Jane the Actuary Retirement

Forbes post, “Biden And Warren Want To Eliminate The Windfall Elimination Provision. Here’s Why They’re Wrong.”

Originally published at Forbes.com on February 13, 2020.

 

Here’s what Elizabeth Warren promises, if elected president, with respect to public sector workers whose employers have opted out of Social Security:

“if you work in state or local government and earn a pension, two provisions called the Windfall Elimination Provision and Government Pension Offset can reduce your Social Security benefits. WEP slashes Social Security benefits for nearly 1.9 million former public-sector workers and their families, while GPO reduces –– and in most cases, eliminates –– spousal and survivor Social Security benefits for 700,000 people, 83% of whom are women.

“My plan repeals these two provisions, immediately increasing benefits for more than two million former public-sector workers and their families, and ensuring that every current state and local government employee will get the full Social Security benefits they’ve earned.” 

Here’s Joe Biden:

“Current rules penalize teachers and other public sector workers who either switch jobs or who have earned retirement benefits from various sources. The Biden Plan would eliminate these penalties by ensuring that teachers not eligible for Social Security will begin receiving benefits sooner – rather than the current ten-year period for many teachers. The Biden Plan will also get rid of the benefit cuts for workers and surviving beneficiaries who happen to be covered by both Social Security and another pension. These workers deserve the benefits they earned.”

To start with an incidental observation, the Biden promise to get rid of the 10 year delay is poorly worded but appears to be a promise to restrict public plans’ ability to use long vesting schedules as a way of reducing benefits for short-service workers in favor of full-career employees, and has nothing in particular to do with federal Social Security rules.

But both of these candidates promise to get rid of the Windfall Elimination Provision (WEP) and the Government Pension Offset — in Warren’s case, characterizing these as unfairly “slashing” benefits.

Yet these provisions are entirely fair, and intended to ensure that these workers don’t double-dip and take advantage of provisions that were intended to help the poor, rather than middle-class workers.

Consider the structure of the Social Security benefit formula: regardless of how many years one has worked, Social Security averages only the highest 35 years (after wage indexation). Then the benefit formula sums up the total of

 

  • 90% of the first $960 in average indexed monthly earnings (AIME), plus
  • 32% of the AIME between $960 and $5,785, and
  • 15% of the AIME over $5,785.

 

(See the Social Security site for more details.)

These two design element are meant to help the poor. The limit of 35 years in the averaging period, even though one might work considerably longer — as many as 47 years, that is, from age 18 to 65 — is not meant as a signal that 35 years of work are sufficient to have “earned” the full benefit rate; Social Security is meant to be accrued over one’s entire working lifetime. Rather, the shorter averaging period benefits those who have spells of unemployment, time spent caregiving or in school, etc. And the 90% benefit level for the lowest income tranche boosts benefits to a relatively higher percent of pay, for those otherwise at risk of below poverty benefits — whether their AIME is low because of many zeros in their work history or a lifetime of low-income work.

Without an adjustment to their benefit, teachers unfairly benefit from these provisions. Teachers who spend part of their working lifetime teaching in a state which opts out of Social Security, and the remainder elsewhere, or working in the private sector during the summer, or moonlighting after-hours, or by working for part of their career in private-sector, Social Security-contributing jobs such as parochial school-teaching, appear “on paper” to have low wages and benefit from the imbalanced 90% tranche meant to aid the genuinely poor. In addition, they are “double-dipping” when they collect benefits from a system that’s designed for people paying into the Social Security system during one’s entire working lifetime, while simultaneously collecting additional benefits earned without paying into the system.

The WEP attempts to remedy this and remove the teachers’ unfair extra benefits. The method is rudimentary and simply says that if you have a pension benefit due to you due to participation in a public pension plan that opts out of Social Security, then you don’t get the benefit of that 90% factor on the first $960 in monthly earnings, because the Social Security benefit is treated as supplementary to the primary public plan benefit. The WEP is not applied if you have 30 or more years of “substantial earnings” (about $25,000 in 2020), which would mean that the income from which you paid Social Security contributions is your “primary” income and your public employment was secondary, and between 20 and 30 years there’s a gradual phase-out. The reduction of the WEP is also capped at half the level of the pension due to Social Security opt-out income (which, among other things, means that schoolteachers who were never vested, never have a WEP applied to them).

(See the Social Security Administration publication “Windfall Elimination Provision” for more information.)

Now, one can argue easily enough that this is not the right way to solve the problem, that this crude calculation doesn’t really work as it should. And indeed, the original formula was based purely on the ultimate Social Security opt-out pension benefit due to limitations in data availability at the time the law was implemented, and a proposed reform which would adjust benefits in proportion to private vs. public sector income, the “Equal Treatment of Public Servants Act of 2019” has been introduced repeatedly, most recently this past summer by Rep. Kevin Brady (R-Texas), with 44 cosponsors, all but 3 of them Republican.

Specifically, since data is now available on noncovered as well as covered wages, the Social Security Administration would calculate a new preliminary PIA (or baseline Social Security benefit) based on a workers’ total lifetime compensation. Then the ratio of the covered earnings to total earnings would be calculated, and this ratio would be applied to the preliminary Social Security PIA. This calculation would be called the PSF, or Public Servant Fairness formula. (See “Reforming the Social Security WEP Exposes Weaknesses in State and Local Pensions,” by Chantel Boyens, Erald Kolasi, and Jack Smalligen athe Urban Institute, for a comprehensive explanation.)

But here’s an interesting wrinkle to that proposal: it would help lower-income earners, by giving them more of the benefit of that initial 90% than they have at present. But there are other workers who would be disadvantaged by this change, because it reduces their Social Security benefits in proportion to their non-covered income without regard for whether that non-covered income actually produced the same level of benefits as Social Security.

And, yes, I yammer on incessantly about the Illinois Tier 2 teachers’ benefits, and the raw deal those teachers are getting. Teachers who leave without accruing 10 years of service will receive no benefit at all. (Yes, Social Security also requires 10 years of work history, but this can be from among multiple jobs.) Teachers who work moderately longer will receive a benefit that’s still lower than Social Security, not so much due to the benefit formula, as because the benefits are frozen at the time of termination, in contrast to Social Security’s indexation (adjusting for wage inflation) of each year’s earnings up to the time of the calculation at retirement.

In fact, as the Teacher Pensions Blog points out, Elizabeth Warren’s home state of Massachusetts is similarly egregious, with a 10 year vesting requirement and a benefit accural structure that means that a new 25-year-old teacher would have to teach for 22 consecutive years before their public pension plan benefits are as generous as Social Security — all to keep the cost of the system in check while keeping benefits (overly-)generous for full-career teachers.

Hence, the title of the Urban Institute report: this appealingly simple WEP reform exposes the weaknesses that these state and local pensions are a raw deal for short- and even medium-service workers.

But that doesn’t mean that the answer is to eliminate the WEP, as Warren and Biden promise. It’s to fix the inequities in the state and local systems or, better yet, to include all workers in Social Security, rather than permitting opt-outs in the first place. (And, incidentally, the GPO works similarly to prevent double-dipping, but the finer points of that program are a story for another day.) As it is, the call to eliminate the Windfall Elimination Provision sounds like a nice way to help teachers, but it’s nothing other than pandering.

And yes, as a final reminder, my “basic retirement income” Social Security plan eliminates these issues entirely.

 

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, “Who Should Pay For Healthcare And Social Insurance? Sorry, Elizabeth Warren, The Answer is ‘All Of Us'”

Originally published at Forbes.com on November 4, 2019.

 

Elizabeth Warren just released her proposal for funding the single-payer healthcare system she calls “Medicare for All” but which is far more generous than the existing Medicare system, promising all medically necessary/appropriate services/treatments not just with respect to traditional healthcare but also dental, hearing, vision, and long-term care, both in-home and institutional, all without any premiums or direct cost to recipients, and without any wait (”care when they need it”). (See Warren’s just-released proposal, in which she references the Medicare for All Act of 2019 as a guide for details, a summary of which is at sponsoring Representative Pramila Jayapal’s website.)

I’ve written previously on another platform that, however often supporters of a national healthcare system claim that this is “what every other country does,” this is in fact not the case, that even the most generous of Social Insurance-based healthcare systems top out at covering 85% of expenditures, with the remaining 15% coming from out of pocket costs or private health insurance, and that either directly through required cost-sharing or non-covered treatments, or indirectly as wait times lead those who can afford it, to supplement or replace the state-provided benefit. As an example, in Australia, which literally calls its state program “Medicare,” the public system covers 67% of healthcare spending.

And now, not only does Warren promise unheard-of generosity in benefits, but she promises that this can be done in a way that’s “free” for everyone but the wealthy. There’s a lot of smoke and mirrors here, including a substantial understatement of the actual cost of her plan ($20.5 trillion over 10 years rather than the $30 trillion that both Bernie Sanders and progressive supporters of the plan estimate), claims that she can hold administrative costs down to the figure Medicare reports for its existing program for the elderly, simply by fiat, and a tax on employers that’s meant to represent the equivalent of what they currently pay in their share of the premiums but becomes after a phase-in something more akin to a (very large) tax on headcount (and a lot more – which I griped about elsewhere), but her bottom line consists of substantial tax hikes on the wealthy and corporations.

And, in the same way as no other country imagines that all medical (and ancillary) care can be provided by the federal government with no limits, copays, or waits, it is also the case countries simply don’t fund their systems by means of “taxing the rich” but expect the same citizenry that benefits from the system, to pay for it, either as a part of an income tax system in which everyone pays at rates higher than in the United States, or through a payroll tax similar to our FICA tax, or both.

Of Bernie Sanders’ favorite countries, that is, Scandinavia: Denmark funds its system mainly through a national health tax of 8% of taxable income, and Norway and Sweden fund their systems through national and local taxes, according to the Commonwealth Fund’s International Health Care System Profiles.

The United Kingdom funds its system through both general tax revenues and a employee tax of 2.05% of pay up to GBP 45,032 in annual earnings, and 1% thereafter, plus an employer tax of 1.9% of earnings.

German employees and employers pay 7.3% of pay up to a EUR 53,100 per year cap, plus 1.275% each up to the cap for long-term care (which, incidentally, covers only a portion of those costs).

In France, employees pay between 0% and 6.5%, employers pay 13.5%, and the national government pays an additional amount from general tax revenues.

And to our north, again, Canada funds its system through general tax revenues, as well as up to a 4.3% employer payroll tax, varying by province, and, in Ontario, a premium of about 1% of pay, capped at $900 for income of $200,000.

(In each of these cases, this excludes the additional costs to individuals for out-of-pocket costs and private insurance.)

The fundamental premise of social insurance is one of “we’re all in this together.” These are programs in which everyone pays (with certain exceptions for the poor) and everyone benefits.

And consequently, to truly implement a system such as what Warren promises, in which it is the wealthy and corporations who bear the burden of providing health benefits for Americans, would not be placing us within the norm for healthcare-providing countries, but far outside it.

 

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, “Elizabeth Warren Wants To Cut The Value Of Your Retirement Account”

Originally published at Forbes.com on September 21, 2019.

 

So, as it turns out, Elizabeth Warren’s Social Security expansion proposal is not the only one of her plans to affect Americans’ retirement well-being. But the proposal of hers which will affect Americans’ retirement savings, in their 401(k)s and their IRAs and the funded status of their pension plans (which might be irrelevant for single-employer traditional pension plans guaranteed by employers but matters considerably for multi-employer plans), is tucked away in a component of her platform with the harmless-looking title, “Empowering Workers Through Accountable Capitalism.”

It’s a proposal that’s a repeat of legislation she proposed in 2018, the “Accountable Capitalism Act,” which, as it happens, I dug into at the time on another platform. The most nebulous part of the proposal is the notion that large corporations would be obliged to pursue the “best interests” of a long list of entities, not merely shareholders but also employees, suppliers, customers, the local communities where the companies locations are based, and others, with the fundamental premise that such a corporation “shall have the purpose of creating a general public benefit.” But however much writers such as Kevin D. Williamson decried this as “the wholesale expropriation of private enterprise in the United States” this all appears to be aspirational and symbolic, without any enforcement mechanism included in the legislation, or administrative agency named to ensure the corporation is indeed “creating a public benefit.”

What is far more concrete is a requirement that such “United States corporations,” that is, those with over $1 billion in revenue, would be obliged to bring onto their boards of directors, representatives elected by employees, at a minimum ratio of 40% of the total board members. The website declares:

“Elizabeth’s plan gives workers a big voice in all corporate decisions, including those about outsourcing, wages, and investment,”

and references Germany as an example of a country with a similar approach.

In an abstract way, of course, directors are bound to represent shareholders; if 40% of board members no longer represent the shareholders, than this is, in effect, taking away from shareholders the ownership of 40% of the company. But this is more than just an abstract impact. How much of a difference would it make?

In an analysis of Warren’s proposal in 2018, Matthew Yglesias at Vox cites research that ties the German “codetermination” requirement, as it’s called (which has required employee representation in many industries in 1951 and universally in companies with over 2,000 employees in 1976), versus the American principle of maximizing shareholder value, as responsible for the considerably greater growth of share prices in the U.S. compared to Germany and countries with similar requirements. Based on these differences, Yglesias writes, “share prices could fall by 25 percent.”

But this is fine for Yglesias because, he claims, it’s only the ultra-rich who own stock: the richest 10% own 81.4% of the stock market, and the top 1% own 38% of the stock market wealth. But the study he derives these figures from focuses exclusively on household wealth based on a government survey, the Survey of Consumer Finances, so it excludes from its calculations “wealth” owned by individuals in the form of promised future pension benefits (and backed by pension funds), and takes no interest in the amount of stock market wealth owned by nonprofits or other institutions. Take a look at the estimates from Pensions & Investments: 80% of stock market equity is held by institutions: that means, mutual funds, pension funds, 401(k)s, and the like. In particular, 37% of stock is owned by retirement accounts; when subtracting out foreign owners of US stock (26% of the total), 50% of US-owned US equities are owned within retirement funds. And it should go without saying that there is no way to “punish” the wealthy by causing the value of only the stock they own to go south while somehow protecting the 401(k) and other retirement accounts for the rest of us. It’s cutting off your nose to spite your face and, as someone with a 401(k) account, I’d really prefer not to do this.

 

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.