defines social groups and Swiss language groups are separated by a clear geographic border. Actual levels of social insurance are identical on either side of the within state segments of the language border. We can therefore study the role of culture in shaping the demand for social insurance. Specifically, we contrast at the language border actual voting decisions on country-wide changes to social insurance programs. Key results indicate substantially higher support for expansions of social insurance among residents of Latin-speaking (i.e. French, Italian, or Romansh) border municipalities compared to their German-speaking neighbors in adjacent municipalities. We consider three possible explanations for this finding: informal insurance, ideology, and the media. We find that informal insurance does not vary enough to explain stark differences in social insurance. However, differences in ideology and segmented media markets are potentially important explanatory factors.

"Diversity and Defined Contribution Plans: The Role of Automatic Plan Features"

STEPHEN P. UTKUS, Vanguard Group, Inc.
Email: steve_utkus@vanguard.com
CYNTHIA A. PAGLIARO, The Vanguard Group, Inc.
Email: cynthia_a_pagliaro@vanguard.com

In a sample of seven large defined contribution (DC) plans, automatic enrollment reduces differences in savings and investment behavior associated with race and ethnicity. Participation rates rise across the board with automatic enrollment, but particularly for blacks and Hispanics. Automatically enrolled whites and Asians are more likely to override the default deferral rate than blacks and Hispanics, leading to a difference in deferral rates. Automatic enrollment to a default target-date fund equalizes risk-taking and reduces extreme portfolio allocations for all groups.

New issue brief: "Disability Insurance: Does Extending Unemployment Benefits Help?"

noreply@blogger.com (Andrew G. Biggs) — Mon, 21 Nov 2011 21:18:00 +0000

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

"Disability Insurance: Does Extending Unemployment Benefits Help?"

by Matthew S. Rutledge

The brief's key findings are:

Jobless individuals tend to delay applying for disability insurance (SSDI) until their extended unemployment insurance (UI) runs out.
Those who do apply for SSDI while still on unemployment are more likely to be approved, suggesting they are less healthy than those who delay.
UI extensions do not appear to reduce SSDI costs, because any given application is more likely to be approved due to worsening health or poor job prospects.

The brief is available here.

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Fri, 18 Nov 2011 12:32:00 +0000

SOCIAL SECURITY, PENSIONS & RETIREMENT INCOME eJOURNAL

"Optimal Discrete Ratchet Consumption"

JOHN G. WATSON, Financial Engines, Inc., Stanford University - Graduate School of Business
Email: jwatson@financialengines.com
JASON S. SCOTT, Financial Engines, Inc.
Email: jscott@financialengines.com

Philip Dybvig (1995) found optimal spending and investment strategies for endowments with zero tolerance for spending declines. His spending rule is a ratchet - spending never decreases, but has a substantial chance of increasing. Many retirees find this strategy appealing, and in this paper, we find an optimal consumption rule for them. In particular, we solve a discrete-time, finite-horizon version of the ratchet problem. Further, we generalize the utility's felicity and time preference functions, so that we can tailor a solution to a retiree's specific preferences. For optimality, a spending rule must be paired with an investment rule. Here, we investigate dynamic investment strategies - we treat consumption as a derivative security and derive formulas for its delta-hedge.

"The 2006 Earnings Public-Use Microdata File: An Introduction"
Social Security Bulletin, Vol. 71, No. 4, pp. 33-59, 2011

MICHAEL COMPSON, Office of Research, Evaluation and Statistics
Email: michaelcompson@ssa.gov

This article introduces the 2006 Earnings Public-Use File (EPUF) and provides important background information on the file's data fields. The EPUF contains selected demographic and earnings information for 4.3 million individuals drawn from a 1-percent sample of all Social Security numbers issued before January 2007. The data file provides aggregate earnings for 1937 to 1950 and annual earnings data for 1951 to 2006. The article focuses on four key items: (1) the Social Security Administration's experiences collecting earnings data over the years and their effect on the data fields included in EPUF; (2) the steps taken to "clean" the underlying administrative data and to minimize the risk of personal data disclosure; (3) the potential limitations of using EPUF data to estimate Social Security benefits for some individuals; and (4) frequency distributions and statistical tabulations of the data in the file, to provide a point of reference for EPUF users.

"What Can We Learn from Analyzing Historical Data on Social Security Entitlements?"
Social Security Bulletin, Vol. 71, No. 4, pp. 1-13, 2011

JOYCE MANCHESTER, Government of the United States of America - Congressional Budget Office (CBO)
Email: joyce.manchester@cbo.gov
JAE SONG, U.S. Social Security Administration
Email: jae.song@ssa.gov

We use data from Social Security administrative records to examine the lifetime patterns of initial entitlement to retired-worker and Disability Insurance (DI) benefits across cohorts born in different years. Breaking out age-at-entitlement patterns for different birth-year cohorts reveals close adherence in entitlement ages to changes in program rules, such as increasing the full retirement age. The proportion of a cohort that becomes newly entitled to DI benefits rises noticeably during recessions and at ages 50 and 55, and cumulative entitlement rate patterns show that more recent cohorts rely increasingly on DI benefits in their late 30s and 40s.

"Behavioral and Psychological Aspects of the Retirement Decision"
Social Security Bulletin, Vol. 71, No. 4, pp. 15-32, 2011

MELISSA KNOLL, Social Security Administration - Office of Retirement Policy
Email: melissa.knoll@ssa.gov

The majority of research on the retirement decision has focused on the health and wealth aspects of retirement. Such research concludes that people in better health and those enjoying a higher socioeconomic status tend to work longer than their less healthy and less wealthy counterparts. While financial and health concerns are a major part of the retirement decision, there are other issues that may affect the decision to retire that are unrelated to an individual's financial and health status. Judgment and decision-making and behavioral-economics research suggests that there may be a number of behavioral factors influencing the retirement decision. The author reviews and highlights such factors and offers a unique perspective on potential determinants of retirement behavior, including anchoring and framing effects, affective forecasting, hyperbolic discounting, and the planning fallacy. The author then describes findings from previous research and draws novel connections between existing decision-making research and the retirement decision.

"Caregiver Credits in France, Germany, and Sweden: Lessons for the United States"
Social Security Bulletin, Vol. 71, No. 4, pp. 61-76, 2011

JOHN JANKOWSKI, Government of the United States of America - Social Security Administration
Email: John.Jankowski@ssa.gov

Recently, analysts in the United States (US) have proposed adopting caregiver credits, or pension credits, provided to individuals for time spent out of the workforce while caring for dependent children and sick or elderly relatives. The primary objective of these credits, used in almost all public pension systems in the European Union, is to improve the adequacy of old-age benefits for women whose gaps in workforce participation typically lead to fewer years of contributions, lower lifetime average earnings, and consequently lower pensions. This article examines caregiver credits in the context of future reforms to the US Social Security system, with attention given to the adequacy of current spouse and survivor benefits and how changing marital patterns and family structures have increased the risk of old-age poverty among certain groups of women. It then analyzes caregiver credit programs in selected countries, with particular focus on design, administration, and cost.

New paper: “How Reforms Would Affect Social Security’s Funding Shortfalls, Total Spending, and Distribution of Benefits and Taxes”

noreply@blogger.com (Andrew G. Biggs) — Wed, 09 Nov 2011 14:13:00 +0000

The National Center for Policy Analysis released a new paper, "How Reforms Would Affect Social Security's Funding Shortfalls, Total Spending, and Distribution of Benefits and Taxes,"
by Liqun Liu and Andrew J. Rettenmaier. Here's the summary:

Entitlement reform has dominated the ongoing debate over reducing the federal government's persistent deficits and mounting debt. Together Medicare and Social Security account for a third of current federal spending and will continue to grow as a share of both the economy and federal spending in coming years. Since the inception of Medicare and Social Security, numerous reforms have been proposed. This study focuses on Social Security reform, examining four types of reform that represent the range of most commonly mentioned options.

Click here to read the entire article.

Cut the budget and reduce inequality – by cutting Social Security?

noreply@blogger.com (Andrew G. Biggs) — Wed, 09 Nov 2011 12:00:00 +0000

Over at NPR, Marilyn Geewax outlines some of the interesting cross-currents in the Social Security debate: one of the sources of income inequality is the country is that seniors are a lot better off than younger Americans, in part due to programs like Social Security. At the same time, both Republicans and Democrats tell pollsters it's extremely important to protect the program. That makes the supercommittee's job tricky.

New papers from the National Bureau of Economic Research

noreply@blogger.com (Andrew G. Biggs) — Mon, 31 Oct 2011 11:13:00 +0000

The Composition and Draw-down of Wealth in Retirement by James M. Poterba, Steven F. Venti, David A. Wise - #17536 (AG EFG PE)

Abstract: This paper presents evidence on the resources available to households as they enter retirement. It draws heavily on data collected by the Health and Retirement Study and calculates the "potential additional annuity income" that households could purchase, given their holdings of non-annuitized financial assets at the start of retirement.

Even if households used all of their financial assets inside and outside personal retirement accounts to purchase a life annuity, only 47 percent of households between the ages of 65 and 69 in 2008 could increase their life-contingent income by more than $5,000 per year.

At the upper end of the wealth distribution, however, a substantial number of households could make large annuity purchases. The paper also considers the role of housing equity in the portfolios of retirement-age households, and explores the extent to which households draw down housing equity and financial assets as they age.

Many households appear to treat housing equity and non-annuitized financial assets as "precautionary savings," tending to draw them down only when they experience a shock such as the death of a spouse or a period of substantial medical outlays. Because home equity is often conserved until very late in life, for many households it may provide some insurance against the risk of living longer than expected.

http://papers.nber.org/papers/W17536

How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study? by Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai - #17547 (AG EFG LS PE)

Abstract: 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 their 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.

http://papers.nber.org/papers/W17547

What can the presidential candidates learn from Social Security privatization abroad?

noreply@blogger.com (Andrew G. Biggs) — Fri, 28 Oct 2011 15:17:00 +0000

Elaine Fultz of the National Academy of Social Insurance weighs in. She sums up:

The candidates should take a close look at countries where social security privatization is a reality. Based on their findings, they should explain to the public how they would meet its high transition costs, avoid erosion of worker accounts by private management fees, and deal with workers who are disadvantaged by financial market volatility.

Given where NASI stands on things, you're not likely to get the full story on the positive aspects of defined contribution pensions. And there ARE good answers to all of these questions. But still, her comments are worth reading since many policymakers haven't thought closely about these questions.

Finally, a COLA coming your way…

noreply@blogger.com (Andrew G. Biggs) — Fri, 21 Oct 2011 17:41:00 +0000

The AP reports on a 3.5 percent Cost of Living Adjustment for Social Security benefits in 2012. If you want a detailed look at how we got where we are on COLAs, here's my take for AEI.

New papers from the Social Science Research Network

noreply@blogger.com (Andrew G. Biggs) — Wed, 19 Oct 2011 19:27:00 +0000

SOCIAL SECURITY, PENSIONS & RETIREMENT INCOME eJOURNAL

"Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2010"
EBRI Issue Brief, No. 363, October 2011

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper examines the level of participation by workers in public- and private-sector employment-based pension or retirement plans, based on the U.S. Census Bureau's March 2011 Current Population Survey (CPS), the most recent data currently available (for year-end 2010). Among all working-age (21-64) wage and salary employees, 54.2 percent worked for an employer or union that sponsored a retirement plan in 2010. Among full-time, full-year wage and salary workers ages 21-64 (those with the strongest connection to the work force), 61.6 percent worked for an employer or union that sponsors a plan. Among full-time, full-year wage and salary workers ages 21-64, 54.5 percent participated in a retirement plan. This is virtually unchanged from 54.4 percent in 2009. Participation trends increased significantly in the late 1990s, and decreased in 2001 and 2002. In 2003 and 2004, the participation trend flattened out. The retirement plan participation level subsequently declined in 2005 and 2006, before a significant increase in 2007. Slight declines occurred in 2008 and 2009, followed by a flattening out of the trend in 2010. Participation increased with age (61.4 percent for wage and salary workers ages 55-64, compared with 29.2 percent for those ages 21-24). Among wage and salary workers ages 21-64, men had a higher participation level than women, but among full-time, full-year workers, women had a higher percentage participating than men (55.5 percent for women, compared with 53.8 percent for men). Female workers' lower probability of participation among wage and salary workers results from their overall lower earnings and lower rates of full-time work in comparison with males. Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan. The gap between the percentages of black and white plan participants that exists overall narrows when compared across earnings levels. Wage and salary workers in the South and West had the lowest participation levels (Florida had the lowest percentage, at 43.7 percent) while the upper Midwest, Mid-Atlantic, and Northeast had the highest levels (West Virginia had the highest participation level, at 64.2 percent). White, more highly educated, higher-income, and married workers are more likely to participate than their counterparts.

While individual factors are important, retirement plan participation by workers is also strongly tied to macroeconomic factors such as stock market returns and the labor market. Better macroeconomic conditions of the late 1990s resulted in higher levels of participation, while less positive macroeconomic conditions of the 2000s led to lower levels of participation. Regardless of the current direction, this trend has important implications for workers, since having more opportunities to participate in an employment-based retirement plan greatly increases the amount of money a retiree is likely to have in retirement. The downturns in the economy and stock market in 2008 and into 2009 showed a two-year decline in both the number and percentage of workers participating in an employment-based retirement plan. The 2010 levels stabilized as the economy was more stable but not experiencing strong growth, so these levels were just above the lowest levels set in 1997. The economy has improved but is still stagnant, which is likely to mean the 2011 numbers will see essentially no change or a decrease.

"Do Low-Income Workers Benefit from 401(K) Plans?"
Center for Retirement Research at Boston College Working Paper No. 2011-14

ERIC J. TODER, Urban Institute
Email: etoder@urban.org
KAREN E. SMITH, Urban Institute
Email: ksmith@ui.urban.org

Economists frequently assume that employees "pay for" employer-provided fringe benefits, such as contributions to retirement plans, in the form of reduced wages. Because low-income employees receive little tax benefit from saving in qualified retirement plans, however, and may prefer immediate consumption to additional retirement accruals, they may not be willing to accept a one dollar reduction in their wage in return for an additional dollar contributed to their 401(k) plan, while high income workers may be willing to give up more than a dollar in wages to get the tax benefit.

"Effects of Legal and Unauthorized Immigration on the US Social Security System"
Levy Economics Institute of Bard College Working Paper No. 689

SELCUK EREN, Bard College - Levy Economics Institute
Email: eren@levy.org
HUGO BENÍTEZ-SILVA, affiliation not provided to SSRN
Email: hbs@sagecomputing.com
EVA CARCELES-POVEDA, State University of New York (SUNY), Stony Brook - Department of Economics
Email: ecarcelespov@notes.cc.sunysb.edu

Immigration is having an increasingly important effect on the social insurance system in the United States. On the one hand, eligible legal immigrants have the right to eventually receive pension benefits but also rely on other aspects of the social insurance system such as health care, disability, unemployment insurance, and welfare programs, while most of their savings have direct positive effects on the domestic economy. On the other hand, most undocumented immigrants contribute to the system through taxed wages but are not eligible for these programs unless they attain legal status, and a large proportion of their savings translates into remittances that have no direct effects on the domestic economy. Moreover, a significant percentage of immigrants migrate back to their countries of origin after a relatively short period of time, and their savings while in the United States are predominantly in the form of remittances. Therefore, any analysis that tries to understand the impact of immigrant workers on the overall system has to take into account the decisions and events these individuals face throughout their lives, as well as the use of the government programs they are entitled to. We propose a life-cycle Overlapping Generations (OLG) model in a general equilibrium framework of legal and undocumented immigrants' decisions regarding consumption, savings, labor supply, and program participation to analyze their role in the financial sustainability of the system. Our analysis of the effects of potential policy changes, such as giving some undocumented immigrants legal status, shows increases in capital stock, output, consumption, labor productivity, and overall welfare. The effects are relatively small in percentage terms but considerable given the size of our economy.

"Trade-Offs in Means Tested Pension Design"

CHUNG TRAN, Australian National University (ANU) - School of Economics
Email: chung.q.tran@gmail.com
ALAN D. WOODLAND, University of New South Wales
Email: a.woodland@unsw.edu.au

Inclusion of means testing into age pension programs allows governments to better direct benefits to those most in need and to control funding costs by providing flexibility to control the participation rate (extensive margin) and the benefit level (intensive margin). The former is aimed at mitigating adverse effects on incentives and to strengthen the insurance function of an age pension system. In this paper, we investigate how means tests alter the trade-off between these insurance and incentive effects and the consequent welfare outcomes. Our contribution is twofold. First, we show that the means test effect via the intensive margin potentially improves the insurance aspect but introduces two opposing impacts on incentives, the final welfare outcome depending upon the interaction between the two margins. Second, conditioning on the compulsory existence of pension systems, we find that the introduction of a means test results in nonlinear welfare effects that depend on the level of maximum pension benefits. More specifically, when the maximum pension benefit is relatively low, an increase in the taper rate always leads to a welfare gain, since the insurance and the positive incentive effects are always dominant. However, when maximum pension benefits are relatively more generous the negative incentive effect becomes dominant and welfare declines.

AARP's offensive new ad campaign

noreply@blogger.com (Andrew G. Biggs) — Wed, 19 Oct 2011 14:48:00 +0000

The Concord Coalition's Diane Lim Rogers – aka, Economist Mom – writes in the Christian Science Monitor regarding the AARP's advertisements against reductions in Social Security and Medicare benefits, which Rogers calls "offensive." At the very least, it's highly deceptive – arguing that deficit hawks should focus on cutting "waste and tax loopholes" rather than entitlements. The "waste, fraud and abuse" storyline is about the oldest trick in the book when you're trying to avoid touch choices, and the real tax loopholes aren't for the top 1 percent but for people who buy homes, get health insurance from their employers, or save for retirement. I'm with Diane on this one.

New paper: How Would Seniors Fare Under the Bowles-Simpson Social Security Proposals?

noreply@blogger.com (Andrew G. Biggs) — Tue, 18 Oct 2011 12:19:00 +0000

"How Would Seniors Fare – By Age, Gender, Race and Ethnicity, and Income – Under the Bowles-Simpson Social Security Proposals by 2070?"
National Academy of Social Insurance: Social Security Brief, No. 39, September 2011

VIRGINIA P. RENO, National Academy of Social Insurance (NASI)
Email: vreno@nasi.org
ELISA WALKER, National Academy of Social Insurance (NASI)
Email: ewalker@nasi.org

Micro-simulation of future benefits shows how recommendations by Alan Simpson and Erskine Bowles, co-chairs of the deficit commission appointed by President Obama, would lower Social Security benefits for almost all (92 percent) of seniors entitled to benefits in 2070. The cuts would affect all age and income groups: 88 percent of young elders (ages 62-69) and 97 percent of the oldest (ages 90 and older) are projected to receive lower benefits, as are 81 percent of seniors in the lowest household income quintile, 93 percent of the middle quintile, and 97 percent of the top quintile. Major benefit reductions – of 20 percent or more below the benefits scheduled in current law – are projected to befall about one in three women and one in two men. Slightly more than one in four black and Hispanic elders would experience cuts of 20 percent or more, as would half of all white elders and nearly half (45 percent) of middle income elders. The simulations show how Social Security proposals that rely mainly on benefit cuts to achieve long-term solvency would weaken retirement income security for the children and grandchildren of today's retirees across age, gender, income, and racial and ethnic groups.

Would the Chilean model work in the U.S.?

noreply@blogger.com (Andrew G. Biggs) — Mon, 17 Oct 2011 18:23:00 +0000

Bloomberg takes a closer look at the Chilean pension model that presidential candidate Herman Cain wants to adapt to the United States. As I've argued before, it really all comes down to transition costs.

10 Things Social Security Won't Tell You

noreply@blogger.com (Andrew G. Biggs) — Tue, 11 Oct 2011 11:18:00 +0000

Some of these seem a bit hard on SSA, but interesting nonetheless.