Posts Tagged ‘Social Security’

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The Social Security system, now in its 81st year, is (according to the Congressional Budget Office [pdf]) solvent until 2029. In that year, the trust fund will be exhausted—but, still, even without any changes, the program will be able to pay out at least 71 percent of mandated benefits. And all it would take is eliminating the earnings cap (currently $118,500) to make the program fully financed for the foreseeable future.

But you wouldn’t know that from Wharton economist Olivia S. Mitchell, who like many others who have attempted to propose “reforms” to the system attempts to gin up the numbers. Her particular version is to get people to delay taking their monthly payments by promising them a lump-sum payout at the later date.

The problem, of course, is we should be doing exactly the opposite—lowering the retirement age and expanding benefits (which we could do by eliminating the earnings cap).

Even more, as Michael Hiltzik explains, Mitchell cites a particular statistic in order to create the specter of a system facing imminent crisis, to which she can then offer a “painless solution.”

The questionable part of her article appears near the bottom, where she writes:

“The Social Security shortfall is enormous. Actuaries have estimated that it’s on the order of $28 trillion in present value. That’s twice the size of the gross domestic product of the U.S. So a small delay in claiming won’t solve the problem. We’re also going to have to change the benefit formula. We’re going to have to make changes in the retirement age.” (Emphasis added.)

Most Social Security experts view that $28-trillion figure as a red flag. That’s because many people who cite it are ideologues aiming to scare the public into thinking the program’s finances are far worse than they really are. Let’s see what makes the statistic, and Mitchell’s use of it, so misleading.

The figure is an estimate of the present value of Social Security’s unfunded obligation not as it exists today, but as if it were calculated out to infinity. Economists find the so-called infinite horizon model useful in some contexts. But as it’s typically applied to Social Security it’s beloved by ideologues because it produces a really big, and really scary, estimate of the accumulated deficit.

The infinite projection appears in the annual Social Security Trustees Report, but its placement there is controversial. The Social Security Advisory Board’s 2015 technical panel of economists, actuaries and demographers recommended dropping the infinite projection from the trustees reports altogether, for two reasons. One is that it incorporates enormous uncertainties. Estimating costs, revenues and policy changes for Social Security’s conventional 75-year forecasts is hard enough; the influences playing on the program hundreds or thousands of years into the future are literally unimaginable. That makes the infinite projection “unhelpful as a guide to policy-making,” the panel reported.

The second reason is that it’s so vulnerable to misinterpretation. As an earlier technical panel observed, the projection is sometimes “quoted in policy discussions without including its relation to corresponding GDP, which is both misleading and shifts the focus from more useful metrics.”

Interestingly, that’s exactly what Mitchell does. (We should mention in passing that Mitchell actually gets her numbers wrong. The infinite projection deficit, as published by the trustees in their most recent report, was $25.8 trillion as of Jan. 1, not $28 trillion; U.S. GDP, according to the Bureau of Economic Analysis, was $18.2 trillion as of the end of 2015, not $14 trillion as Mitchell implies.)

In her MarketWatch article, Mitchell doesn’t disclose that the figure she’s citing is the infinite projection, which could lead some readers to think she’s talking about Social Security’s current deficit. (In current terms, Social Security actually runs an annual surplus and is expected to do so until 2020.) Even worse, she juxtaposes it with current gross domestic product by stating that it’s “twice the size” of GDP today. The unwary reader might be led to think that a Social Security “crisis” is on the verge of bankrupting the U.S. in the here and now. . .

Mitchell’s lump-sum plan might be a useful element in a Social Security fix if it were entirely clear that a fix was necessary. But the fact that she relied on an exaggerated statistic to make her case suggests that there may not be such a strong case, after all.

The CBO’s projection of the 75-year actuarial deficit of the Social Security program as a share of GDP is only 1.45 percent—not nearly as dramatic as Mitchell’s statistic. It’s a number that doesn’t conjure up crisis or induce panic. All it suggests is that “tweaking” the system (by, as I suggested, raising the earnings cap) will make the program solvent and create the space for what we should really be doing, lowering the retirement age and expanding benefits for American workers.

Lies, damned lies, and Mitchell’s statistic serve a very different purpose.

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It’s an issue that often comes up with my students. They believe the key problem in the country is the growing polarization between the two major political parties. Nothing gets done because politicians from opposing parties don’t seem to agree on anything.

But, as Robert Weissman [ht: ja] explains, “That story is not true.”

In fact, Americans overwhelmingly agree on a wide range of issues. They want policies to make the economy more fair and hold corporate executives accountable. They want stronger environmental and consumer protections. And they want to fix our political system so that it serves the interest of all, not just Big Money donors. These aren’t close issues for Americans; actually, what’s surprising is the degree of national consensus.

The problem isn’t that Americans don’t agree. The problem is that the corporate class doesn’t agree with this agenda, and that class dominates our politics.

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The question in the table from a recent Democracy Corps/Roosevelt National questionnaire (pdf) is a good example. Fully 73 percent of those polled were (very or somewhat) convinced by the following story:

The rules that govern our economy no longer work for Americans. For 40 years, economic policies have rewarded large corporations and the wealthiest with the promise that their gains would “trickle down” to everyone else. It hasn’t worked. Instead we have faced sluggish growth and economic insecurity for more and more Americans with all the gains going to the top. It is time to rewrite the rules of our economy so small businesses and average American families have a chance too, not just the wealthy and well-connected. That starts with preventing corporations and CEOs from flooding the political process with money so they can manipulate the rules to their advantage. Then we can focus on policies that will grow our economy and level the playing field—rebalancing the tax code so those at the top pay their fair share like the rest of us, changing corporate governance so CEOs prioritize long term investments in workers and their companies over short-term gains and speculation, and ensuring banks do what they’re supposed to do and serve America’s families and provide loans to productive businesses. We can also raise wages for working people by guaranteeing equal pay for women and create more family-supporting jobs by investing in infrastructure and making college more affordable. We have the power to rewrite the rules of our economy.

The same is true on a wide variety of issues, from increases in the minimum wage to expanding Social Security.

American opinion is not divided. What is true is that the views of the average voter are trumped by a corporate elite that finances and writes the rules for political debate in the United States.

That’s the real gridlock that needs to be broken up.

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People are always amazed when I tell them how little American workers have managed to save for retirement—and, thus, why the Social Security system is so important.

According to a new report from the Economic Policy Institute, on the state of retirement for American workers, the numbers are sobering.

Remember from yesterday that nearly half of American working families have no retirement account savings at all. That makes median (fiftieth-percentile) values low for all age groups, ranging from $480 for families in their mid-30s to $17,000 for families approaching retirement in 2013. For most age groups, median account balances in 2013 were less than half their pre-recession peak and lower than at the start of the new millennium.

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Of course, mean retirement savings are much higher than the median. Yet, while average retirement account savings grew somewhat between 2001 and 2013, this was mostly due to the aging of the large baby-boomer cohort, as older families have had more time to accumulate savings. And, for those baby-boomers, their retirement savings had declined on average more than 20 percent between 2007 and 2013.

In fact, rather than declines (or, for some groups, stagnation), we should be seeing rising retirement account balances at all ages to offset declines in defined-benefit pension coverage and Social Security cuts.

And we’re not.

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According to a new report from the Economic Policy Institute, on the state of retirement for American workers, two fundamental shifts have occurred in recent decades.

First, employers have managed to fundamentally change the nature of retirement funding by substituting defined-contribution plans for defined-benefit plans, thus shifting the risk from themselves to workers.* For example, in 1989, 41 percent of families age 32-61 had defined-benefit plans versus 35 percent that had defined-contribution plans. By 2013, that difference had reversed in dramatic fashion: only 21 percent had defined-benefit plans while 43 percent had defined-contribution plans.

Second, the percentage of families age 32-61 with any retirement plan has declined over the same period from 58 percent to 53 percent.

The combination of the two shifts has left working families even more dependent on the vicissitudes of Wall Street, since that’s where their retirement savings (if they have them) are invested, and the Social Security system, exactly when the direction of the national discussion at the elite level has been to cut Social Security payments.

Is it any wonder that American workers—while they’re working and as they attempt to plan for retirement—are feeling both insecure and angry?

 

*For those who are unfamiliar with the difference between the two kinds of plans, here’s a quick primer:

401(k) and similar plans are referred to as defined-contribution (DC) plans because employer contributions, rather than retirement benefits, are determined in advance and employers incur no long-term liabilities. Participants in these plans are responsible for making investment decisions and shoulder investment and other risks. In contrast, in traditional defined-benefit (DB) plans (pension plans, in layman’s terms), employers are responsible for funding promised benefits, making up the difference if the contributions are insufficient due to lower-than-expected investment returns, for example.

My father and many in his generation had defined-benefit plans, in other words, real pensions. I and many in my generation, if we have a retirement plan at all, only have access to defined-contribution plans.

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According to a new report from Committee on the Long-Run Macroeconomic Effects of the Aging U.S. Population—Phase II of the National Research Council, there’s a large and growing gap between the life expectancies (for both men and women) of those at the top and bottom of the distribution of income in the United States.

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For example, for a period of more than 30 years, there will have been no net gains in life expectancy at age 50 for males at the bottom of the earnings distribution. However, for males in the top earnings quintile, life expectancy at age 50 for the 1930 birth cohort is 31.7 years while, for those born in 1960, life expectancy at age 50 is projected to rise to 38.8 years.

Thus,

between the 1930 cohort and the 1960 cohort, according to these estimates and projections, life expectancy is roughly unchanged for males at the bottom of the earnings distribution but increases by more than 7 years for those at the top.

The implication of these differential trends is that the gap in life expectancies is expanding rapidly. For males born in the 1930 cohort, the highest quintile’s life expectancy at age 50 is 5.1 years longer than the lowest quintile’s. For males born in the 1960 cohort, the projected gap widens to 12.7 years.

For women, the differences in life expectancies between those at the top and the bottom are over more pronounced.

These differences, in and of themselves, are extraordinary. Four decades of rising economic inequality have resulted in rising inequality in life expectancies.

The differences in life expectancies also mean that those who want to raise the retirement age (because average life expectancies have been rising) are disproportionately hurting workers at the bottom, since their expected lifetime losses from cuts in Social Security benefits are much larger than for those at the top.

Think about it: growing inequality means that the richest among us are living much longer than men and women at the bottom. And those at the top who want to cut Social Security benefits are hurting those at the bottom even more after they retire.

The grotesque levels of inequality we’re witnessing these days hurt the poorest among us when they’re alive—while they’re working and after they’ve retired—and are pushing those at the bottom to quicker deaths.

That’s the kind of society we now live (and die) in.

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Special mention

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