Friday, September 26, 2014

Smith: “Does Social Security Impact the Federal Deficit?”

Brenton Smith, writing for FedSmith.com, hits on a point that others have missed in the question of how Social Security affects the overall budget deficit:

Social Security is not self-supporting as [Oregon Sen. Jeff Merkley] claims.  It receives by law (Public Law 98-21) annual general fund transfers, mainly the revenue from the taxation of Social Security benefits. This revenue appears on-budget, and is dollar for dollar deficit spending. Over the past three years, Social Security has by law created more than $75 billion of “On Budget” deficit – according to the Trustees.

As I’ve written for Real Clear Markets, I think the Social Security/budget deficit issue is broader than this: when we consider the “unified budget deficit,” which is by far the most common figure used regarding the federal budget, a decline in Social Security’s funding health has basically a dollar-for-dollar impact on the deficit. So if, say, Social Security for some reason collected $10 billion less this year than anticipated then the unified budget deficit will rise by $10 billion. The intergovernmental transfers to and from the trust funds matter for Social Security’s solvency, but on a budget-wide basis those cancel each other out.

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Tuesday, September 23, 2014

New publication: “Using Your House for Income in Retirement”

The Center for Retirement Research at Boston College has released a new consumer guide: “Using Your House for Income in Retirement,” by Steven Sass, Alicia H. Munnell, and Andrew Eschtruth

The booklet’s key points are:

  • Home equity is the largest store of wealth for retirees and, with reduced support from Social Security and pensions, many more will need it for retirement income.
  • The two ways to tap home equity are downsizing and a reverse mortgage.
  • Downsizing:
    • Adds to your savings, which boosts income from savings.
    • Frees up more income by reducing taxes, insurance, and upkeep.
  • A Reverse Mortgage:
    • Allows you to stay in your home.
    • Provides income through a line of credit, lump sum, or monthly payments.
A PDF of this booklet is available here.
Hard copies are available for purchase. Read more!

Wednesday, August 20, 2014

Paul Ryan on Progressive Price Indexing for Social Security Benefits

Here's Rep. Paul Ryan on Bloomberg TV talking about how he would bring Social Security benefits back into line with the program's revenues: reduce the growth of benefits for retirees who had high earnings over their lifetimes. (Sorry about the sizing of the video panel on some screens; here's a link to the original: http://www.bloomberg.com/video/paul-ryan-social-security-price-indexing-best-way-to-go-hs~oHDSuSOOh03YFUW2ilg.html

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Tuesday, August 19, 2014

CRFB: A Primer on General Revenue Transfers to Social Security

The Committee for a Responsible Federal Budget has published a nice review of how Social Security interacts with the rest of the federal budget – a subject that generates confusion even at the highest levels of government.

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Monday, August 18, 2014

New papers from the Social Science Research Network

"The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study"
Social Security Bulletin. 74(3): 55-69.

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

This article examines the Social Security Windfall Elimination Provision and Government Pension Offset. These provisions reduce the Social Security benefits of workers (and the resulting benefits of their spouses) if the prime beneficiary worked in “noncovered” employment (in which Social Security payroll taxes were not paid) that provided a pension, or if the spouse or survivor earned a pension from noncovered work. Using Health and Retirement Study data uniquely suited to the analysis, the authors calculate the household-level average lifetime benefit reductions resulting from these provisions and examine them in the context of lifetime Social Security income, pension income, and total wealth. The analysis also isolates the effects of pensions from noncovered employment on benefit adjustments and wealth.

"Health Effects of Containing Moral Hazard: Evidence from Disability Insurance Reform"
Tinbergen Institute Discussion Paper 14-102/V

PILAR GARCIA-GOMEZ, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Email: garciagomez@ese.eur.nl
ANNE C. GIELEN, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Email: gielen@ese.eur.nl

We exploit an age discontinuity in a Dutch disability insurance (DI) reform to identify the health impact of stricter eligibility criteria and reduced generosity. Women subject to the more stringent rule experience greater rates of hospitalization and mortality. A €1,000 reduction in annual benefits leads to a rise of 4.2 percentage points in the probability of being hospitalized and a 2.6 percentage point higher probability of death more than 10 years after the reform. There are no effects on the hospitalization of men subject to stricter rules but their mortality rate is reduced by 1.2 percentage points. The negative health effect on females is restricted to women with low pre-disability earnings. We hypothesize that the gender difference in the effect is due to the reform tightening eligibility particularly with respect to mental health conditions, which are mor e prevalent among female DI claimants. A simple back-of-the-envelope calculation shows that every dollar reduction in DI is almost completely offset by additional health care costs. This implies that policy makers considering a DI reform should carefully balance the welfare gains from reduced moral hazard against losses not only from less coverage of income risks but also from deteriorated health.

"Is Health Care an Individual Necessity? Evidence from Social Security Notch"

YUPING TSAI, Government of the United States of America - Centers for Disease Control and Prevention (CDC)
Email: ytsai@cdc.gov

This paper exploits Social Security legislation changes to identify the causal effect of Social Security income on out-of-pocket medical expenditures of the elderly. Using the household level consumption data from the 1986-1994 Consumer Expenditure Survey and an instrumental variables strategy, the empirical results show that the estimated income elasticities of out-of-pocket total medical costs, medical service expenses, and prescription drug expenses are about 0.89, 1.05, and 0.86, respectively. The estimated elasticities increase substantially and are statistically significant for elderly individuals with less than a high school education. The corresponding income elasticities are 2.49, 3.66, and 1.38, respectively. The findings are in sharp contrast to existing studies that use micro-level data and provide evidence that health care is a luxury good among the low education elderly.

"Let's Save Retirement"

RUSSELL L. OLSON, University of Rochester
Email: rlolson@rochester.rr.com
DOUGLAS W. PHILLIPS, University of Rochester
Email: douglas.phillips@rochester.edu

Unlike workers in many developed nations, far too few American workers today can look forward to financial independence as they age. As a result, many will be compelled to work much later into their lives, some into their 70s.
Social Security provides only a floor of retirement income. For many years defined benefit (DB) plans provided the core of retirement security, but today most DB plans in the private sector are closed to new employees, and those in the public sector are dramatically underfunded. A patchwork of defined contribution (DC) retirement plans – such as 401(k) 403 (b), and IRA – now serve as the primary retirement saving vehicles in the private sector, but they are complex, costly, and challenging for employers and employees to manage.
This paper recommends a single private DC pension system that can cover all working Americans, with a single set of rules.
A key part is the creation of broadly diversified Trusteed Retirement Funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities.
Payroll deduction of every employee’s salary will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF (and unless the employer already sponsors a defined benefit pension plan).
TRF’s will relieve employers from fiduciary responsibility for all future DC contributions.
To protect retirees from the risks of inflation, longevity, and the unpredictability of the stock and bond markets, retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A Federal Longevity Insurance Administration will enable private insurance companies to provide cost-effective annuities.
All TRFs and annuities will be without marketing costs.
Tax deductions will be designed to stay within our nation’s current tax expenditures for retirement.
This paper offers a basis for near-term action by Congress and the Administration to help resolve the growing problem of funding workers’ retirement.

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Friday, August 15, 2014

Brenton Smith: Fix Social Security Now

Writing for The Hill’s Congress blog, Brenton Smith of Fix Social Security Now argues that

The details of the [2014 Social Security Trustees] report clearly show that the crisis in Social Security is not only deepening but widening as well.

The reasonable solvency of the system was reduced over the course of 2013 from 19 years to 18 years.  This reduction means that for the first time in history on average someone retiring today at normal retirement age expects to outlive full benefits.  Anyone who is 48 years old or younger roughly expects to retire after the system pays depleted benefits.  This, believe it or not, is the good news.

The bad news is that the size of the crisis arriving in 2033 is growing rapidly.  The report reveals that the unfunded liabilities now exceed the Gross Domestic Product of the entire county.  The financing shortfall grew by $1.8 trillion.  The growth means that Social Security created more than $2 of broken promises for every dollar that it collected ($855 Billion in 2013). The grand total of unfunded liabilities exceeds all revenue ever collected by the system since its inception.

Click here to check out the whole piece.

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