Archive for the 'SocialSecurity' Category

Timothy Taylor On Social-Security

He warns:

The figure, taken from the annual report of the Social Security actuaries released in May 2011, tells the story.  Up until 2011, the “non-interest income” for the Social Security trust fund–which basically means payroll taxes–exceeded the costs of the system. Under the rules of federal budget accounting, Social Security was providing extra funds that could be used to purchase Treasury bonds, and thus reduced the amount size of the budget deficit that needed to be financed by borrowing from the public.After 2011, however, the costs of the system are slated to exceed non-interest income. Under federal budget accounting rules, now each year the rest of the budget will need to repay the Social Security trust fund. . 

Thus, we are switching from a situation where the Social Security system helped to hold down the federal deficit each year, to a situation where the Social Security system will be contributing to a larger federal deficit each year. To be sure, this effect won’t be large for a few years. But I suspect that this change will gradually bring changes to Social Security into the debates over reducing budget deficits in a way that they haven’t previously been. 

The link can be found here.

401(K)’s or Pensions?

Which is better? Andrew Samwick, professor of economics at Dartmouth College answers it this way:

My colleague Jon Skinner and I made that comparison in an article in the American Economic Review.  The result was that the projected distributions of retirement income were surprisingly similar under the old-style DB plans that were dominant in the 1980s and the 401(k) plans that supplanted them in the 1990s, assuming workers were covered by the same plan over a long career.  (The comparison was better for 401(k) plans when workers switched jobs — vested deferred benefits under DB plans are often quite low.)

In truth, this should not really come as a surprise.  The amount of retirement income that will come from pensions is determined by workers’ willingness to give up current earnings for current pension contributions, regardless of whether they are making the contributions directly or the employer is (allegedly) contributing for them.  If 401(k) plans are proving to be inadequate, it is because we are a nation of inadequate savers, not because we had a great system of DB pensions that we no longer have.

Full article can be found here.

The Retirement Age

Arnold Kling explains why the term should be dropped:

Klein’s thinking is that people do not want to work longer, so raising the Social Security “retirement age” is a bad idea. His conclusion does not follow from his premise. To avoid this sort of error, we need to stop using the term “retirement age” to refer to the age at which one becomes eligible for government benefits.

Instead, think of it as the age of government dependency. If Klein does not think we should increase that along with longevity, then he is arguing that as lives get longer and longer, taxes on working-age citizens should get higher and higher.

Keeping the age of eligibility low may not necessarily help people to retire sooner. It may have the opposite effect. By keeping taxes high, it may reduce employment and wages for people of working age, thus making it harder for them to retire when they would like.

Quote Of The Day

“Ever since the early eighties, when the Greenspan commission kicked the can down the road with a combination of tax increases and later retirement ages, analysts have been awaiting the day when the system would finally go into deficit.  That date has been sliding around between 2016 and 2020 for some years now, but the suspense is finally over: the system is going into deficit this year….According to the CBO report from which that article is drawn, the deficit will persist until around 2014, at which point it will go temporarily back into surplus before returning permanently to the red in 2018.  This is a small but permanent deterioration of the program’s finances–the people who have retired early will pay no more FICA taxes, and they’ll have less in the way of taxable Social Security benefits.” — Megan McArdle, on Social Security going into deficit

A Bad Track Record

Quote Of The Day

“I believe that in reality what has helped the less fortunate is economic growth. Today’s elderly are affluent not because of Social Security, but because of all of the wealth created by private sector innovation over their lifetimes. Government involvement in health care and education is an impediment to progress in those fields. Job training and welfare are demonstrable failures. I think that treating a national community like a family is a grave intellectual error. A national unit is an institution that creates a legal framework for a large group of strangers to interact. A family is a small group that interacts on the basis of personal bonds. Strengthening government serves to weaken families and other vital civic institutions”. –Arnold Kling, MIT economist responding to University of Chicago law professor Geoffrey Stone’s list of What it Means to be a Liberal

Quote Of The Day

“If I were in charge of the budget, we would massively reform entitlements, transforming Social Security into a system of forced savings combined with a means-tested fallback for those too poor to save, or whose investments tanked at the wrong time. We would kill the whole Medicare/Medicaid debacle, along with the tax deduction for corporate-provided health care benefits, replacing it all with catastrophic federal insurance for those whose medical bills exceed 15-20% of gross income (phasing out for those whose incomes put them in, say, the top .1% of earners) and another means-tested benefit for those who genuinely cannot afford to spend 15% of gross income on health care benefits. I would combine this with the Jane Galt Tax Plan to save the government a whole mess o’ money, while making the economy more efficient, and increasing the incentives for everyone, rich and poor alike, to create value for society. Forget Win-Win . . . that’s like Winwin!” –Jane Galt, an economist who blogs at Asymmetrical Information

Bipartisan Government Waste

Here is a good list of spending cuts that both Republicans and Democrats can support:

Agricultural Subsidies: Everyone’s favorite whipping boy, and for good reason. These subsidies are a handout to rich farmers, and they raise food prices for everyone. $20 billion.

Social Security for the Well-Off: Social Security is not means-tested; people with substantial retirement income get full benefits. This is insanity; recipients did not “save” the benefits they receive; these benefits come from taxes paid by current working generations. Cut Social Security expenditure, say, 20% by introducing a modest degree of means-testing. $100 billion.

Medicare for the Well-Off: Same deal as with Social Security. Raise premiums, deductibles, and co-pays in a means-tested manner to save 20% of current expenditure. $60 billion.

Higher Education for the Well-Off: State governments currently operate colleges and universities in a manner that makes no distributional sense. Children of millionaires pay the same highly subsidized tuition as children in poverty. State governments should emulate the private sector by setting a high tuition rate and then offering discounts on a means-tested basis. $50 billion.

Pork: Although many “bridges to nowhere” are small potatoes, the number of potatoes is large. A recent accounting by Taxpayers for Common Sense estimated 2005 earmarks at $24 billion; most of this is pure pork. Adding big ticket items like manned space flight, Amtrak subsidies, mass transit boondoggles like the Big Dig, senseless flood control projects undertaken by the Army Corps of Engineers, and subsidized disaster insurance, not to mention state and local pork, would easily yield substantial savings. $70 billion.

“The grand total from this list is $300 billion annually, roughly the deficit projected for 2006″. The full article could be found here.

Quote Of The Day

“There are some issues where the views I hold are outside the mainstream. However, among economists, both on the left and the right, essentially everyone who looks at entitlement spending agrees that it would be helpful and appropriate to raise the age of government dependency. Yet we are told that this simple, common-sense solution is politically impossible”. –Economist Arnold Kling, writing about the need to raise the age of retirement benefits

Economics Debate: Stitching a New Safety Net

The Wall Street Journal has posted another economics debate. This time it is between Mark Thoma of EconomistsView blog and Andrew Samwick of Vox Baby blog, on the topic of Social Security, Medicare, and Health Care Reforms (No subscription needed for 30 15 days).

The debate can be found here.

My favorite parts:

We do several things wrong in the way we provide health insurance to non-retirees, and our first tasks should be to undo these mistakes. The first mistake is to make insurance voluntary when we don’t subsequently exclude those who need care from getting it at the public’s expense. We should make health insurance mandatory, but we should do so by putting the mandate on the individual, not the employer. Those who cannot provide proof of insurance on their tax returns should be charged an amount that corresponds to an insurance policy in their area. Implementing this on the tax form allows for family resources to be taken into consideration.

…and this,

But Medicare already offers us a glimpse of whether a single-payer system generates enough preventive care and superior opportunities to resolve conflicts of interest. I am less persuaded here. I do not see Medicare as it is currently implemented as a model of preventive care. Practitioners get paid for providing inputs to health, not necessarily for achieving a healthy outcome. And recent research has documented that there are wide disparities in how much Medicare pays by geographic area. My colleague Jonathan Skinner and his co-authors find that, other things equal, Medicare spends twice as much in Miami as it does in Minneapolis. I don’t think Medicare has made much progress in providing useful resolutions to the conflicts of interest Mark is considering.

An Economists New Years Resolutions

Gregory Mankiw, a professor at Harvard University and former chairman of President Bush’s Council of Economic Advisers gives us his New Years Resolutions:

CAMBRIDGE, Mass. — Now is a time when most of us sit back and reflect on the past year and on how to do better in the year ahead. Since I know, however, that economic policy makers inside the Beltway are often too busy for such introspection, my gift to them is a list of seven New Year’s resolutions. Any senator, congressman or presidential wannabe is free to adopt them as his or her own. Just repeat after me:
• #1: This year I will be straight about the budget mess. I know that the federal budget is on an unsustainable path. I know that when the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. I know that the choices aren’t pretty — either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. I am going to admit these facts to the American people, and I am going to say which choice I favor.

• #2: This year I will be unequivocal in my support of free trade. I am going to stop bashing the Chinese for offering bargains to American consumers. I am going to ask the Bush administration to revoke the textile quotas so Americans will find it easier to clothe their families. I am going to vote to repeal the antidumping laws, which only protect powerful domestic industries from foreign competition. I am going to admit that unilateral disarmament in the trade wars would make the U.S. a richer nation.

• #3: This year I will ask farmers to accept the free market. While I believe the government should provide a safety net for the truly needy, taxpayers shouldn’t have to finance handouts to farmers, many of whom are wealthy. Farmers should meet the market test as much as anyone else. I will vote to repeal all federal subsidies to growers of corn, wheat, cotton, soybeans and rice. I will vote to allow unrestricted import of sugar. (See resolution no. 2.) I will tell Americans that eliminating our farm subsidies should not be a “concession” made in trade negotiations but a policy change that we affirmatively embrace.

• #4: This year I will admit that there are some good taxes. Everyone hates taxes, but the government needs to fund its operations, and some taxes can actually do some good in the process. I will tell the American people that a higher tax on gasoline is better at encouraging conservation than are heavy-handed CAFE regulations. It would not only encourage people to buy more fuel-efficient cars, but it would encourage them to drive less, such as by living closer to where they work. I will tell people that tolls are a good way to reduce traffic congestion — and with new technologies they are getting easier to collect. I will advocate a carbon tax as the best way to control global warming. Because we may well need to raise more revenue (see resolution no. 1), I’ll always be on the lookout for these good taxes.

• #5: This year I will not be tempted to bash the Fed. Ben Bernanke, soon to be the new chairman of the Federal Reserve, will not inherit Alan Greenspan’s halo, and so may be a tempting target. But I will resist temptation. I know that the U.S. has an independent central bank for good reason. I know that sometimes the Fed needs to raise interest rates to fight inflation, even if it risks slowing growth in incomes and employment. I will let Mr. Bernanke and his colleagues do their job. Difficult as it is, I will hold my tongue.

• #6: This year I will vote to eliminate the penny. The purpose of the monetary system is to facilitate exchange, but I have to acknowledge that the penny no longer serves that purpose. When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful. I know that some people will be upset when their favorite aphorisms become anachronistic, but a nickel saved is also a nickel earned.

• #7: This year I will be modest about what government can do. I know that economic prosperity comes not from government programs but from entrepreneurial inspiration. Adam Smith was right when he said, “Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.” As a government official, I am not going to promise more than I can deliver. I am going to focus my attention on these three goals — peace, easy taxes, and a tolerable administration of justice — and I am going to trust the creativity of the American people to do the rest.

Announcing The “Nonpartisan Social Security Reform Plan”

Andrew Samwick, professor of economics at Dartmouth College, announces the creation of the “Nonpartisan Social Security Reform Plan”:

Along with Jeff Liebman of Harvard University and Maya MacGuineas of the New America Foundation, I am pleased to announce the “Nonpartisan Social Security Reform Plan.” Jeff was a Special Assistant to President Clinton’s National Economic Council, where he worked on Social Security, and Maya was a Social Security adviser to Senator McCain’s 2000 presidential campaign. Combined with my experience on the staff of the CEA in the Bush administration, we cover the political spectrum of recent years.

We’ve all spent plenty of time worrying about the looming fiscal crisis associated with the demographic shift toward an aging population, of which Social Security is the tip of the iceberg. Push finally came to shove, and we bound ourselves together via months of conference calls, and this is the plan that emerged. It’s not what any one of us would have come up with on our own, but those sorts of plans never become legislation anyway.

What is unique about the plan is that it is designed around the broad areas of likely compromise across the political landscape on how to restore solvency to the system. What makes the plan important is that the Office of the Chief Actuary has evaluated it and certified that it would “easily satisfy the criteria for attaining sustainable solvency.”

The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency. Specifically:

1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.

2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.

3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.

4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.

5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.

6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.

I invite your comments and questions on the plan, and I will be blogging more about the plan in the days and weeks to come. It was a fascinating experiment–we were trying to walk the very thin line between compromising our principles, which serves no one, and the principle of compromise, which is essential to moving public policy forward. It is a plan that respects political differences but not entrenched political interests. We believe that we have staked out the center of the political spectrum–the challenge now is to capture enough of the people just left and right of center to build the necessary coalition to see it through.

Some common objections and questions are answered here.

Things To Keep In Mind When Discussing Social Security

Will Wilkinson writes:

  • * The Social Security tax is regressive.
  • * The overall benefit structure accomplishes, on net, either no downward income redistribution, or a small amount of upward redistribution. (I.e., it is either close to a wash, or regressive, redistribution-wise.)
  • *The system is structured to disadvantage current workers over current retirees, and is thus invalid as a “compact” between generations, if we take the contract metaphor seriously.
  • * Because the Social Security tax hits least wealthy workers hardest, Social Security prevents many from accumulating wealth, and reinforces the divide between investing an non-investing classes.
  • *Social Security makes it impossible for many of the least wealthy to accumulate wealth that they can pass on to their children or grandchildren, thereby helping to perpetuate generational inequality.

It is crucial to note that whatever else it might be, Social Security is not PRIMARILY insurance, if it is insurance at all. The redistribution to the elderly poor it does manage to effect is incidental to the huge volume of transfers back and forth from within the same income bracket. (Net income-related redistribution come to less than 10% of total transfers) There’s a huge amount of deadweight loss in all this pointless churn.

A system of personal accounts plus a means-tested safety net would:

  • * Be more progressive in every way.
  • * Eliminate most of the unjust intergenerational transfers that are at the heart of the current system.
  • * Almost entirely close the gap between the investing and non-investing classes.
  • * Help the least wealthy workers accumulate inheritable wealth.
  • * Protect the elderly against poverty AT LEAST as well.

George P. Bush On Social Security

George P. Bush The President’s nephew, George P. Bush makes a lot of sense in his article in the DallasNews on social security:

George P. Bush: Lawmakers can’t ignore Social Security problems

A generation’s future hangs in the balance

If you’re in your 20s or 30s, why should you care about retirement when it’s more than three decades away? Because if Congress doesn’t act now to reform Social Security in this session, our generation will not enjoy one of the most cherished entitlements sought by all working Americans.

The problem with Social Security is a simple mathematical issue: There are fewer people paying into the system and more people taking out. And it’s getting worse.

People are living longer and having fewer children. The result is that the number of workers paying Social Security taxes to support one retiree has fallen from 40 in 1940 to 16 in 1950 to 3.3 today – and it will be down to a 2-1 ratio by the time our generation retires.

Most people are under the impression that Social Security is a savings account sufficiently funded to provide benefits to our parents and the rest of the baby-boom generation when it retires. However, when Social Security begins paying out more than it collects, in 2017, the only way to meet its obligations will be to increase our taxes, cut our benefits or borrow massive amounts of money that will add to the debt burden on our generation. And the problem will only get worse as we near retirement and Social Security continues to make promises it cannot afford to keep.

Why have members of Congress not represented the interests of our generation? The answer is that they think we don’t care about the solvency of Social Security. After all, very few of us bother to get involved with the political process in the first place.

Result: Congress has mortgaged our generation’s right to Social Security benefits to satisfy current debts, with members confident that their decision-making will not affect their re-election efforts.

President Bush, however, knows how much trouble Social Security is in and wants to act now to strengthen the institution so that we have the same opportunities in retirement that our grandparents have had and our parents will have. Some in Congress have said reform is not needed, as Social Security’s health is not currently a crisis. What kind of leadership is this? How can we afford not to act quickly when we know that the system’s insolvency is imminent?

True, Social Security isn’t bankrupt yet, but if we don’t tackle the crisis now, the cost of doing so in the future will be staggering. Notwithstanding criticism that reform would endanger the system’s viability, President Bush has made clear that this promise of guaranteed benefits would be kept for those near or at retirement. Still, incremental reform affecting our generation’s benefits must be undertaken or the entire system will capsize.

One way to achieve this goal is through voluntary personal retirement accounts. These accounts would give Americans in their 20s and 30s the option to take some of the taxes they already pay into the Social Security trust and save the money in their own individual retirement accounts. Each person who chooses to put money into a retirement account would make the decision about how to invest that money.

We would be able to invest in a safe mix of bond and stock funds in order to increase potential returns on our hard-earned tax dollars without tremendous risk. In several decades, as our generation nears retirement, we would be able to invest in funds that would shift toward even safer investments – such as government bonds – to help protect our accounts from volatility in the stock market on the eve of our retirement.

This nest egg will give us an opportunity to receive a higher rate of return than the current Social Security system can provide. For example, someone who earns an average of $35,000 a year during the next 35 years under this system could expect to have nearly $250,000 saved in a voluntary personal retirement account.

Our generation has a choice. We can ignore the problem and accept that the Social Security system will be bankrupt when we retire. Or we can support reforms to the system, including personal accounts, so each of us has more control over our own money.

To me, the choice is clear.

George P. Bush is a Dallas lawyer who campaigned in 2004 for his uncle, President Bush. He wrote this column for The Dallas Morning News.

Picture Of The Day

Social Security Explained

Picture Of The Day

Stubborn