social security – Andrew Samwick

One of the Most Important Financial Decisions You Can Make …

June 27, 2013Andrew SamwickLeave a comment

... is when to begin receiving retirement benefits from Social Security. Related to one of the themes in my last post, a new study discusses how claiming at age 62 can impact widow poverty:

This happens to a significant share of couples, because almost 40 percent of all Americans claim their benefits the same year they turn 62. But a husband who waits until age 65 can increase his widowed wife’s future benefits by up to $170 a month, according to new research by Alice Henriques, an economist with the Federal Reserve Board in Washington.

What’s interesting about this study of nearly 14,000 older couples is that she teased out how much the husband’s decision was determined by the filing date’s impact on his own benefits, versus the financial impact on his wife’s spousal and, later, her survivor benefits. Similar research in the past had examined the impact of a filing date on their combined benefits during all their years of retirement.

Henriques was able to show that the husbands, when they made their decisions, took into account the impact on themselves of the claiming date they selected. But they showed virtually “no response to the large incentives” of having the ability to provide their widowed wives with more income in the future, she said.

If the purpose of Social Security is to provide insurance against outliving one's means of support in old age, then there should be a strong presumption that benefits should rise in real terms during retirement, as other forms of support are exhausted and financial burdens of declining health are increased. In the current system, n individual can do this most easily by delaying the initial receipt of benefits from age 62 to an age closer to 70 (after which benefits are no longer actuarially adjusted).

Some Social Security Tweaks

March 14, 2013Andrew SamwickLeave a comment

Social Security is back in the news this morning as the Senate Democrats have produced their 10-year spending plan, a counterpoint to the plan released by the House Republicans earlier this month. Here's some language that caught my eye from today's Washington Post article:

While Democratic leaders are offering quiet support for Obama’s renewed campaign to strike a grand bargain with Republicans that would include cuts to Social Security and Medicare, a significant number of Democratic lawmakers are digging in their heels and vowing to protest any reduction in promised benefits. [emphasis added]

The appropriate word is "scheduled," not "promised." I've been over this before. Apart from the ability of the government to change the law at any time, there is no legal authority for some portion of these benefits to be paid after the Trust Fund is exhausted. The judicial system recognizes this -- beneficiaries have no legal standing to benefits other than what the law says at the time the benefits are payable. The press, and policy makers and analysts, would do well to choose their language accordingly. It's an easy mistake to make -- I used to do it myself.

The article then reports on an area of possible bipartisan compromise between the President and House Republicans. This alone should signal that it might be a bad idea:

Meanwhile, a growing number of Democrats have declared their opposition to a proposal that has emerged as Obama’s biggest selling point to Republicans: his offer to apply a less-generous measure of inflation to Social Security, resulting in slightly smaller annual cost-of-living increases.

I am in favor of using the most accurate measure of inflation possible to index the benefits of retirees for inflation. So yes, the change should be made, but the larger problem with Social Security benefits is that they do not rise in real terms at higher ages. The purpose of Social Security is to provide insurance against outliving one's means of support in retirement. That risk increases, dramatically for some people, at higher ages. Other sources of support, like private saving, may not be annuitized and may thus run out at advanced ages. An increasing age profile to Social Security benefits in real terms helps to offset the decline in other sources of support.

The reductions in future Social Security benefits should come in the initial benefits, not the way those benefits change over time. That would also improve incentives for older workers to stay in the labor force. But, of course, that would require agreement on principles of design, which seems very far removed from the realm of possibility in the current climate.

Debt in the White House

February 8, 2008Andrew SamwickLeave a comment

Greg Mankiw posts an e-mail from a colleague in the White House regarding "Debt and the Real Threat." Some elements are correct (like the need to scale debt or deficit figures by GDP and the challenges presented by future entitlement programs). One element is not correct, and it is reflected in a couple of instances regarding whether it is appropriate to include the Treasury bonds in the Social Security trust fund in the measure of total indebtedness or whether the right deficit measure is the unified deficit (which includes the Social Security surplus) or the on-budget deficit (which excludes it). Here's the key excerpt:

2. gross debt vs. debt held by the public - (this is the hard part) What we care about is how much the US Government owes to the American public and the rest of the world (meaning to those who buy Treasury bonds). This is commonly known as "debt held by the public". To this amount, the Chairman adds debt that one part
of the government owes to another part of the government, to get what budgeters call "gross federal debt". If you use funds from your savings account to pay down a credit card, you have decreased your "debt held by the public". For comparison, if you borrow from your savings account and put it into your checking account, and leave in your savings account an IOU from you to you, Chairman Conrad's metric would say that you have "increased your gross debt." This is economically meaningless.

Not so fast. The difference between Total Debt and Debt held by the Public is the bonds held in the Social Security trust fund. Those bonds represent a claim on future tax revenues just like bonds held directly by the public. The taxpayers in 2025 will not care whether the additional income taxes they are paying are to pay off an American citizen who holds a Treasury bond or the Social Security beneficiaries who have presented a bond from the trust fund to the Treasury for redemption so that they can collect benefits. It's the same to them--it should be the same to us.

The only way the trust fund is equivalent to "using funds from your savings account to pay down a credit card" is if the Social Security surplus is used to repurchase Debt from the Public as an equivalent amount of special issue debt is placed in the trust fund. Debt held by the Public should go down, but Total Debt should stay constant if we are operating the trust fund as it was intended.

In 2025, we get the reverse. As beneficiaries make their claims, bonds come out of the trust fund. Either taxes go up, or new debt must be issued to the public to generate funds to pay off those bonds. Debt held by the Public goes up, but Total Debt stays the same. In both cases, it is Total Debt that is telling you accurately about the size of the liabilities being passed on to future generations. Debt not currently held by the public will eventually be held by the public.

The honest budget policy is to target the on-budget deficit or Total Debt/GDP. Anything else leaves you open to the charge that you are spending the Social Security surplus, raiding the Social Security trust fund, etc. You can ignore the debt held in the trust fund only if you don't intend to honor its redemption. Let's not go there.

For more on these issues, see these earlier posts: "Chairman Ben and the Long-Term Budget" and "Which Budget Deficit to Target?"

Krugman on Obama on Social Security

November 18, 2007Andrew SamwickLeave a comment

Senator Obama's decision to make Social Security's long-term financial health an issue in last week's debate has generated some discussion among economists and pundits. As usual, Paul Krugman gets us going, claiming that Obama has been played for a "sucker:"

But the “everyone” who knows that Social Security is doomed doesn’t include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.

As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: “The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, such as the coming retirement of the baby-boom generation, our country’s financial health will in fact be determined primarily by the growth rate of per capita health care costs.”

How has conventional wisdom gotten this so wrong? Well, in large part it’s the result of decades of scare-mongering about Social Security’s future from conservative ideologues, whose ultimate goal is to undermine the program.

For the record, Obama has not said that our country's financial health won't be determined primarily by the growth rate of per capita health care costs. He is merely not using that as an excuse to ignore the challenges to Social Security's long-term financial health.

Greg Mankiw takes Krugman to task for ignoring a few people who have pointed out Social Security's long-term financial challenges who would hardly qualify as conservative ideologues. We might also point out that Peter Orszag, who is quoted so approvingly by Krugman, is the co-author of the Diamond-Orszag plan for "Saving Social Security." Conservatives like myself who do understand the numbers readily praise the plan as one that Democrats should have proposed years ago.

Krugman concludes:

But Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want.

We all wish that American politics weren’t so bitter and partisan. But if you try to find common ground where none exists — which is the case for many issues today — you end up being played for a fool. And that’s what has just happened to Mr. Obama.

I will agree with Krugman that there have been some cases where that's what bipartisanship has meant, substituting "President Bush" for "conservatives." Medicare Part D is the leading example. However, I have not met the conservative who wants what Obama has proposed: raising the maximum taxable earnings level and doing nothing else. Conservatives want something like this, which makes all of the adjustments on the benefit side. Conservatives will settle for something like this, which includes Obama's proposal plus some other changes, like gradual reductions in future benefits, small increases to the payroll tax and retirement ages, and personal accounts to absorb any new revenues to make sure they are saved rather than spent.

What is frustrating about Krugman's column is that he's given up on finding common ground and mocks those like Obama who haven't. There may be no common ground at the moment on the issues Paul thinks are relevant, and the President is as much to blame for that as anyone, but that doesn't mean that there can be none after the next election. Krugman seems to be looking for his turn to be in the majority of 50.1%. I'm looking for something better and something different.

Read more commentary from PGL at Econospeak, Don Boudreaux at Cafe Hayek, and Tom Redburn in the New York Times, who quotes some non-conservative, non-ideologues about the size of Social Security's financing problems.

A Guide to Posts on Social Security Reform

October 7, 2007Andrew SamwickLeave a comment

Welcome to any readers who arrived here from the link in the local Valley News' article, "Democrats Raise Issue of Raising Social Security Income Cap," by John Gregg. His article makes reference to this post and an interview from last week.

If you would like additional information (and opinion) about Social Security reform, there are a few ways to navigate the site to find it.

1) John's article quotes me in one part as follows:

“As a … conservative, I would prefer to do almost everything on the benefit side, that's how I'm wired,” said Samwick, who supports funneling some Social Security payments into “personal” (or what opponents call “private”) accounts for recipients. “But if you are going to raise (revenue) from taxes, raising the cap is probably the most reasonable way to do it.”

That's an accurate quote, but it could use some clarification that is permitted by a blog if not the space constraints at the Valley News. To see a conservative approach to reforming Social Security, see these three early posts on the topic from October 2004:

For a very good reform proposal that would appeal to those on the political left, see this post from the same month:

What Social Security Reform Should Democrats Propose?

2) Along with Jeff Liebman, a former advisor to President Clinton, and Maya MacGuineas, an advisor to Senator McCain in his 2000 Presidential campaign, I have proposed a Nonpartisan Social Security Reform Plan. The plan documents are here, and my initial post on it is here. It represents the sort of compromise that we think could emerge from a genuine bipartisan effort to restore long-term solvency to Social Security.

3) There's plenty of other writing about Social Security on this blog. You can find it:

A post-by-post listing in Part I (through May 2005) and Part II (since then) of the Social Security archive.
A single link to all posts tagged as being about Social Security.
A search for the term "Social Security," linked here.

Enjoy!

Social Security in the Democratic Candidates’ Debate

September 28, 2007Andrew SamwickLeave a comment

There was a portion of the debate on Wednesday night focused on Social Security, and, in particular, raising the maximum taxable earnings as a way to collect more revenue and improve projected solvency. You can watch the segment here. The issue at hand is whether solvency can be restored by removing the cap on taxable earnings, so that all earnings are subject to the 12.4% combined (employer plus employee) tax for Social Security. This is currently the case for the 2.9% combined payroll tax for Medicare Part A.

There are two ways in which this might be done. In the first, workers who pay this additional tax would have the earnings on which they were taxed included in the calculation of their subsequent benefits. In the second, workers who pay this additional tax would not have these incremental earnings included in the calculation of their benefits. The Office of the Chief Actuary at the Social Security Administration has made it very easy to assess the effect of changes of this sort on projected solvency. The first case is shown here, and the second case is shown here.

In the first case, the system can pay full benefits for almost all of the 75-year projection period. You can see this in two ways. First, the second to last column is -0.10, meaning that over the 75-year period, full benefits could be paid entirely if this provision were enacted and the combined payroll tax rate were increased (on the old base) from 12.4 to 12.5 percent. Second, you can see that the new path of the trust fund crosses zero just at the end of the projection period.

In the second case, the system can pay full benefits for the full 75-year projection period. The second to last column is now +0.28, and the trust fund has a balance of about 3.5 years worth of benefits at the end of the period. Is this enough to say that the system is solvent? I don't think so. Even in this case, the balance in the trust fund is declining and will cross zero at some point after the 75-year projection period ends. The last column of numbers shows that annual deficits are equal to almost 3 percent of (the old base) taxable payroll. More would need to be done here to ensure that the trust fund is never projected to cross zero.

It is not clear which provision the candidates meant, but I am going to assert that it was the second one. If the problem is that there is not enough money to pay currently projected benefits, then it seems odd to now increase the claims that will be made on the system by the very wealthiest recipients. (Very roughly, if I pay these taxes on another million dollars of earnings each year over the course of a career, my benefits will go up by $150,000 per year during retirement.)

This is a large increase in top marginal tax rates on incomes where the supply-side response could be relevant. When Jeff, Maya, and I were developing the LMS plan, we decided that we didn't want to do this all on the revenue side and didn't want to get all of our revenue via increases in the cap. Instead, we borrowed the idea from the Diamond-Orszag plan to lift the cap to a point where 90% of all earnings were taxed (with no incremental benefits for the additional earnings subject to taxation). This was roughly the amount subject to the tax at the time of the last big reform in 1983. (Since a lot of the increase in average earnings has been at the high end, over time, a lower share of total earnings have been below the cap.) We also added an increase in the payroll tax rate for 1.5 percent of (the old base) taxable payroll, and made up the rest of the financial shortfall with changes on the benefit side.

More importantly, we required that all new revenues go into a system of personal accounts. This was my deal-breaker. If we were to raise this much additional revenue, without channeling it to personal accounts, we would simply be compounding a budget problem that is already severe. When the government runs a Social Security surplus, it treats those monies as available to spend on things other than Social Security. We know this because it targets the unified budget deficit, and has done so pretty routinely over the last several decades. (See here and here.) If these government inflows are matched by offsetting outflows (into the personal accounts), then there is no danger that they will be used to finance current expenditures, and the additional revenues will actually raise saving rates to help prefund future obligations.

Fine Work by the Treasury on Social Security

September 25, 2007Andrew SamwickLeave a comment

The U.S. Treasury Department has released its first of six issue briefs on the Social Security and its potential reform, "The Nature of the Problem." It is a very good overview of the projected future shortfall based on the latest Social Security Trustees Report. It is particularly gratifying to see these passages in a Treasury brief:

Viewing Social Security from the perspective of how it affects current and future individuals and generations explains why reform can be fairer to future generations the sooner it is implemented. Delay reduces the options for distributing the financial burden of reform across generations because delay exempts additional generations from sharing in the financial consequences of reform.

To make this point more concretely, consider a policy of closing Social Security’s permanent financing gap by immediately increasing the payroll tax rate by 3.5 percentage points. This policy would affect all current and future workers. If the tax increase were instead delayed until 2041, when the trust fund is projected to be depleted, the requisite tax increase would be 5.8 percentage points rather than only 3.5 percentage points—the difference being that there are fewer cohorts (and therefore less resources) to tax the longer one waits. Similarly, all retirees’ benefits would have to be cut by 20.4 percent in 2007 to make Social Security permanently solvent—but this would rise to a benefit adjustment of 30.4 percent if reform were initiated in 2041. These examples show that fairness to future generations requires that action be taken sooner rather than later.

They appeared here (my first post on Social Security) nearly three years ago. The teaser for the next of the six briefs, from footnote 4 of the current brief:

The special Treasury securities in the present trust funds represent claims on the government and—ultimately—the public, in the form of future general tax revenues. Whether these trust fund accumulations constitute true pre-funding is an open question, and is discussed in Treasury’s second issue brief.

I'll look forward to seeing it.

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