Jane the Actuary Retirement

Forbes post, “Do’s And Don’t’s For Social Security Reform – Does A New Proposal Have The Answers?”

Originally published at Forbes.com on November 24, 2020.  Is it outdated four years later?  If we had reformed the system in those years, it would been, but as it is, it’s just as relevant today!

 

Just in time for Joe Biden to carefully scrutinize — or toss into the circular file — comes a new report from The Heritage Foundation, authored by Rachel Greszler, with recommendations for modernizing the Social Security old age program in order to improve its benefit structure and resolve its solvency problems. Are they on the right track? Yes — and no.

This brief report frames its recommendations in the form of Do’s and Don’t’s.

Don’t enact the Social Security 2100 Act. This House legislation matches up with many of Biden’s campaign promises, most notably that it increases Social Security’s minimum benefit to 125% of the single-person poverty level, per person, and applies FICA taxes to income above $400,000, unindexed. But Biden’s plan failed to fully-fund Social Security because benefit increases ate up most of the added revenue; this bill would have also increased the payroll tax by 2.4 percentage points, from 12.4% to 14.8% of pay. This would boost total taxes to 68.9% for the top bracket in the highest-tax state. The report notes that recipients of all income levels would see benefit boosts, even millionaires, and concludes, “Middle-income and upper-income workers do not need higher Social Security benefits to keep them out of poverty in old age, and workers of all income levels would fare better by keeping the money that the Social Security 2100 Act would take from them.”

Don’t “expand Social Security’s purpose.” Greszler criticizes proposals to use Social Security as a “piggy bank” to fund student loan debt or paid parental leave. These proposals, such as Marco Rubio’s 2018 proposal, would have, more or less, enabled new parents or young adults “borrow” against their future Social Security benefit and repay the funds by deferring the start date.

Do shift Social Security to a flat benefit. Regular readers will know that I’ve touted this reform from the start. Rather than having Social Security try to serve multiple purposes — an anti-poverty benefit as well as a pay-replacement benefit for the middle class — we should recognize that it can accomplish the former purpose much more effectively than the latter. How large this benefit should be, the report doesn’t specify.

Don’t raise or eliminate the tax cap. Greszler cites data on the impact of such a tax hike, and writes, “Even workers not directly affected by the higher taxes could experience reduced incomes as a result of lower capital that makes workers of all income levels less productive.” In fact, this argument is relatively weaker when advocating for a flat benefit; once you’ve removed the connection between the benefit formula and pay, the justification for limiting taxes to a given pay level becomes much weaker.

Do reduce the payroll tax rate. Gradually shifting to a flat benefit would enable a drop in FICA Social Security taxes from 12.4% to 10.1% while also becoming solvent. Of course, ending the cap would enable an even greater reduction.

Do reduce costs by increasing the eligibility age and indexing it to life expectancy, adopting the chained-CPI, and modernizing spousal benefits. This call for a change in the CPI used for Social Security benefits, which would tend to reduce benefits over time, relative to the current CPI-U measure, is quite the opposite of Biden’s call for adopting the CPI-E, an experimental measure which would boost benefits. With respect to spousal benefits, Greszler does not spell out a specific provision but in a separate article notes that the current survivor’s benefit disproportionately benefits wealthier women, and suggests that shared benefits or childcare earnings credits would improve the system. (Yes, there is a point of agreement with Biden’s plan here!)

Do let workers opt out of the Social Security earnings test. This is a proposal I have made in the past as well; Greszler correctly observes that the earnings test is perceived of as a tax but it isn’t, really, and suggests that workers have the option of keeping it, or keeping their full benefit instead and forgo higher benefits if they would be eligible due to recalculations from higher wages.

Do let workers opt out of a portion of their taxes and future benefits. This is in many respects the same proposal we’ve heard before: divert some of one’s payroll tax to an investment account instead, namely, in a system managed through the federal government, similar to the Thrift Savings Program for federal government workers. Greszler doesn’t specify what proportion that might be or what the corresponding reduction in ultimate benefits might look like, but touts the benefits of an “ownership option.” She also acknowledges that the math cannot be a simple matter of proportions because of the need to fund current retirees, though she notes that “That portion—similar to a legacy tax—would decline over time if policymakers enact reforms to put Social Security on a path to long-term solvency.”

Readers, this is where the math becomes challenging, and, to be honest, raises questions of fairness. Even in the existing system, higher earners subsidize lower earners because of the “bendpoint” nature of the benefit formulas. In a flat benefit system, that’s all the more clear. Is it reasonable for a higher worker to be able to use some of those funds meant to subsidize others, to use for him/herself instead? Would it not be more sensible to simply say that the lowered tax rate is what enables individuals to save more in individual accounts?

But in any case, if conservatives who would otherwise object to a nationwide autoenrollment retirement savings program find it attractive if it’s part and parcel of a broader reform package, does that point to a way forward?

Or is all of this simply several years too late, as the Democrats’ new objective to expand Social Security’s benefits doesn’t square with this at all? After all, this proposal imagines a trade-off of increasing benefits for the poor while reducing them for the middle class (gradually over time), but Biden promises we can have our cake and eat it, too, with benefit hikes for everyone.

 

 

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, “Social Security Benefit Accruals Stop After 35 Years Of Work History. Is That Fair?”

Originally published at Forbes.com on November 11, 2020.

 

Imagine that you’re a blue-collar worker who starts out with an apprenticeship directly out of high school and works until your full retirement age of 67 — for a working lifetime of 49 years.

If you had a pension in the private sector, say, 1.5% of pay per year, you’d get a pension benefit of 73.5% of your average pay.

On the other hand, imagine you’re a white collar worker who attends college for 4 years, then grad school for another three, with a gap year travelling Europe somewhere along the way. That’s a working lifetime of only 41 years. For many college graduates, add another year, because college often takes longer or an unpaid internship gets tacked on somewhere along the way. With the same pension plan, your benefit would only be 60% of average pay. If you decide to take early retirement at age 62, that would put you at a 35 year working lifetime, or a hypothetical private-sector pension of 52.5%.

But in any of these three cases — the person who works 49 years, or 40 years or 35 years, if their highest-35-year average salary is the same, indexed for wage increases, then their Social Security benefit — or, strictly speaking, their Primary Insurance Amount before any early retirement reduction, is the same.

Is that fair?

Is it fair that someone who continues to work after reaching that 35 year marker, even if they take a pay cut (say, in a semi-retirement part-time job) so that the new work history won’t actually boost their Social Security benefits, must continue to pay FICA taxes?

Yes, framed this way, it sounds pretty outrageous. It suggests that blue-collar workers are being cheated out of money they should be getting, or that white-collar workers are getting money that they don’t deserve.

Of course, that’s not actually the way the 35 year averaging works. (I admit: I initially wrote “the purpose of the 35 year averaging” but realized I can’t make a claim as to the intentions of the formula’s designers.) Effectively, the system presumes that workers who are not in the workforce are missing for valid and appropriate reasons, whether it’s schooling, or periods of unemployment or caregiving for children or parents. In some Social Security systems, say, France, for instance, the system requires a full “working lifetime” and grants “credits” for justified reasons such as these, but no such “credit” for periods spent on the beach in Fiji.

Or, the system’s design has the effect of saying, “anyone who worked ‘enough’ years over their lifetime deserves the same benefit-relative-to-income as anyone else who worked at least that much.” Social Security, in this point of view, is not about hard work, but just about being “a worker.” There’s nothing particularly worthy about working more years beyond this minimum, no reason to get rewarded or for someone who didn’t do so to lose out, because, after all, Social Security is not truly “earned” in the same way as a private-sector pension but is social insurance, which operates entirely differently. This is similar to Biden’s promise that any individual who works at least 30 years (and, remember, to earn sufficient credits requires earning $5,640 per year, as of 2020, or 15 hours per week at minimum wage) would be promised a benefit of 125% of the single-person poverty line, not because they had “earned” it by their contributions but as a matter of social insurance.

But this is, again, the problem with our ideology about Social Security. If we wished to reward people who worked more years, without increasing costs for the system, it stands to reason that we’d need to somehow reduce benefits for people who had worked fewer years. And we’ve talked ourselves into the premise that the system is fundamentally unalterable, rather than designing a system which is fundamentally flexible enough to respond to changing conditions.

 

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, “Whatever Happened To Illinois’ Plan To Fund Pensions With Asset Sales? Not Much, It Turns Out.”

Originally published at Forbes.com on October 29, 2020.

 

It was going on two years ago, back in February of 2019, that Illinois Gov. J.B. Pritzker’s office announced the creation of two task forces to improve Illinois’ chronic pension underfunding. The first of these led to a report in October, that is, a year ago, proposing the consolidation of the asset management of Illinois’ police and fire pensions, which are managed by local municipalities rather than on a statewide basis, and very quickly thereafter, in November, to legislation accomplishing the proposal.

The second of these task forces, the Pension Asset Value and Transfer Taskforce, was intended, as described in the governor’s press release, “to analyze state assets across Illinois and make recommendations as to their best use to help stabilize the state’s finances. Recommendations could include, but are not limited to, the repurposing or sale of these assets or transfer to state pension systems to improve their levels of funding.” At the time, selling the Illinois Tollway was speculated to be a possibility, with the proceeds plowed into pension plans. Other observers speculated that the state could be playing financial games by transferring currently valued at “book value” into a fund where they’d be valued at “market value,” instantly conjuring up money!

And then . . . nothing.

Or, rather, nothing visible to the public.

According to (heavily-redacted) materials recently provided to me through a Freedom of Information Act request, the task force did indeed meet regularly in the months after its formation.

In April, the governor’s office claimed that their recommendations would be coming in July.

In May, reports were said to be coming “in the coming months,” with the expectation that the end result would be a “long-term pension reform plan.”

In September, the governor’s staff circulated among themselves a draft version of an Asset Transfer report. (I was unable to inspect the report itself.)

In October, that is, almost exactly a year ago, the office told an inquiring reporter that the task force was “still working on their recommendations and should be ready to present them soon.”

Finally, in November 2019, in response to a reporter, the staff said, “the chairs of the taskforce thought it would be helpful to have municipal representation at the table during discussions.”

And here the trail ends. There’s no explicable reason why a task force meant solely to identify whether the state could shore up the funding level of its public pensions via asset transfers, would involve city governments, especially when the Illinois Municipal Retirement Fund (all employees of Illinois cities except fire, police, and the city of Chicago) is nearly fully-funded. Had the scope of the task force been expanded to a point where local municipalities’ participation had truly seemed relevant? It was, after all, at about this time, again, a year ago, when Chicago’s Mayor Lightfoot had been calling for a “statewide pension reform package” — with, of course, no further specifics. Did this hypothetical broadened scope become unmanageable?

Were there indeed assets identified — but then squabbles about how any funds should be allocated? Or, what’s most likely, did they conclude that, other than the planned sale of the Thompson Center, the proceeds of which are unknown but earmarked for pensions, there’s just not a lot of extra cash to be scrounged up from the state’s metaphorical couch cushions? And, having concluded that, did they prefer to let the task force die a quiet death, eventually forgotten about, rather than issue a report which would disappoint its readers and embarrass those who promised solutions? It should be noted that I, likewise, asked the governor’s press office for an update but received no reply.

The bottom line is, of course, that, even prior to the arrival of COVID-19, there was no easy path towards states conjuring well-funded pension plans into existence without simply contributing the necessary funds to those plans.

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.