Wednesday, February 24, 2010

Are We Overpaying Grandpa?

Casey Mulligan over at the New York Times' Economix blog:

The total annual income in the United States (national income, as economists call it) is about $12.5 trillion, or about $40,000 per person per year.  The egalitarian view of government is that it taxes persons with annual incomes more than $40,000, and pays benefits to persons with less than $40,000, so that those with less than average incomes could enjoy living standards closer to the average.

For reasons that I began to explain last week, our government actually does the opposite.  The vast bulk of government spending goes to the elderly, whose average living standards are significantly above $40,000 per year.

Also see Mulligan's article with Xavier Sala-i-Martin, "Internationally Common Features of Public Old-Age Pensions, and Their Implications for Models of the Public Sector," which shows – contra my comments last week that entitlements favor the old because the old vote more – that you get this favoritism even in countries where, shall we say, voting doesn't count as much. (Although, in my defense I'd add that even dictatorships have to pay some attention to public opinion, particularly that of classes who, as Mulligan notes, have more money and presumably more influence than the average.)

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Tuesday, February 23, 2010

Accounting rules hide New Jersey’s pension deficits

I have a piece in today's Newark Star-Ledger regarding public pension deficits in New Jersey, which the new Gov. Chris Christie has raised as a major issue for the budget. But, I argue, even the $32 billion shortfall the pensions admit to is a low-ball figure since they use very different accounting methods than private sector plans. Using market valuation methods, which financial economists argue presents a more accurate figure of the liabilities facing the taxpayer, New Jersey is around $145 billion in the hole, equal to around $17,000 for each New Jerseyan (Jerseyite, Jerseyer, etc.).

But if you don't live in New Jersey, don't feel left out. It's just as bad everywhere else. In fact, when you compare the market value of unfunded pension liabilities to state GDP, as I do in an upcoming AEI working paper, New Jersey is hardly the worst-off state in the country. (You'll have to stay tuned to find out who is…)

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Monday, February 22, 2010

Upcoming event: Rep. Hoyer to Speak on Fiscal Responsibility at Brookings Institution

WASHINGTON, DC - On Monday, March 1 at 1 p.m., House Majority Leader Steny H. Hoyer will speak at Brookings on restoring fiscal responsibility to Washington. Majority Leader Hoyer will discuss the origins of our unprecedented deficits, the dangers posed to our prosperity and leading role in the world by the "politics of easy choices," and the steps taken by President Obama and the Democratic Congress to put our country back on a fiscally sustainable path. To date, the most important steps include pay-as-you-go legislation, sponsored by Majority Leader Hoyer in the House, and the President's establishment of a bipartisan fiscal commission. A strong Congressional advocate for the commission, Majority Leader Hoyer participated in negotiations leading up to its creation.

Majority Leader Hoyer will insist that Congress take up the commission's recommendations at the end of the year and criticize both parties for putting ideology ahead of America's fiscal future. He will urge Democrats and Republicans to participate constructively in the commission's work, without preconditions. And he will suggest options for a bipartisan budget deal on both spending and revenues that can help America avert a debt crisis.

Brookings Senior Fellow Ron Haskins will provide introductory remarks and moderate the discussion. After the program, Rep. Hoyer will take questions from the audience.

WHO:            House Majority Leader Steny H. Hoyer

WHAT:             Speech on restoring fiscal responsibility to Washington

WHEN:          1:00 PM, Monday, March 1, 2010

WHERE:         Brookings Institution

                    1775 Massachusetts Ave. NW
                    Washington, DC

**To RSVP for this event, please click here or call 202-797-6105.

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Sunday, February 21, 2010

Two new issue briefs from NASI

The National Academy of Social Insurance has released two new Social Security Briefs:

Tough Times Require Strong Benefits: Views on Social Security among African Americans, Hispanic Americans and White Americans 

By Maya Rockeymoore and Melissa Maitin-Shepard

 SUMMARY: All Americans firmly believe in Social Security's value to society and want government leaders to take action to keep the program vibrant for future generations. African Americans and Hispanics, who are more heavily reliant on Social Security benefits, express even stronger support for Social Security than whites on most measures.

A representative survey of individuals aged 18 or older on attitudes toward Social Security was conducted by the Benenson Strategy Group for the National Academy of Social Insurance and the Rockefeller Foundation in July 2009. This brief analyzes the responses from African Americans, Hispanic Americans and White Americans, who together made up about 92 percent of respondents.

Key findings from the poll are:

  • Overall, 88 percent of African Americans, 84 percent of Hispanics, and 74 percent of whites agree that preserving Social Security for future generations is critical, even if it means increasing Social Security taxes on workers.
  • When given a choice between cutting taxes and benefits or strengthening Social Security in response to the economic crisis and large deficit, 73 percent of African Americans, 67 percent of Hispanics, and 66 percent of whites support strengthening Social Security over cutting benefits.
  • African Americans (95%) and Hispanics (85%) are more likely than whites (80%) to assert that Social Security is or will be an important part of their retirement income.

Click here to visit NASI's website and download a PDF of the brief.

Click here to read the press release.

* * * * * *

When to Take Social Security: Questions to Consider

By Virginia P. Reno and Joni I. Lavery

SUMMARY: Two of the most important financial decisions people make are when to stop working and when to claim Social Security benefits.  Retirees can claim Social Security benefits at any age between 62 and 70.  These decisions have lasting consequences for the financial security of retirees and their spouses.  While trying circumstances – such as ill-health, caring for a sick family member or working in a job that is physically or emotionally demanding – may in some cases trump financial calculus in making these choices, delaying benefit receipt brings greater financial security to a retiree over the long term. This brief elaborates the following reasons why:

  • Monthly benefits will be higher for the rest of your life if you wait.
  • Social Security is the safest and most secure source of retirement income most people have, it is guaranteed to last for life and it automatically keeps up with the cost of living.
  • At advanced ages, work may no longer be an option, pensions may be eroded by inflation and savings may be depleted.
  • Maximizing Social Security benefits for the long term can offset some of the decline in other sources of support.

Click here to visit NASI's website and download a PDF of the brief.

Click here to read the press release.

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Thursday, February 18, 2010

Discussion Social Security reform on New Hampshire public radio

Gary Burtless of Brookings and I were guests this morning on New Hampshire Public Radio's "The Exchange," hosted by Laura Knoy (who did a terrific job with an often-confusing subject). It's a good thing this was on public radio, where bashing your opposite number isn't mandatory, since Gary and I offered more of differences in emphasis than outright disagreement. Agreement is in sight, as long as you don't need to get Congress to sign off on things.

You can listen to the program online here.

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Wednesday, February 17, 2010

Event/webcast: “Trillions Of Reasons To Get Serious About Our Fiscal Future”

 TRILLIONS OF REASONS TO GET SERIOUS ABOUT OUR FISCAL FUTURE

Thursday, February 25, 2010

Noon–1:30 p.m. ET

 To attend in Washington, D.C., RSVP at

http://www.urban.org/events/other/rsvp.cfm,  

e-mail publicaffairs@urban.org, or call (202) 261-5709.

To listen to the audio webcast or a recording, register at

http://www.visualwebcaster.com/event.asp?id=66432.

It's not exactly news -- to Congress, the White House, and now many outside of elite circles -- that the federal budget is out of control. Social Security, Medicare, and Medicaid make up more than 40 percent of spending other than interest during a normal year and all are growing faster than the economy and tax revenues. Yet, Congress has kept the overall tax burden remarkably constant as a share of gross domestic product for most of the past 50 years. Together, these factors lead to sky-high deficits, an exploding national debt, and the specter of economic collapse.

But now what? With major studies -- such as "Choosing the Nation's Fiscal Future," released last month by the National Research Council and National Academy of Public Administration, and the Peterson-Pew Commission on Budget Reform's "Red Ink Rising" -- showing how desperate our fiscal straits are, what will it take for the public and politicians to move beyond overheated rhetoric and threats of political reprisals?

Panelists:

·        Richard Keil, director of media relations, Public Strategies, Inc.; former chief White House correspondent, Bloomberg News

·        Maya MacGuineas, president, Committee for a Responsible Federal Budget

·        Rudolph Penner, Institute fellow, Urban Institute; former director, Congressional Budget Office

·        Margaret Simms, Institute fellow and director of the Low-Income Working Families project, Urban Institute

·        Eugene Steuerle, Institute fellow, Urban Institute (moderator)

·        Ruth Wooden, president, Public Agenda; former president, Advertising Council

At the Urban Institute

2100 M Street N.W., 5th Floor, Washington, D.C.

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

Webcast note:

You will need to register for the webcast on the same computer you will use to listen. You can register anytime up to and during the event. To access the webcast, you can go to the same link where you registered, http://www.visualwebcaster.com/event.asp?id=66432.

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How Not to Do Pension Reform

Various news outlets report that Greece is hiking the retirement age of its pension system as part of its efforts to restore confidence in its fiscal management and avert a financial crisis. This change, designed to raise the average retirement age by two years to 63 (this is Europe, after all) will take place over the next five years.

I'm all for the retirement age increase and I'm all for not having financial crises. But a two-year increase over a five year period will surely cause some Greeks problems. Yet the government has little choice since it let reforms wait too long. In the last round of U.S. Social Security reforms in 1983, the retirement age was increased by the same two years, but the increase from 65 didn't start until 2000 and doesn't reach 67 until the early 2020s. That's a luxury you have when short-term cash flows aren't a problem (they were a problem for Social Security in the early 1980s, but were addressed through other means).

The broader point is that the longer you put off reforms to programs like Social Security, Medicare and Medicaid the more drastic and painful those reforms have to be. People who get exercised about the painful steps involved with reform – and by their efforts make reform more difficult to enact – may be acting counterproductively.

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Tuesday, February 16, 2010

New paper from CRR: “Workers’ Response to the Market Crash: Work More, Save More?”

The Center for Retirement Research at Boston College has released a new Issue in Brief by Steven A. Sass, Courtney Monk, and Kelly Haverstick titled "Workers' Response to the Market Crash: Work More, Save More?"

In the summer of 2009, the CRR surveyed individuals age 45-59 on how the market crash has affected their retirement planning. Key findings from our analysis are:

  • In response to the crisis, over 40 percent expected to work longer/save more.
  • Those who were highly distressed were more likely to act.
  • After receiving "reliable" financial advice, the majority of initial "no changers" decided to work longer/save more.

The brief is available here.

My comment: one thought about the findings, which I obviously haven't yet reviewed carefully. The survey found many individuals reporting that they will work longer in response to the market crash, yet we also see reports that filings for Social Security retirement benefits have shot up. Contradictory? Maybe, but possibly not. My guess is that recent events may have affected different people in different ways. High income people get most of their retirement income from their own pensions, which were hit hard by the market downturn. To make up for these losses, these folks will tend to work a little longer. Low-income people, by contrast, suffered little from the market downturn since most of their retirement income will come from Social Security, but they are more likely to have been hurt by rising unemployment. So these folks may find themselves squeezed on the employment front and decide to retire earlier. So the same events may result in opposite reactions from different people.


 

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Robert Myers Passes Away

The National Academy of Social Insurance notes that Robert Myers died this weekend. From the obituary NASI circulated by email:

Robert J. Myers, Chief Actuary of the Social Security Administration from 1947–1970 and a founding NASI member, passed away from pneumonia on Sunday, February 14. He was 97. 

Bob Myers, as he was known to friends and colleagues, began working on Social Security in 1934 – the year before the program's enactment – as a young actuary with the Committee on Economic Security. After serving as Chief Actuary at SSA, Bob later became Deputy Commissioner of Policy (1981–1982). He continued to champion Social Security as Executive Director of the National Commission on Social Security Reform (1982-1983), also known as the Greenspan Commission; as Chairman of the Commission on Railroad Retirement Reform (1988-1990); as a member of the Prospective Payment Assessment Commission (1991-1997); and as a member of the Commission on the Social Security ''Notch'' Issue (1993-1994).

Energetic and tenacious, Bob was the author of more than 900 articles and five books on the Social Security program. According to the SSA website, he held a Guinness Book of Records world record for testifying before Congress 175 times, during his tenures as Chief Actuary and Deputy Commissioner of SSA. A lifelong Republican, he believed deeply in the principles of social insurance. Like his contemporaries, Bob Ball and Wilbur Cohen, he devoted his life to this program – continuing to write and speak about the program well into his 90's, until he became too frail to continue.  

A founding member of the National Academy of Social Insurance (NASI), Bob served on its Board of Directors from 1986 to 1997, and on the Editorial Board of Social Insurance Update. He and his wife, Rudy, also endowed a Library of Social Insurance, which has been housed at NASI since 1989. 

Bob received his M.S. from the University of Iowa and LL.D. from Lehigh University and Muhlenberg College. He and his wife Rudy, who passed away in 1995, were married for 56 years and had two sons, Jonathan and Eric.

"Trusted and respected completely by Democratic and Republican leaders alike, Bob was a man of the highest integrity. A giant in the field, he was responsible for setting the utmost professional and ethical standards for the Office of the Actuary at the Social Security Administration, where he served this nation so well. An extremely warm, kind, and generous person, he is owed a debt of gratitude by all Americans, though most will have never heard his name. The economic security of Americans is greater and their lives are better because of his important work," said Nancy Altman, NASI Board member and Co-Director of Social Security Works. "His death truly marks the passing of an era. He will be deeply missed by all of us who knew him. He is now rejoined with his wife, Rudy, with whom he shared a deep and abiding love, apparent to anyone who knew them or even simply saw them together."

Bob was a leading figure in the actuarial field and a member of numerous professional societies, including serving as President of both the Society of Actuaries and of the American Academy of Actuaries.

"Bob was a man of principles. As one of the founding leaders of Social Security, he was committed to ensuring a secure retirement for all Americans," said Fred Kilbourne, an actuary and a founding member of NASI. "He was a legendary public servant and a mentor to numerous actuaries and others."

In 1996, SSA Historian and NASI member, Larry DeWitt, sat down with Bob for an oral history interview about Social Security and his career. The full transcript of this interview, as well as additional info about Bob's career, can be found on the SSA website.

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Upcoming event: "A Discussion on the U.S. Budget"

The National Economists Club will host a free event titled "A Discussion on the U.S. Budget" TODAY, Tuesday February 16, at George Washington University. Speakers include:

Brian Riedl, Senior Policy Analyst, Heritage Foundation
Joseph Minarik, SVP & Director of Research, Committee for Economic Development.


Where: The George Washington University, Funger Hall, Room 222 (2201 G. St., N.W.)
Time: 6:30 p.m.
RSVP: Please RSVP to info@national-economists.org or 703-493-8824, option 4.
Happy Hour Following: Tonic Restaurant at Quigley's Pharmacy (Third Floor)
2036 G Street NW
Washington DC 20052
(202) 296-0211

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Wednesday, February 10, 2010

Tuesday, February 9, 2010

Me on Fox Business talking about Social Security

For some reason I can't embed it, but here's a link. The focus is on the CBO's projection that for the first time since the 1980s Social Security will run a cash deficit this year. CBO projects a deficit of around $28 billion, moving back toward balance over the next few years and then back into deficit again.
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Monday, February 8, 2010

Me talking about Social Security on Fox, Part 1

Social Security's been in the news a bit lately and I've been the beneficiary with a few TV spots. Here's one that focuses on the problems facing the program.

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USA Today: Rash of retirements push Social Security to brink

USA Today's Richard Wolf reports that "a rash of retirements" – and disability applications – have worsened Social Security's finances, pushing it into deficits several years before government agencies had previously projected. At the same time, it's worth asking, "The brink of what?" It's not the brink of insolvency, since solvency is measured by the balance of the trust fund – which remains at over $2.5 trillion – rather than by cash flows. In fact, what we're facing isn't a problem for Social Security so much as a problem caused by Social Security: that is, Social Security payments will be made because it can and will redeem bonds held in the trust fund. However, after decades of being subsidized by Social Security, the non-Social Security budget will be forced to pony up and start repaying what it borrowed. The problem is that the money isn't there, and in fact the budget is facing record deficits due to falling tax revenues and rising spending. This is a time when tough choices need to be made or they'll be made for us, by the Chinese and others overseas who are currently financing our deficits. Better to make them ourselves.

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Why did the budget not use Trustees projections for health cost growth?

Over at AEI's The American, I write about an arcane but (I think) important issue in the Obama administration's FY 2011 budget: for the first time, I argue, the administration has rejected the projections of its own Trustees for health care cost growth, substituting a rate twice as high as projected by the Trustees (and around one-third higher than projected by CBO). The result, I argue, is that the budget seems to confirm the administration's argument that health care cost growth is by far the biggest driver of future entitlement costs. Population aging, I've argued, is an equal cost driver over the long-term and the biggest source of costs over the next several decades.

A knowledgeable friend counters my argument on several fronts:

First, the FY 2011 budget isn't the first to reject the Trustees assumptions. The FY 2008 and FY 2009 Bush budgets also did not use the Trustees projections for health care cost growth. This is true, but the final two Bush budgets were explicitly modeling the effects of policy changes – principally, capping the tax exclusion for employer provided health care – that were designed to reduce the rate of health cost growth. These budgets made clear that the current law baseline projection was that of the Medicare Trustees. The FY 2011 Obama budget, by contrast, uses different assumptions for current law than do the Medicare Trustees, with the effect that Medicare spending is projected to rise to 22 percent of GDP by 2085, versus less than 9.5 percent under Trustees assumptions.

Second, the historical rate of health care cost growth is a good guess for how costs will grow in the future. This is certainly a defensible argument, though both the Medicare Trustees, an expert group that advised them, and the CBO think that costs will slow over time. What I think is missing, though, is some explanation in the budget that a higher rate of cost growth actually makes sense. The budget itself is a bit cagey on this; it doesn't explicitly state that its baseline projections are its best guess for the future. Rather, it merely states that if historical costs rates continue then this is what we'll see in terms of overall costs.

My skepticism on the administration's health cost assumptions comes down to this: they've often argued that rising per capita health care costs, not population aging, are the biggest driver of entitlement spending. By this argument, reforms to reduce cost growth in the private sector would leak over into Medicare and Medicaid, painlessly reducing entitlement costs – "Healthcare reform is entitlement reform," the President likes to say. This conclusion is not true under Trustees or CBO assumptions, but is true under the new assumptions in the budget. Perhaps I'm just being too cynical, but given some of the other arguments the administration has used over the course of the health care debate that turned out to be underwhelming I was suspicious over how this change came about and what drove it.

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Wednesday, February 3, 2010

CBO estimates of stimulative effect of payroll tax cut underwhelming

The Congressional Budget Office released a letter to Sen. Robert Casey (D-PA) estimating the effects on employment of a proposed policy of giving employers a one-year, nonrefundable credit against their payroll tax liability for increasing their payrolls in 2010 from their 2009 levels. Here's the short story:

CBO estimated that reducing payroll taxes for firms that increased their payrolls would raise output (gross domestic product, or GDP) by a total of $0.40 to $1.30 between 2010 and 2015 for each dollar of budgetary cost. CBO also estimated that the policy would add 8 to 18 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost. Thus, the cost of increasing employment by one full-time person for one year in 2010 and 2011 would probably be between $56,000 and $125,000. Although such a policy would have economic benefits in the short run, it would also add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

Given that the median wage of a full time worker is around $37,500, effectively paying $56,000 to $125,000 to produce each job sounds a bit steep to me. With this policy – as with, it seems, much of the rest of the stimulus bill – it may have been more cost effective for the government create employment by directly hiring new employees than by indirectly attempting to stimulate the economy. (That said, a private sector worker produces goods and services while a government worker produces, well, more government, so there's more to the equation than that.) In any case, this isn't very encouraging news.

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Tuesday, February 2, 2010

Allan Sloan: Social Security next on bailout list?

In the Washington Post, columnist Allan Sloan points to Social Security's funding problems:

Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system. A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits. Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

Some would argue – correctly, in some important ways – that Social Security isn't so much being bailed out as being repayed; after all, the federal budget has borrowed around $2.5 trillion from Social Security over that 25 years of surpluses and it's not unreasonable that Social Security ask for it back.

That said, there's some inappropriate anthropomorphizing of government programs here: "Social Security" isn't a person that lends or borrows. Rather, individuals are called on to finance borrowing or repayment, either through higher-than-needed payroll taxes in the past (when Social Security was the lender) or higher-than-needed income taxes in the future (when Social Security will need to be repaid). It's the point of view of citizens that matters, and from this point of view the real driver is simply costs: as the baby boom generation retires, Social Security costs will rise. And those costs must be borne by the working age Americans who support the program. 'Nuff said.

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Monday, February 1, 2010

David Walker on how to fix Social Security

NCPA's daily Policy Digest reports on former GAO director David Walker's recommendations to fix Social Security in his new book Comeback America. Here's NCPA summary:

"For the next few years, Social Security is fine, however, the system is already setting off alarm signals.  The disability program is already in a negative cash flow position and the retirement and survivor's income program is expected to have a negative cash flow in 2010-2011.  If we keep on doing nothing until the trust funds that finance the program run dry in 2037, monthly benefits will have to be cut by about 24 percent across the board and the cuts will get deeper than that, says David Walker, who served as the seventh comptroller general of the United States and was the CEO of the U.S. Government Accountability Office. "

"In his new book, "Comeback America," Walker has several suggestions on how to save Social Security. 

"Benefits: 

  • Focus on people who are most in need; provide a new higher-level floor benefit for Americans who have worked at least 30 years to insure they will not live in poverty.
  • Do not eliminate Social Security benefits for higher-income individuals but reduce the relative benefit for middle- and upper-income persons through progressive wage indexing or otherwise.
  • Raise the normal and the early retirement eligibility ages on a gradual basis, and require that they keep pace with increases in life expectancy; a relatively modest increase phased in over a 20-year period would have a significant impact.
  • Allow all individuals to defer their Social Security benefits to any age they choose and increase their monthly benefits based on life-expectancy tables; this would encourage people to work longer. 

"Revenues: 

  • Increase tax revenue; keep the payroll tax rate at the current level of 6.2 percent but raise the cap on taxable wages from the 2009 level of $106,800 per person to around $150,000.
  • This would be less than the historical dollar level at which 90 percent of total wage income would be subject to the Social Security payroll tax ($171,900 in 2009). 

"Savings: 

  • Require supplemental savings accounts; an additional 2 or 3 percent payroll deduction would go into an individual account for each worker.
  • Individuals would have several professionally managed investment options to choose from along the lines of the Federal Thrift Savings Plan, which is now used for federal elected officials and employees. 

"Source: David M. Walker, "Comeback America: Turning the County Around and Restoring Fiscal Responsibility," Random House, January 12, 2010." 

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