The Congressional Budget Office has a very nice new study titled "Measuring Retirement Income Adequacy: A Primer," which outlines the economic theory behind retirement income adequacy and the choices of calculation you need to make when applying that theory to data.
The study hits on a number of issues I've discussed in how to measure replacement rates, which are a key shorthand for measuring retirement income adequacy. I appreciate that the CBO cites my work in a couple of places.
The basic theory of retirement saving is the so-called "life cycle model," which -- in simplified terms -- predicts that people will tend to spend the same amount from year to year.
Two key points I'd make regarding how to measure replacement rates, which represent Social Security benefits or total retirement income as a percent of pre-retirement earnings.
First, pre-retirement earnings should be calculated in real, inflation-adjusted terms. These allow you to compare the buying power of retirement income to the purchasing power that the retiree had when he was working. That's how the life cycle model would tend to see things. Social Security's actuaries, by contrast, compare retirement benefits to the "wage-indexed" average of pre-retirement earnings. This overstates the real purchasing power of the retiree's pre-retirement earnings and inappropriately raises the bar on what counts as an adequate retirement income.
Second, if you're calculating replacement rates using administrative data -- meaning, real earning records rather than stylized earners -- you're faced with the issue of whether to include years of zero earnings in the measure of average pre-retirement earnings. The life cycle model says that you should: if people smooth their consumption across years, that means that their average spending will be a function of all their years of earnings, including years of zero earnings. The SSA actuaries include 'zero years' when they calculate replacement rate relative to career-average earnings. But when they calculate replacement rates relative to 'final earnings' -- meaning, earnings in the years approaching retirement -- they exclude zero years. Doing so raises the measure of pre-retirement earnings, and so makes Social Security replacement rates look lower. The actuaries' argument is that there are too many 'zero years' in the years approaching retirement. But as I showed using the actuaries' own data, zero years aren't that much more common in the years immediately preceding retirement than they are earlier in life, when people may leave the workforce due to education, unemployment or child raising.
Where does the rubber meet the road? Well, if you were to ask SSA, they'd tell you that the average person receives a Social Security replacement rate of about 40% and that they need a replacement rate of about 70% in order to maintain their standard of living in retirement. Properly measured, I believe the average Social Security replacement rate isn't 40% but something in the 50-55% range. That helps explain why most retirees say they're doing well, even if they don't seem to have much savings on top of their Social Security.
In any case, the new CBO primer is highly recommended. Many commentators and journalists write about how much is "enough" retirement income, but the reality is that you can't really know what your opinion is until you wrestle with the sorts of choices that the CBO lays out.
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Monday, October 30, 2017
New article from the CBO: "Measuring Retirement Income Adequacy"
Tuesday, October 17, 2017
Upcoming event: “How employer-sponsored rainy day savings accounts can help workers prepare for emergencies”
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Upcoming event: “2017 OECD/AARP Seminar: Preventing Aging Unequally”
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2018 Sandell Grant Program and 2018 Dissertation Fellowship Program
The Center for Retirement Research at Boston College announces the 2018 Sandell Grant Program and 2018 Dissertation Fellowship Program for research in areas such as retirement income, older workers, or well-being in retirement. These programs are funded by the U.S. Social Security Administration.
2018 STEVEN H. SANDELL GRANT PROGRAM:
- Provides the opportunity for junior scholars or senior scholars in a new area to pursue projects on retirement income and policy issues. The program is open to scholars in all academic disciplines.
- Awards up to five grants of $45,000 for one-year projects.
- The submission deadline for grant proposals is January 31, 2018. Grant award recipients will be announced by April 2018. - Visit the Sandell Program website to view the proposal guidelines: http://crr.bc.edu/about-us/grant-programs/steven-h-sandell-grant-program-2
2018 DISSERTATION FELLOWSHIP PROGRAM:
- Supports doctoral candidates writing dissertations on retirement income and policy issues. The program is open to scholars in all academic disciplines.
- Awards up to five fellowships of $28,000.
- The submission deadline for proposals is January 31, 2018.
- Visit the Dissertation Fellowship website to view the proposal guidelines: http://crr.bc.edu/about-us/grant-programs/dissertation-fellowship-program-2
FURTHER INFORMATION: For questions, please contact: Marina Tsiknis, tsiknis@bc.edu, 617-552-1092
Read more!New working papers from the Center for Retirement Research
The Center for Retirement Research has recently released six working papers:
The Behavioral and Consumption Effects of Social Security Changes
Wenliang Hou and Geoffrey T. Sanzenbacher
Dementia, Help with Financial Management, and Well-Being
Anek Belbase and Geoffrey T. Sanzenbacher
Can Knowledge Empower Women to Save More for Retirement?
Drew M. Anderson and J. Michael Collins
How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income?
Melissa McInerney, Matthew S. Rutledge, and Sara Ellen King
How Much Does Motherhood Cost Women in Social Security Benefits?
Matthew S. Rutledge, Alice Zulkarnain, and Sara Ellen King
Homeownership, Social Insurance, and Old-Age Security in the United States and Europe
Stipica Mudrazija and Barbara A. Butrica
Monday, October 16, 2017
New paper: ““What’s Happening to U.S. Mortality Rates?”
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Friday, October 13, 2017
Upcoming event: “Bold New Approaches to Social Security Reform in the 21st Century”
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Thursday, October 12, 2017
New paper: “The Behavioral and Consumption Effects of Social Security Changes”
The Behavioral and Consumption Effects of Social Security Changes
by Wenliang HouandGeoffrey T. Sanzenbacher
Abstract
Social Security’s Trust Fund is projected to be exhausted in 2034. A variety of changes to the program have been put forward that would either push this date out into the future or delay it indefinitely. Some of these changes would cut benefits – e.g., increasing the Full Retirement Age (FRA) to 69 – while others would increase program revenue – e.g., increasing the payroll tax. While Social Security’s Office of the Chief Actuary projects the financial impact on the program of a wide variety of changes, understanding the impact of these changes on recipients’ behavior and well-being is also a valuable exercise. This paper uses the Gustman and Steinmeier structural model to analyze the effects of four changes to the Social Security program on recipients’ retirement timing and household consumption.
This paper found that:
- The two policies that reduce benefits – an increase in the FRA to 69 and a reduction in the COLA of 0.5 percentage points – would increase the length of workers’ careers by delaying retirement.
- The two policies that increase revenues – an increase in the payroll tax to 7.75 percent and an increase in the cap to cover 90 percent of earnings – would have a negligible impact on retirement timing.
- For the benefit-based policies, the reduction in consumption relative to current policy is relatively high post-retirement, with the COLA adjustment having an increasing effect with time.
- Policies that increase revenue have little effect on consumption after retirement but have a consistent effect during the working life.
The policy implications of this paper are:
- Policymakers can expect individuals to delay retirement more in response to Social Security changes that reduce benefits than from changes that increase revenue.
- In terms of consumption, policymakers considering benefit cuts versus revenue increases face a tradeoff: a sharper reduction in consumption over the shorter span of retirement or a smaller, but more prolonged, reduction in consumption during the working life.
DOWNLOAD FULL PAPER
Read more!Monday, October 9, 2017
Michigan Retirement Research Center's Fall Newsletter
MRRC Newsletter: Volume 17, Issue 3 - September 2017
DIRECTOR’S CORNER
John Laitner recaps highlights from the 2017 RRC meeting.
RESEARCHERS EXAMINE LONGER WORK LIVES
The annual Retirement Research Consortium meeting showcases the current crop of research projects from the RRC’s three research centers — Michigan Retirement Research Center, NBER Retirement Research Center, and Center for Retirement Research at Boston College. Video, slides, and papers for all the talks are available on the CRR website.
NO RETIREE IS AN ISLAND
RRC session examines how family dynamics affect wealth, retirement.
FURTHER READING ON RRC TOPICS
While the working papers for most of the projects presented at the RRC meeting will not be available until later this year, other papers on related subjects are available at MRRC’s website. Some suggestions:
NEWS FROM MRRC RESEARCHERS
Academic publications, media sightings, and conference presentations from our authors. Read more!
Thursday, October 5, 2017
Upcoming Event: Savings and Retirement Foundation, “A Primer on Household Spending in Retirement.”
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Monday, October 2, 2017
New papers from the Social Science Research Network
"Retirement Timing and Pension Incentives: Evidence from the Teachers Retirement System of Texas"
GABRIEL SALINAS, University of Texas at Austin
Email: gabriel.salinas@trs.texas.gov
I exploit unanticipated reforms to the Texas Teacher's pension plan to estimate the effect of pension incentives on retirement decisions. In 2000 and 2002 the Teacher Retirement System increased the benefit levels of all employees covered by the pension system. The reforms provide plausibly exogenous variation in the incentives to work - which differentially impacted workers due to non-linearities in the pension's benefit schedule. I leverage the reforms coupled with the non-linear benefit schedule in an instrumental variables framework to estimate the effect of pension related incentives on the decision to retire. I find substantial heterogeneity between men and women in their response to a one-year incentive to remain in the labor force. Additionally I find that a 10 percent increase in forward looking incentives decreases the probability of retirement by 1.84 percentage points from a baseline of 11 percent.
"Guardianship and the Representative Payee Program"
CRR WP 2017-8 August 2017
ANEK BELBASE, Boston College - Center for Retirement Research
Email: anbelbas@gmail.com
GEOFFREY SANZENBACHER, Boston College Economics Department
Email: geoffrey.sanzenbacher.1@bc.edu
Research suggests that 0.3 percent of all adults have been appointed a legal guardian. While the requirements for being placed into guardianship can vary from state to state, a lack of decision-making capacity is a precondition. As a result, one would expect Social Security beneficiaries who have a guardian to also have their guardian act as a representative payee. Yet little is known about the relationship between guardianship and the Representative Payee Program.
In response to a request from the Social Security Administration, this report uses the Survey of Income and Program Participation (SIPP) linked to the Social Security Master Beneficiary File and the Supplemental Security Record to investigate three questions:
1) how many beneficiaries with representative payees have guardians?;
2) how many beneficiaries have their guardian as their payee?; and
3) what are the characteristics of those with both a payee and a guardian.
Because the SIPP does not include individuals residing in nursing homes, the project also examines data from the Health and Retirement Study, which does include these individuals.
This paper found that:
- Guardianship is more common among those in the Representative Payee Program than in the population writ large, with between 5 percent to 11 percent of those with a representative payee also having a guardian, depending on the program and dataset considered.
- For those with both a representative payee and a guardian, the guardian serves as the payee the vast majority of the time.
- Individuals with a representative payee are more likely to have a guardian if they are older, white, and are not living with their representative payee. The policy implications of this paper are:
- While guardianship could lessen the need for representative payees since it provides a protective legal arrangement, few individuals with a representative payee have one.
- As more representative payees are needed with the aging of the Baby Boomers, pre-existing guardians seem unlikely to fill a large portion of the need.
"Family Transfers with Retirement-Aged Adults in the United States: Kin Availability, Wealth Differentials, Geographic Proximity, Gender, and Racial Disparities"
ASHTON VERDERY, Pennsylvania State University
Email: amv5430@psu.edu
JONATHAN DAW, Pennsylvania State University
Email: jddaw@psu.edu
COLIN CAMPBELL, East Carolina University
Email: colin@senscot.net
RACHEL MARGOLIS, University of Western Ontario
Email: soeppapers642@diw.de
This paper examines transfers of time and money between retirees and their children. It uses data from the Panel Study of Income Dynamics to test whether numbers of children, parent-child wealth differentials, geographic proximity, and gender contribute to racial and ethnic differences in transfers of time and money between retirement-aged adults and their children. Critical components of the analysis include measuring kin availability, the spatial and social embeddedness of family networks, supply as well as demand for transfers, and gender. Key limitations are that we exclude those who have no living family members with whom they could transfer, and we do not examine the role of non-familial transfers.
The paper found that:
-There are large racial disparities in family transfers; non-White older adults are less likely to give either time or money transfers to their children than White older adults. Non-White older adults are also less likely to receive time transfers from their children, but they are more likely to receive money transfers from them.
-Having more children is associated with marginal declines in the likelihood of transfer with each child, but an overall increase in the likelihood of transfer with any child.
-Parents who live closer to their children tend to provide more time to them and receive more time from them, while those in the same family provide more money.
-Parents who are relatively wealthier than their children are more likely to give them money and are less likely to receive time or money from them.
-Racial disparities in transfers appear to be growing across parental birth cohorts.
The policy implications of these findings are:
-Challenges regarding retiree financial security and the availability of informal care from family members are likely to grow because adults with fewer children receive less overall support than those with many children, and historical declines in birth rates mean that more older adults increasingly have fewer children.
-Older adults may be more likely to receive instrumental care, but not financial support, from their children in the future, because people are increasingly likely to live close to their children, and closer children are more likely to provide such care.
-There may be especially large unmet financial and instrumental needs for female and non-White population subgroups of retirees.
"Pension Plan Heterogeneity and Retirement Behavior"
NEHA BAIROLIYA, Harvard University
Email: nbairoli@hsph.harvard.edu
This paper examines the role of the shift in pension plans — from Defined Benefit to Defined Contribution — in explaining the recent increase in labor supply of older workers. A structural model of consumption, savings, Social Security, and pension plan heterogeneity is estimated using data from the Health and Retirement Study. Model simulations indicate that changes in pension plan composition can explain 10% to 30% percent of the recent increase in labor force participation of the age group 65-69, while changes in Social Security rules can explain less than a quarter of the increase in labor supply for this group.
Read more!CBPP: “Understanding the Trust Funds.”
The Center on Budget and Policy Priorities has published a “Policy Basics” article providing background on the Social Security Trust Funds and how they work.
Few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds. Despite being described by some as “funny money,” or “IOUs,” the Social Security trust funds are invested in Treasury securities that are just as sound as the U.S. government securities held by investors around the globe; investors regard those securities as being among the world’s safest investments. Although Social Security has a long-term financial shortfall that must be closed, the program’s combined trust funds will not be depleted until around 2034, which gives policymakers time to develop a carefully crafted solvency plan.
You can read the whole document here.
It’s a good piece as far as it goes, but a casual reader of the Center’s article wouldn’t come out understanding why there’s much controversy regarding the funds and whether they’re “real.”
I tried to provide some background on that issue in this 2008 post, one of the first I made to this blog. I think it’s helpful in making the controversy over the trust funds easier to understand.
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