Federal Disability Claims Spike

The already financially beleaguered Social Security Administration was revealed to be one step closer to insolvency as House Investigators revealed that disability claims are being approved in record numbers. Disability claims have swelled 25% since 2007, aggravated by the recession and the aging baby boomer population, so that the SSA fund responsible for handling such claims is expected to run out of money by 2016.

It is no wonder that the agency finds itself in such difficulties. In March of this year, they paid out over $10 billion to 8.8 million workers. Field offices and state agencies, equally low on funds, tend to reject claims that they know will have to be taken up by the federal government, and allegations of mismanagement and lack of scrutiny over fraudulent claims are all contributing factors in the fund’s potential collapse.

This further underscores the need for reforming the SSA. If nothing is done, benefits will likely be slashed and taxes will likely go up. This will impact not only the disabled and their families, but also retirees and soon-to-be retirees who have paid into Social Security and rely heavily on its benefits.

Proposal to Expand Social Security

The New America Foundation recently released a paper by Michael Lind, Steven Hill, Robert Hiltonsmith, and Joshua Freedman (Lind et al) titled Expanded Social Security:  A Plan to Increase Retirement Security for All Americans.  The primary idea advanced by the authors is the creation of a two-tiered Social Security system.  In addition to the current benefits one receives based on lifetime earnings—what they call “Social Security A”—they propose the creation of a “Social Security B” plan, which gives every retiree an additional flat benefit.  This benefit would not be connected to life-time wages. Continue reading

Analysts Differ on Ways to Shore Up Retirement Security

In response to new studies illustrating how inadequate America’s retirement savings accounts really are, combined with President Obama’s proposed budget calling for a cap on employees’ contributions to their 401k plans, several analysts are launching new proposals to combat the retirement savings shortfall.

Chris Farrell, on Bloomberg News, outlined a suggestion to remove the tax incentives from 401k plans and IRAs, and replace them with an automatic enrollment program. This, he argues, would increase aggregate retirement savings while simultaneously reducing costs to the federal government.

Farrell is not the only one who thinks mandatory savings could be answer to the retirement crisis. Alicia Munnell, director of the Center for Retirement Research, has stated that voluntary savings plans are inadequate to meet the needs of modern retirees, and columnist Dan Kadlec has pointed out that mandatory retirement savings seem to have rescued Australia from a similar dilemma.

Other proposals involve increasing 401k contributions, setting up a Federal Retirement Board or allowing people to simply be “bought out” of their Social Security plans early.

However, some advocates are pushing back against talk of eliminating the tax incentives from current retirement plans, demonstrating that 71% of the money from such incentives flows to families making less than $150,000 a year. A report from the American Society for Pension Professionals and Actuaries concludes that these incentives are the most efficient way to help the average American save for retirement, and that reductions in these incentives would damage the retirement security of workers. About two-thirds of workers currently hold jobs that offer retirement plans, the report says, and incentives such as these are necessary to maintain, and indeed increase that number in the future.

Assorted Links: April 15

Andrew Briggs at AEI feels using chain-CPI to adjust Social Security benefits is a bad idea.  Link

Far be it from me to criticize Andrew when it comes to Social Security.  He has probably forgotten more about Social Security than I will ever know.  Yet I do disagree with him.  It should be the goal of policy-makers to use the most accurate data available–regardless of who may or may not benefit from it.  If that isn’t the case, why use the CPI at all?  Why not just make up a number?  Andrew makes the argument that lower COLA’s hurt retirees because “the chained CPI, like CPI-W, doesn’t account for the fact that older retirees spend disproportionately on health care, a sector in which inflation is particularly high.”  True, but another sector where prices are have run much higher than the overall inflation rate over the last twenty years is education–a sector where demand is basically zero among retirees.

The Committee for a Responsible Budget has some analysis of the President’s budget.  Link

Nancy Cook at the National Journal feels “It’s Easy to Fix Social Security.”  Link

Another Suggestion to Fix Social Security

Megan McArdle had a recent post—Why Not Make Social Security Benefits Even More Generous?  The post provides some analysis of a recent article by Josh Barro, who points out that Americans are not saving enough for their retirement (very true) and thus the federal government should increase Social Security benefits.  To pay for the higher benefits, he suggests either reducing Medicare spending or raising taxes. Continue reading

Retirement confidence lags leading indicators

Admitting you have a problem is the first step in recovery. It’s not news that people are living longer than they used to, and it’s certainly not news that workers often underfund their retirement expectations. What is news, is workers are starting to realize in larger numbers that they likely won’t be able to afford retirement at 65 if they continue saving–or not saving– as they have in the past. The Employee Benefit Research Institute (EBRI) just released its 23rd annual Retirement Confidence Survey, and it shows worker confidence resting on last year’s record low sentiment.

The economy has shown signs of improvement in the last year–albeit not overwhelming improvement–and one would think that like the stock market, retirement confidence would take the opportunity to show some exuberance. Not the case this time. The poor economy of the past few years seems to have woken up workers to the practical uncertainties of retirement, and its mounting cost. EBRI suggests that regardless of whether the actual savings and investment rate increased or decreased, this lowered retirement confidence is likely a result of the Great Recession as workers faced prolonged periods of unemployment, reduced wages, and lower rates of return (or more likely losses) during that period.

“One reason that retirement confidence has remained low despite a brightening economic outlook may be that some workers may be waking up to a realization of just how much they may need to save. Asked how much they believe they will need to save to achieve a financially secure retirement, a striking number of workers cite large savings targets: 20 percent say they need to save between 20 and 29 percent of their income and nearly one-quarter (23 percent) indicate they need to save 30 percent or more.”

In other words, workers have been badly shaken during this economic doldrums, and the lasting affect is workers rude awakening to previous under-saving. We’ll have to wait and see whether or not the fear translates to long-term improved savings rates.

 

Another Reform to Social Security COLAs

In a previous post, I cited a CBO report which stated that the federal government could save $127 billion over the next decade if the Social Security Administration (SSA) used a chain-weighted consumer price index (CPI) to adjust retiree’s payments to increases in cost-of-living.  Current policy uses a non-weighted CPI to measure the rate of inflation—which the report says overstates inflation by 0.25 percentage points a year.

A little over a year ago I wrote a paper which suggested a somewhat related reform to the way the federal government handles the cost-of-living-adjustment (COLA) to Social Security payments.  Instead of implementing COLAs on an annual basis, the SSA should adjust payments when the price index increased by five percent.  The following is the abstract from the paper:

 The most recent Social Security Trustee Report projects an Old Age Survivors Disability Insurance (OASDI) shortfall of $16.1 trillion in present value terms over an infinite time horizon.  Politicians have divergent opinions on how to address this looming crisis.  Some advocate higher payroll taxes, others propose reductions in benefits.  Still others believe there isn’t a problem since there is money in the Trust Fund to cover outlays until 2037.  One aspect looked at in the past has been with the way the government adjusts benefits to rises in cost-of-living.  The current methodology uses annual changes in the Consumer Price Index (CPI) to adjust retiree’s benefits.  Some economists argue the CPI overstates the impact of inflation, which means benefits have increased well above the rate of inflation—putting the system under additional financial strain.  Even if a consensus believed this true, the creation of a new index would be a costly and time-consuming endeavor.  This paper presents an alternative way to administer COLAs, which could over the ensuing decades, provide trillions of dollars in savings relative to the present methodology.  Instead of adjusting retiree benefits every January based on the annual rise in the CPI, the proposal is to adjust benefits when the CPI has increased by five percent—however long it takes.  If the rate of inflation is below five percent per annum, it would save the government money.  In addition, it would not entail any revision to the methodology used to calculate the CPI; nor should it induce large hardships on those who currently receive benefits.  The author does not suggest that this recommendation would alone solve the fiscal crisis facing Social Security.  Rather, it is a political viable way to create some budgetary savings while political forces come together to create a more sustainable solution.

Many, like The Washington Post’s Ezra Klein oppose using the chain-weighted CPI.  He writes:  “The only reason we’re considering moving to chained-CPI because it saves money, and it saves money by cutting Social Security benefits and raising taxes, and it’s a much more regressive approach to cutting Social Security benefits and raising taxes than some of the other options on the table.”

The purpose of COLAs is to adjust Social Security benefits so as to maintain a constant purchasing power.  So why is it wrong to introduce an improved measurement of the true rate of inflation?  Should it not be the goal to be as accurate as possible?  Besides, no one’s benefits are being cut—only the size of future increases is impacted.  If the studies are true, that the non-weighted CPI overstates inflation, then seniors have been receiving real increases in payments for decades, adding additional budgetary strain to the system.

Now I admit a major reason for my proposal was to offer a way to create some budgetary savings with as little pain as possible.  Yet adopting my proposal would better reflect the true reason for COLAs—the maintaining of a constant purchasing power.  For instance, under current policy, if the economy experiences deflation (as it did a couple of years ago) benefits are not decreased.  This results in a real increase in benefits, which gets embedded into future cost-of-living increases.  This doesn’t happen in my proposal.

A second benefit has to do with economic signaling.  Classical economics describes how the economy, through changes in prices, moves to an equilibrium output.  When there are changes in supply and/or demand, prices adjust to induce consumers to modify their behavior to restore equilibrium.  For instance, if the price of gasoline rises, in the short-run people may consume the same amount and purchase less of something else like eating out.  Over a period of time they may do any number of things:  buy a more fuel-efficient car; move closer to work; get a job closer to where they live; or join a carpool.  When the government gives predictable raises in benefits, it discourages people from making adjustments to their economic behavior.

In an ideal world we could provide seniors with real benefit increases every year.  The problem is we don’t live in such a place.  Yet since the adoption of COLAs to Social Security benefits in the early 1970s, we have in essence been doing just that.

At some point Congress and the president will need to do something to reform Social Security.  According to the latest SSA Trustee Report the present value of the unfunded obligations (over an unlimited time horizon) is now at $20.5 trillion—up from $17.9 trillion projected in the previous year’s report.

The Trustees write:  we “recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits.”

Using a chain-weighted CPI and implementing my suggestion will not alone bridge the gap in the expected long-term deficits in Social Security.  That requires making decisions on such things as raising the retirement age, increasing payroll taxes and/or modifying the benefit formula used to calculate initial monthly benefits.  Instead, the intention is to provide some real savings to the system in order to allow politicians to gradually incorporate the necessary reforms.  In the end, how to save Social Security is not an economic effort but rather a political one.

The Washington Post: Payments to Elders Are Harming Our Future

by Ike Brannon

Isabel Sawhill and Harry Holzer correctly identify the cost to society (and also in terms of reduced government services) that’s created by soaring entitlement costs in their Washington Post oped Saturday, but their anodyne suggestions for addressing the problem manifest the difficulty in tackling this problem.

The problem has been litigated on this blog before: we have a large cohort of Americans entering their retirement ages, they’re living longer than every before, and their health care costs continue to rise. Holzer and Sawhill diagnose this problem, and point out that from a liberal perspective this is pernicious because entitlement spending is crowding out all the other things government should do.

Coming from two card-carrying members of the liberal intelligensia this is a welcome admission. However, when they get to the money paragraphs–namely, telling us what to do about this–they become timid, and suggest that the recent diminution of health care inflation may continue and maybe there’s more to be done there, and then mention some kinds of means testing.

Given that we’re not sure why health care inflation has slowed I think it’s less than a safe bet to assume that the trend will continue, and pointing to the Affordable Care act as a source for further downward price pressures begs a detailed explanation as to what, precisely, those provisions are. Capping the deductibility of employer-provided health insurance would be a big force for good but under current law it comes too late (2017) and affects too few people to make any difference.

Charging the wealthy more for Medicare (which they also mention) is undoubtedly going to be a part of any solution but the deficit is so deep and growing so rapidly that it can never be enough.

On the Social Security side–which they skipped over–a progressive indexation of initial benefits is definitely a part of any solution, but that would have to dip down and impact to some degree the top fifty percent or so of all new retirees to come close to getting the system in balance. Having them point out that progressive indexation wouldn’t cut anyone’s benefit–it only slows the real growth of initial benefits for the wealthy–would have been a positive addition to the debate.

It’s heartening to have respected economists associated with the Democratic party pointing out that the entitlement crisis is real; it would have helped a bit more if they could have made it clear that it can’t be fixed solely by wise bureaucrats or on the backs of the wealthy.

Nothing Left to do But Raise Taxes—A Real Alternative to Thomas Edsall’s Lamentations

by Ike Brannon

Thomas Edsall’s screed in the Thursday NY Times against any sort of SS reform that increases the retirement age left me perplexed: while he did note that longevity for those who reached age 65 was higher than ever and going up steadily, he seemed to regard this as a reason NOT to increase the retirement age, since these people are going to need a lot more during retirement since they’re spending so much of their life not earning money. I’m not quite sure what to do with that one other than to pound my head against a wall.

He also objected to means-testing, arguing that eliminating benefits for even a small fraction of retirees would weaken its universal support. Fair enough, but why would reducing the real growth of benefits for people at the top of the income distribution also weaken support—which is what progressive indexation would do? He failed to bring this up, and it’s that—and not means testing—that’s on the table, realistically speaking. The real question seems to be whether we bring it into balance by increasing taxes on the top ten or fifteen percent or reduce their benefits, and the preferred answer is of course, for Edsall, to increase taxes. After all, his points out, there’s a poll suggesting that people want to increase taxes on the rich.

Removing the cap max on Social Security would put a wide swath of earners in a situation where they are paying the federal government more than fifty percent of each additional dollar earned—and people above $400,000 over 55 percent. While the impact of higher marginal tax rates is best left to be litigated elsewhere, a tax change that puts a non-insignificant swath of Americans in California and New York giving the government two/thirds of every dollar earned is a recipe for disaster.

Non-Sequitors: Catching Up

The Economists‘ Buttonwood blog comments on retirement, longevity, and inherent inequity in a universal pension age.

Michael Barone of American Enterprise Institute foresees an end to the entitlement age, while his AEI colleague Andrew Biggs discussed public pension reform with former San Diego city councilman Carl DeMaio, after San Diego made some painful, but needed reforms.

Some wise words about personal responsibility in planning for retirement from the Wall Street Journal… let’s just say these resolutions are obviously sound practice, but easier said than done.

According to the Washington Post‘s Michael Fletcher the American worker is borrowing from tomorrow to pay for today–which means less leisure, retirement, what-have-you tomorrow.

The Washington Post‘s Jim Tankersley writes that the global economy has pulled American manufacturing into an age of weak labor, and thus weak unions… something to keep in mind during the Social Security and pension reform discussion.

Video with Chuck Jaffe of WSJ‘s MarketWatch in re avoiding the Personal Retirement Cliff.

NPR finds that the government isn’t only struggling with the question of homo sapien retirement as a growing population of research chimps are hanging up their lab coats for country living.