Monday, September 18, 2017

Did the Social Security Deficit Sneak Up On Us?

Writing for MarketWatch, Alicia Munnell of Boston College explains why the long-term Social Security deficit has been increasing, arguing that it’s not that Social Security’s financing has been worsening so much as that the way we’re measuring Social Security’s finances will naturally lead to a larger deficit over time.

“In 1983 — the last year for any major legislation — the Trustees projected was a small surplus over the 75-year period (1983-2057). Almost immediately after that legislation, however, deficits appeared and increased markedly in the early 1990s, then dipped for a while, and then rose to around 2.7% where it has remained in the last six years.”

“The question is why the program moved from a 75-year surplus of 0.02% of taxable payroll in 1983 to today’s 75-year deficit of 2.83%. As shown in the table below, the major reason for this swing is the impact of changing the valuation period. That is, the 1983 report looked at the system’s finances over the period 1983-2057; the projection period for the 2017 report is 2017-2091. Since Social Security costs are rising with the retirement of the baby boomers, each time the valuation period moves out one year it picks up a year with a large negative balance. This moving the period forward is responsible for the bulk of today’s deficit — 1.97 of the 2.83% of taxable payroll.”

Munnell is correct, but I think she misses an important point. Policy analysts have long been aware of this “measurement window” problem: if you measure Social Security’s finances over the next 75 years, then with every passing year you’ll be picking up a new 75th year. And since those distant years are ones with big deficits, each year the 75-year Social Security deficit will increase. So in that sense, a rising Social Security deficit is entirely predictable.

The problem is that we don’t have to measure Social Security’s finances over only 75 years. Beginning in 2003, Social Security’s Trustees included in their report a measurement of the program’s finances over the “infinite horizon.” This found a substantially larger long-term long-term deficit – 3.5% of payroll in the 2004 Trustees Report, versus 1.8% over 75-years.

But the infinite horizon actuarial balance has the advantage of not rising simply due to the passage of time. So the current infinite horizon shortfall of 4.2% measured in the 2017 Trustees Report represents changes not to the measurement period, meaning either negative experiences since 2004 or more pessimistic assumptions about future economic or demographic variables.

So why don’t policymakers rely principally on the infinite horizon measure? It’s mainly not because it’s less accurate: most of the supposedly “infinite" funding shortfall is actually accounted for by things that already have happened or are predicted to occur during the next 75 years. The main reason policymakers don’t use the infinite horizon figure is that it makes the Social Security funding problem seem larger, and a larger problem is harder to solve. And elected officials don’t like hard problems.

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Monday, September 11, 2017

CRFB: “Are Today's Seniors Facing a ‘Retirement Crisis?’”

The Committee for a Responsible Federal Budget has a nice write-up of a recent AEI event on retirement incomes, which showed that retirees of all income levels are substantially better off and have lower poverty rates than you’d guess by reading official U.S. government statistics.

An event last Wednesday at the American Enterprise Institute showcased two new studies that use actual tax data from the IRS—rather than flawed survey data—to  get a better idea of how retirees are doing financially.

The first paper, authored by economists at the Investment Company Institute and the IRS, used data from a large sample of taxpayers to examine what happened to individuals’ inflation-adjusted disposable income up to three years after they claim Social Security retirement benefits. On average, individuals’ work-related income (wages, Social Security benefits, and retirement income from pensions, annuities and savings accounts) net of federal taxes stays roughly constant in three years after they claim Social Security; gross work-related income drops about 10 percent, but lower federal income and payroll taxes offset about 80 percent of this decline.

In fact, mean net incomes actually rise slightly for the lowest income groups, and are basically maintained for all but the highest-earners (who still enjoy sizeable incomes). This is true even among individuals who are no longer working.

Click here to read the whole article – it’s a great summary of what’s going on with retirement incomes.

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Smith: “How Would Dismantling Obamacare Impact Social Security?”

Writing at Newsmax.com, Brenton Smith looks at how repealing the Affordable Care Act might impact Social Security:

Why? The ACA added about $1 trillion of projected revenue to the program in 2010 (see the comments for details). At the time, economists believed that this legislation would cause paychecks to rise as healthcare costs are reduced. This sequence is great for Social Security because compensation will shift from healthcare premiums that are exempt from payroll taxes to wages that are taxable.

I am not saying that the ACA was smart legislation, nor that laws by themselves will control the cost of healthcare. The point here is that the Trustees assume that it would push the cost of health insurance down and consequently the paychecks of workers higher.

I agree with the theory. I’ve argued in the past that rising employer health costs have eaten away at employee wages, especially for low and middle earners, thereby reducing the wages taxed by Social Security. If we can reduce employer health costs, that should increase wages and tax revenues.

Obviously, whether the ACT actually will reduce health costs, and by how much, isn’t really known. But if Congress repealed the ACA, you could expect the Social Security Trustees to project a somewhat larger long-term deficit. 

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Upcoming event: RAND Behavioral Finance Forum 2017

RAND Behavioral Finance Forum 2017

Promoting Consumer Competence in Financial Decision-Making

Tuesday, October 24, 2017, 8:30 a.m. – 5:15 p.m. ET

Location:
The Pew Charitable Trusts
901 E Conference Center
901 E Street, NW
Washington, D.C.

REGISTER TO ATTEND

The RAND Behavioral Finance (BeFi) Forum brings together academic, financial, and government leaders to share cutting-edge behavioral research in financial decision making and related topics through an annual conference and webinar series.

This year's forum will focus on financial decision-making as it relates to aging, debt and credit, retirement planning, and investments and disclosure. Presentations include a mix of studies from academics, policy makers, and industry working to better understand financial decisions.

BeFi Forum Program

Agenda is subject to change. All times are Eastern.

CONTINENTAL BREAKFAST

8:30 - 9:00 a.m.

WELCOME

RAND Corporation and the Pew Charitable Trusts

9:00 - 9:15 a.m.

KEYNOTE ADDRESS

9:15 - 10:15 a.m.

Aging and Decision-Making Competence
Wändi Bruine de Bruin, Leeds University Business School

BREAK

10:15 - 10:30 a.m.

SESSION I

Using Behavioral Insights to Support Retirement Planning

10:30 - 11:45 a.m.

Costly Zero Bias in Target Retirement Fund Choice
Xiao Liu, New York University

A Community Based Randomized Controlled Trial on an Educational Intervention “YoPlaneoMiRetiro” to Promote Retirement Saving Among Hispanics
Luisa Blanco, Pepperdine University

Improving engagement with pension decisions: evidence from a randomised controlled trial
Elisabeth Costa, The Behavioral Insights Team

BREAK

11:45 - 12:15 p.m.

LUNCH SPEAKER

12:15 - 1:00 p.m.

Borrowing to Save? The Impact of Automatic Enrollment on Debt
Brigitte Madrian, Harvard Kennedy School

SESSION II

Consumer Credit Behavior

1:00 - 2:15 p.m.

Status Goods: Experimental Evidence from Platinum Credit Cards
Martin Kanz, World Bank

Do Prize-Linked Incentives Promote Positive Financial Behavior? Evidence from a Debt Reduction Intervention
Jeremy Burke University of Southern California

Don't Watch Me Read: Effects of Mandatory Waiting Periods and Observer Presence on Consumer Responses to Disclosures
Alycia Chin, Consumer Financial Protection Bureau

BREAK

2:15 - 2:30 p.m.

SESSION III

Providing Information to Investors

2:30 - 3:45 p.m.

Does Changing How Fees Are Displayed Nudge Investors Away From Overpriced Index ETFs?: Evidence from Two Experiments
Ray Sin, Morningstar, Inc.

Can Financial Disclosures Be More Effective If They Are Interactive?
TBD, New York University

Learning and Confirmation Bias: How First Impressions and Ambiguous Signals Influence Perceptions of Financial Ad
Julie Agnew, College of William and Mary

BREAK

3:45 - 4:00 p.m.

SESSION IV

The Impact of Peers on Financial Decisions

4:00 - 5:15 p.m.

Peer Advice on Financial Decisions: A case of the blind leading the blind?
Sandro Ambuehl, University of Toronto

Raising Anchor for Behavioral Interventions: Evidence in Favor of Peer Effects
Pieter Verhallen, Maastricht University

Prompting Savings Behavior through Social Comparison
Martina Raue, Massachusetts Institute of Technology

CLOSING REMARKS

5:15 p.m.

Register for this Program

Please register for this event online.

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Friday, September 8, 2017

New papers from the Social Science Research Network

"Hispanics’ Understanding of Social Security and the Implications for Retirement Security: A Qualitative Study" Free Download
Social Security Bulletin: 77(3): 1-14 (2017)

LILA RABINOVICH, Center for Economic and Social Research (CESR)
Email: lilarabi@usc.edu
JANICE PETERSON, California State University
Email: jlpeterson@hotmail.com
BARBARA A. SMITH, Government of the United States of America, Social Security Administration, Office of Retirement Policy
Email: barbara.a.smith@ssa.gov

This article discusses why effective outreach to Hispanics is important to improve their understanding of Social Security and enhance their retirement security. It examines Social Security literacy and preferred ways of receiving information about the program by using focus groups of three ancestries (Mexican, Puerto Rican, and Cuban) and of English and Spanish speakers. This article is one of the first to research between-group differences and discuss their implications.

"The Rotten Deal: Managed Mutual Funds and Retirement Income" Free Download

DAVID W. RASMUSSEN, Pepper Institute on Aging and Public Policy
Email: dwrasmussen@fsu.edu

About 70 percent of mutual fund assets are in managed funds. These funds seek to earn an above average return for investors but, because of the up-front loads, fees and other costs, they generally earn less than the low cost index funds that only seek to get a return equal to that of the stock market. Investors can expect their retirement savings to be reduced by 25 percent or more by favoring managed funds over index funds. The costs imposed on investors in managed funds result in tens of billions of dollars in profit for the industry. Compromised retirement savings is of public concern if government programs are going to support elderly households in need. Two policy options are explored. One is focused on educating investors about the rotten deal offered by managed funds while the other is to impose a fiduciary responsibility on the industry that requires them to act in the best interests of its clients. There is ample evidence that the industry will vigorously combat such efforts.

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Thursday, September 7, 2017

Ways and Means Hearing on Disability Backlogs

On September 6, the Social Security Subcommittee of he House Ways and Means Committee held a hearing titled

“Determining Eligibility for Disability Benefits: Challenges Facing the Social Security Administration.”

The hearing video is available at the Subcommittee’s webpage, while you can download the written testimony below.

Witness List

Bea Disman
Acting Chief of Staff, Social Security Administration
Testimony

Kathryn Larin
Director of Education, Workforce, and Income Security Issues, Government Accountability Office
Testimony

Elizabeth McLaren
Bureau Chief, Iowa Disability Determination Services on behalf of National Council of Disability Determination Directors
Testimony

Marilyn Zahm
President, Association of Administrative Law Judges
Testimony

Lisa Ekman
Director of Government Affairs, National Organization of Social Security Claimants’ Representatives on behalf of the Consortium for Citizens with Disabilities Social Security Task Force
Testimony

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Tuesday, September 5, 2017

Social Security Advisory Board Releases Annual Report

Social Security Advisory Board

Board releases 2016 annual report

The Board is pleased to release the 19th Annual Report of the Social Security Advisory Board. The annual report is also available on the Board’s website (www.ssab.gov). It chronicles the events and activities in which the Board engaged in during 2016.

The Board continued its study of representative payees and published the report A Call to Action outlining the growing need for payees and a thorough review of Social Security Administration (SSA) policy and procedures. In its Supplemental Security Income (SSI) statement (published in SSA’s Annual Report of the SSI Program), the Board continued discussing payee issues and concerns, highlighting growing awareness of a model that supports, rather than replaces, a person’s financial decision making authority.

Following the Board sponsored report of the 2015 Technical Panel on Assumptions and Methods, the Board decided to explore in more detail how the Social Security trustees project labor force participation and the effect of those projections on trust fund finances. In the spring of 2016, the Board commissioned an independent technical panel of five eminent labor economists to focus on explaining trends in labor force participation and the methods used to project participation rates into the future. The panel’s completed report was issued in 2017.

The passage of the 2015 Bipartisan Budget Act included a requirement for SSA to field a  demonstration project to study the effects on earnings of a voluntary offset of disability benefits  offered to beneficiaries who attempt work. The Board commissioned a report to differentiate and discuss the new demonstration project with an earlier demonstration project. The independent report was released in the spring of 2016.

In July, the Board held a public forum to discuss some of the complexity inherent in the SSI program. The event, held in Washington, D.C., brought together experts in the field to discuss resource limits and in-kind support and maintenance rules as well as the experiences of young recipients navigating the program. The forum generated some surprising bipartisanship around the need for a less complex program, automatic cost of living increases and stronger incentives for both youth and adult recipients to attempt work and earnings.

Throughout the year, the Board met month-by-month in furtherance of its mission to understand and report on the administrative challenges facing the agency and how those challenges impact program beneficiaries and the public writ large. The Board met with the Acting Commissioner of Social Security, SSA executives, and staff, with policymakers on Capitol Hill, and advocates. The Board traveled to San Francisco for meetings with regional management and employees from the field, hearing office and processing center operations as well as local stakeholders to learn firsthand how policy made in Washington and Baltimore translates on the ground and in the lives of real people.

The Board saw significant changes in its membership in 2016, as Dorcas Hardy and Alan Cohen finished their terms, and Kim Hildred joined the Board in September. The Board is grateful to Alan and Dorcas for their service and innumerable contributions to the work of the Board. 

The Board is proud of its bipartisan work and looks forward to continued efforts to improve Social Security programs for the American people. 

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