Jane the Actuary Retirement

Forbes Post, “Social Security, The Dependency Ratio, And Immigration”

Originally published at Forbes.com on June 22, 2018.

 

Since the release of the most recent Social Security Trustees’ Report earlier this month, there’s been a recognition that 2034 will be here before we know it, and that, subsequent to the depletion of the Trust Fund, when benefits are cut by a quarter, we’ll all regret not having done something sooner. To be sure, my own cynical view is that the Trust Fund mechanism, however “real” it may be, is not what really matters, but rather that the boost in tax receipts from Boomers could have allowed us to build up real assets, or to at any rate, be in a position of a lower federal debt, that we’ll end up with a “Social Security Fix” along the lines of the “doc fix” to pay out benefits at their promised level regardless of Trust Fund balances, and that the greater worry is the Old Age Dependency Ratio, that is, that the combination of decreasing fertility and increasing longevity moving the ratio of working-age adults able to fund the living and medical expenses of the elderly off-kilter.  We’ve just started on a trajectory from one retiree for every 5 workers to one retiree for every 3 workers — and, what’s more, this is based on a standardized definition in which “workers” are all adults between the ages of 15 – 64, where, in practice, a significant fraction of this group are still in school, out of the workforce raising children, and so on.

Now, there are a number of proposed “fixes” for this problem, and various countries that are far more worried than the U.S. about this issue are trying to accomplish such changes as greater labor force participation (e.g., more working moms, less travel time to college degrees), more automation/robotics (e.g., as caregivers in nursing homes), and boosts in the country’s fertility rate.  And when Germany was faced with the crisis of skyrocketing numbers of migrants coming to the country in 2015, many pundits and politicians saw this as another means of solving its significantly more severe old age dependency crisis, given that the same forecasts of future populations also show a ratio of one retiree for not quite every two workers.  To be sure, initial reports were of a highly-skilled workforce of middle-class displaced Syrians, and this is now proving not to be the case, but at the same time, the birth rate in Germany is recovering due to the impact of foreign-born women.

All of which leads to the question of whether, in fact, as MarketWatch columnist Caroline Baum puts it, “immigration is ‘pure gravy’ for federal finances” and “more high-skilled immigrants could help solve Social Security’s shortfall” in the title and subtitle of an article yesterday.  Emphasizing that high-skilled immigration is key, she writes:

Increased immigration alone — even a program focused on admitting more high-skilled workers — can’t fix Social Security’s impending insolvency. But it would help.

Extrapolating from the assumptions in the trustees’ annual report, a 30% annual increase in immigration would eliminate 10% of the Social Security shortfall, according to Charles Blahous, who was a public trustee for Social Security and Medicare from 2010 through 2015 and is currently a senior research strategist at Mercatus.

But here’s the problem:  immigration isn’t just about changing this ratio.  It’s not just about wages and taxes and costs for education and healthcare and ESL lessons.  It’s not just about GDP growth.  It’s about whether our country continues along its path of division or finds a way to work together for the common good.

After all, the conventional wisdom regarding benefits for the elderly is that we as a country will always keep the spigot flowing because, in the first place, they have time on their hands to vote and to call their representatives and senators, and because, in the second place, even in the absence of the strong elder-revering culture of Asian countries such as Japan or Korea, we as a country will still consider it an obligation to care for those who are unable to care for themselves, seeing our own parents or grandparents in need.  But as the numbers of the elderly grow, their needs will increasingly compete with other government funding priorities, especially as young adults and families begin looking to the government to provide free or heavily-subsidized university education, parental leave, and childcare and perceiving this as the norm by looking overseas at European countries which do provide these benefits.  Will the next generation of young adults be as willing to accept the conventional wisdom that the elderly come first, if it is even true now in the first place?

And here’s the trouble with seeing immigration as an easy fix:  this only works if we can rid ourselves of the us-vs.-them mentality.  Consider the latest census data.  As reported by Brookings, the ethnic/racial make-up of the United States is forecast to be “minority-majority” in the year 2045; that is, in that year, the non-Hispanic white population, as defined by the Census Bureau, will form less than half the total population of the country.  However, because of the relatively young age and higher birthrates of the nonwhite and immigrant populations, there will be “tipping points” for younger ages much sooner.  In the year 2020, less than half the population of under-18s will be non-Hispanic white; in the year 2027, the same is true for those in their 20s; in the year 2033, for thirty-somethings; and 2041 for forty-somethings.  This means that, in the year 2034 when (per the current forecast) Congress will be (if they dither now) trying to come up with a fix, there won’t just be an age but a racial/ethnic divide, with the seniors whose benefits are at stake predominantly white but young adults and parents of young children nonwhite.  Will the younger generation still feel a duty to care for their elders, or will that sense of duty be, if not eliminated, then reduced by a feeling, however much or little it may be articulated, that their elders are not these people worrying about benefit cuts at all?  And, conversely, a cohort of (predominantly-white) elderly folk making voting and lobbying decisions may look at the balance between spending on the young and old differently as well and see the issue of education vs. Medicare spending in terms of hardened battle lines rather than needs of equal importance.

By no means am I saying that we should stop immigration because “they” (the newly-arrived immigrants, or nonwhite Americans in general) will not take care of “us”(white and/or native-born Americans) in our old age.  But at the same time, we can’t take it for granted that all we need to do is boost the number of bodies living in the United States to solve our retirement crisis.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Should We Continue To Count On Employers For Retirement Provision?”

Originally published at Forbes.com on July 10, 2018.

 

Yes, this is a question.  It’s not even a rhetorical question.  It’s something that I ask myself, and I invite readers to think about.

We take the so-called “three-legged stool” a bit for granted, don’t we?  Employers historically provided pension benefits for their employees, in a time and a place when it made sense for them to do so, when they relied on those pensions to scoot aging employees out the door at a traditional normal or even early retirement age, when they perceived of full-career employees as highly valuable, and when the state of funding requirements, longevity expectations, investment and risk attitudes combined together to create the expectation that pensions were a relatively affordable and low-risk means of achieving their business objectives.  Now employers have shifted almost universally to 401(k) or other forms of Defined Contribution retirement benefits.  But it’s still taken as a given, among those who discuss retirement provision, that employers, second only to the government, should be the chief providers of retirement accruals to workers.

I’d like to offer some pros and cons to maintaining this status quo.

Pros

Employees are a captive audience.  Not only can employers provide enrollment forms as a part of their new hire packet, but they can provide continued communications over time.  And because of the protections provided by legislation, employers can use automatic features to increase participation in 401(k) plans in ways that a financial advisor setting up shop and handing out business cards just can’t do.  They can auto-enroll employees into the company 401(k) plan at a given contribution rate, so that employees need to take the active step of changing or canceling their contributions.  They can auto-escalate, that is, increase the contribution rate over time, with employees needing to actively make a change to avoid it.  And they can default employees into investment funds appropriate for their age, with greater levels of risk and expected return for younger employees.  These are all very powerful tools.

Low-income employees in particular may be disconnected enough from other forms of investing and saving that there is not particularly good way of replacing the employer’s role.  A 401(k), that is, retirement savings through one’s employer, may not just be the only realistic means of retirement savings, but, for the un- or under-banked, or indeed those who live paycheck-to-paycheck, this may be the only sort of savings these workers have at all, to the extent that these employees wouldn’t seek out other financial institutions, or if, due to low account balances, such institutions wouldn’t be interested in them, or would charge high enough fixed fees to severely hamper their savings.

Employers are also able, if they’re large enough to have sufficient bargaining power, to select low-fee fund options for their employees, and even work with consulting firms to identify the best methods of helping their employees save for retirement, to get the most “bang for the [employer contribution] buck.”  They may provide online modelers and other sorts of advice — though this may come at a cost for the employees, taken as fees from their accounts.

And it goes without saying that the matching contributions that employers offer can be a strong incentive for retirement savings.  It may be that, in a world without employer-sponsored plans, that money would be redirected into pay increases or other benefits, but the incentive for employees to contribute (with the typical advice being, “always contribute at least enough to get your employer’s match”) would be lost.

Cons

Yes, there are some real disadvantages to our employer-centered retirement saving system.

To begin with, an employer-based system misses those without conventional employment (part-timers, freelancers, contractors, small business employees or owners), and a system generally structured around employers can make it difficult for these workers to find their way.  Now, as it happens, the fears that we are turning into a “gig economy” with large portions of the workforce making their way as freelancers, Uber drivers and the like, turned out to have been overblown — as reported by the New York Times, the percentage of workers working in “alternative work arrangements,” a category which encompasses all of these insecure incomes, didn’t just hold steady but dropped slightly from 11% to 10% since 2005.  But there are considerable numbers of workers, while in traditional “employee” arrangements, who lack workplace retirement plans; in fact, among all private-sector workers, about half lack such access.

There are indeed efforts to ensure that conventionally-employed workers at businesses too small to easily offer 401(k)s have access to retirement savings, with legislative proposals aimed at making it easier for employers to do so (see this summary at J.P. Morgan), and state initiatives such as that of Oregon to auto-enroll employees in state-managed IRAs.  But is all that effort at shoehorning more workers into an employer-based retirement system the most effective approach in the long term, or is there a better alternative?

It is also the case that each of the remaining items in the “pros” column has a corresponding disadvantage.  The very employer match that serves as an incentive to make a contribution, can act as a ceiling, in which employees take the match as the recommended maximum contribution level.  The default contribution levels may be right for the average employee but not for any given individual employees, especially since saving needs vary by pay levels (due to relative differences in Soc Sec pay replacement) as well as other variations in life circumstances.  And for every employer who seeks out the funds with the best value for the money, for their employees, there’s another who has other things on his mind.

All that being said, what is the alternative?  Is there an alternative?  Let’s save that for another column.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes Post, “Against Social Security Anti-Chicken-Little-ism”

Originally published at Forbes.com on June 6, 2018.

 

The latest Social Security Trustees Report was released yesterday, and, really, there was nothing remarkable about it.  It reports on the same trajectory towards Trust Fund depletion and the system’s subsequent inability to pay promised benefits, as in prior reports.  But one item that is striking is the insistence of various pro-Social Insurance advocacy groups that, not only is Social Security, and, indeed, the entire system of Social Insurance, in good health, but this demonstrates that it’s entirely appropriate to expand the generosity of the system.

Here’s the advocacy group Social Security Works:

The most important takeaways from the 2018 Trustees Report will be that (1) Social Security has a large and growing surplus, and (2) Social Security is extremely affordable. At its most expensive, Social Security is projected to cost just around 6 percent of gross domestic product (“GDP”). Indeed, in three-quarters of a century, Social Security will constitute just around 6.17 percent of GDP. . . .

The report will show that Social Security is fully and easily affordable. The question of whether to expand or cut Social Security’s modest benefits is a question of values and choice, not affordability. Indeed, in light of Social Security’s near universality, efficiency, fairness in its benefit distribution, portability from job to job, and security, the obvious solution to the nation’s looming retirement income crisis, discussed below, is to increase Social Security’s modest benefits. . . .

Moreover, expanding Social Security not only addresses the retirement income crisis, it also is part of the answer to growing income and wealth inequality and the financial squeeze on working families. Expanding, not cutting, Social Security while requiring the wealthiest among us to contribute more – indeed, their fair share – is the best policy approach to addressing these challenges while restoring Social Security to long-range actuarial balance.

The group then spends the remainder of this “backgrounder” making the claim that Social Security is, all things considered, in good financial health:  they write, for instance, that “Social Security is fully funded for the next decade, around 93 percent funded for the next 25 years, around 87 percent funded over the next 50 years, and around 84 percent funded over the next 75 years.”

And their message is repeated by others who decry those worried about the system as nothing more than Chicken Littles.

In fact, their statement about the small size of Social Security as a percent of GDP is deceptive.  Social Security taxes, based on present law, remain low, but this has no relationship to the degree to which Social Security’s actual benefits, as defined in present law, are “affordable” because the only reason why this 6% of GDP projection is true year after year is that, according to current law, when the Trust Fund ends, benefits will be cut to the degree necessary to be able to pay them from incoming FICA taxes, a benefit cut of (based on current projections) 23%, as Social Security Works acknowledges.  In fact, this oft-repeated statement, that Social Security will only be able to pay out 77% of benefit, is itself misleading as this figure, too, changes over time:  immediately upon depletion of the Trust Fund, in 2034, FICA taxes will be sufficient to cover 79% of promised benefits, but at the end of the 75-year projection period, in 2092, this drops to 74% due to changing demographics, and that’s, again, based on the assumption, as with the prior year’s report (and discussed separately here) that fertility rebounds from its current low level to a more usual 2.0 children per woman, which may or may not happen.  If fertility remains low, benefit cuts will be harsher.

I will also remind readers that Social Security is only one piece of the overall question of an aging America.  Add in Medicare and all of the other programs of government support to the elderly, and we’re looking at a projection that as early as 2046 we’re looking at government spending on the aged at nearly 30% of GDP.  And I am skeptical of easy answers like asking the “millionaires and billionaires” to “pay their fair share,” because any such new tax revenue (besides being wholly outside the international norm for how one runs Social Insurance programs) has to compete will all manner of other spending priorities.

There is not an easy answer.  And such answers as there are connect together Social Security with a whole constellation of related issues around health care, improving the well-being of the elderly, the economy and working life.  But the current tactic among various advocacy groups to claim that there’s nothing wrong with Social Security (that a tax hike can’t fix, anyway) is worrisome.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes Post, “Too Old To Work, Too Young To Retire? ‘Everyone Just Works Longer’ Isn’t An Easy Fix”

Originally published at Forbes.com on May 24, 2018.

 

It’s taken as a given these days: The current state of affairs with respect to Social Security solvency and Americans’ retirement savings rates inevitably means that Americans will have to work longer, whether that’s to the Social Security Full Retirement Age, or to age 70, or even later.  But’s it not that simple: workers will need to be healthy enough to continue working, and they’ll need jobs available for them.

Let’s back up briefly: readers may be familiar with the concept of the Old Age Dependency Ratio, defined as the ratio of older dependents (people older than 64) to the working-age population (those ages 15-64), expressed as the proportion of dependents per 100 working-age population.  For example, in 1950, there were 14 retirement-aged people for each 100 people of working age; in 2015, 25; and the relative number of older people increases to 33 in 2025 and in 2075, there are projected to be 49 retirement-aged people for each 100 people of working age, according to the OECD.  To be sure, this isn’t as bad as most OECD countries (the most extreme:  Greece, Japan, Korea, and Portugal, each with over 75 oldsters per 100 working-age people in 2075) but it remains a considerable source of worry.

And, as ratios go, both sides impact the changes over time.  There are relatively fewer people of working age, when the birth rate drops.  There are relatively more people of retirement age when longevity increases.  (And incidentally, but perhaps best reserved for another article, in the real world it also matters greatly how many of those people of hypothetical working age, are actually working — vs. spending increasingly many years in schooling to earn more credentials, for instance, or out of the labor force for childrearing or video gaming purposes.)  Whether one has many, few or no children, clearly enough, doesn’t necessarily have anything to do with whether older Americans are able to work later in life.  But we tend to assume that increased longevity more or less automatically means that these longer-lived older Americans will be able to defer retirement for the necessary number of years to keep retirement finances in balance.

To the extent that Americans choose to retire just because they’ve reached an arbitrary age at which it’s traditional to do so, it’s all well and good.  If it’s reasonable to spend a given portion of your adult lifetime working, and the remainder out of the labor force engaging in rest and relaxation, it’s fair enough that as one’s life expectancy increases, so too should your working lifetime.  It may even be that the current fears of roadblocks in the form of employers who will age-discriminate, will fade; Tyler Cowen, writing last week at Bloomberg, expressed confidence that as the relative proportion of the population who fit into the mold of desirable younger workers, decreases, those companies which succeed in best adapting to an older workforce will be the most successful:

I would suggest that the ability to spot, mobilize and deploy older workers is the next biggest source of competitive advantage in the U.S. The sober reality is that many companies should retool their methods to fit better with the experience and sound judgment found so often in older workers. That also will involve a retooling of the glamour notion to valorize the young less and the idea of maturity more. HR departments may have to work harder to help older workers keep up with new technologies.

But that gets us, with apologies for the longwinded preamble, to the greater question:  will American workers be healthy enough to continue working?  It is, after all, important to recognize that increases in life expectancy are not necessarily paired with the number of years of “healthy life expectancy.”  In fact, the data is mixed.

There exists a metric developed by the World Health Organization, the Healthy Life Expectancy, or HALE, which is intended to measure the average number of years of “healthy life” at birth, or at a given age.  According to this measure, the data for which is available beginning in 2000, American’s HALE is indeed improving.  In 2016, men had 16.7 years of “healthy life,” on average, ahead of them at age 60, compared to 15.4 years in 2000.  Women had 19.0 years, compared to 18.0 in 2000.  To be sure, these numbers are lower than elsewhere (Japan:  18.6/22.9; Canada:  19.4/21.6, etc.) but it suggests that, on average, the ability remains for older workers to, well, work.

But according to a recent report by the Population Reference Bureau, which itself compiles the results of multiple recent studies, according to some indicators, Americans are less well positioned to keep working, than was the case with the prior cohort of retirees, due to greater incidences of disability, including that caused by obesity.  One study found that:

Obese individuals face a greater likelihood of having physical limitations. . . . Although baby boomers are less likely to smoke, have emphysema, or have heart attacks, they are more likely to be obese or have diabetes or high blood pressure than the previous generation at similar ages, they report.

Another study reported that

adults in their late 50s today are in poorer health than their parents’ generation was at the same age, even though the younger group will have to work longer to collect full Social Security benefits.

However, there are some bright spots.  One of them is that dementia, surprisingly, is declining in incidence, not in absolute numbers of the elderly affected (because the number of elderly is increasing to such a degree) but in the proportion of the elderly so affected.

The other bright spot is that continued employment, far from harming ailing would-be retirees, may help them retain their health.  Studies are difficult to come by, because it’s a chicken-and-egg-type situation, since those who are in poor health are more likely to retire early in the first place.  But one study compared memory test scores of older Americans to older Europeans; the later-working Americans’ scores, on average, were higher, which is consistent with a working thesis of “use it or lose it,” that is, that the mental stimulation of work helps stave off cognitive decline.  Another study found that later-retiring French retirees were less likely to develop dementia than early retirees.  On the other hand, other studies found that blue collar workers’ cognitive function was boosted due to retirement “perhaps through more opportunities for intellectual stimulation than their workplaces” and that retirees might be using their leisure time to “practice better health habits,” for example, by exercising more.

The bottom line is that there is no ready answer to the question of how successfully Americans will be able to work later.  But what is clear is that the question of Social Security’s financial stability, or of Americans’ retirement security in general, can’t be looked at as its own silo.  Instead, it’s interconnected with a number of larger issues around the broader economy and culture.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.