_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 6, No. 10: May 19, 2005
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
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Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2005. All rights reserved.
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Topic of This Issue:
Social Security
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"The Social Security Early Entitlement Age in a Structural Model
of Retirement and Wealth"
Journal of Public Economics, Vol. 89, pp. 441-463,
February, 2005
ALAN L. GUSTMAN
Dartmouth College
Department of Economics
National Bureau of Economic Research (NBER)
THOMAS STEINMEIER
Texas Tech University
Department of Economics and Geography
"The Security of Social Security Benefits and the President's
Proposal"
The Elder Law Report, Vol. 16, No. 9, pp. 1-5, April 2005
RICHARD L. KAPLAN
University of Illinois at Urbana-Champaign
College of Law
WORKING PAPERS
"Reducing the Risk of Investment-Based Social Security Reform"
MARTIN S. FELDSTEIN
National Bureau of Economic Research (NBER)
Harvard University
"Options to Balance Social Security Funds Over the Next 75 Years"
VIRGINIA P. RENO
National Academy of Social Insurance (NASI)
JONI LAVERY
National Academy of Social Insurance (NASI)
"The Life-Cycle Personal Accounts Proposal for Social Security:
An Evaluation"
ROBERT J. SHILLER
Yale University
Cowles Foundation
ICF at Yale School of Management
National Bureau of Economic Research (NBER)
"Social Security, the Government Budget and National Savings"
PETER A. DIAMOND
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
"Changes in the Physiology of Aging During the Twentieth Century"
ROBERT W. FOGEL
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"The Social Security Early Entitlement Age in a Structural Model
of Retirement and Wealth"
Journal of Public Economics, Vol. 89, pp. 441-463,
February, 2005
BY: ALAN L. GUSTMAN
Dartmouth College
Department of Economics
National Bureau of Economic Research (NBER)
THOMAS STEINMEIER
Texas Tech University
Department of Economics and Geography
Contact: ALAN L. GUSTMAN
Email: Mailto:Alan.L.Gustman@dartmouth.edu
Postal: Dartmouth College
Department of Economics
6106 Rockefeller Center
Hanover, NH 03755 UNITED STATES
Phone: 603-646-2641
Fax: 603-646-2122
Co-Auth: THOMAS STEINMEIER
Email: Mailto:thomas.steinmeier@ttu.edu
Postal: Texas Tech University
Department of Economics and Geography
Lubbock, TX 79409-2101 UNITED STATES
ABSTRACT:
A structural life cycle model of retirement and wealth
attributes retirement peaks at both ages 62 and 65 to Social
Security rules and wide heterogeneity in time preferences. Those
with high discount rates often retire at 62. They have few
assets and heavily value lost benefits from working after 62,
largely ignoring potential increases in later benefits.
Declining actuarial adjustments beginning at 65 induce those
with low discount rates to retire at 65. Raising the Social
Security early entitlement age to 64 induces 5 percent of the
population to delay retiring, shifting the retirement spike from
62 to 64.
JEL Classification: H55, J14, J26, J32, D31, E21, D91, I3
______________________________
"The Security of Social Security Benefits and the President's
Proposal"
The Elder Law Report, Vol. 16, No. 9, pp. 1-5, April 2005
BY: RICHARD L. KAPLAN
University of Illinois at Urbana-Champaign
College of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=700323
Paper ID: U Illinois Law & Economics Research Paper No. LE05-007
Contact: RICHARD L. KAPLAN
Email: Mailto:RKAPLAN@LAW.UIUC.EDU
Postal: University of Illinois at Urbana-Champaign
College of Law
504 E. Pennsylvania Avenue
Champaign, IL 61820 UNITED STATES
Phone: (217) 333-2499
Fax: (217) 244-1478
ABSTRACT:
This article considers the Social Security program and President
George W. Bush's proposal for individual accounts. The article
begins by addressing the nature of the Social Security program's
trust fund and explains how the federal government's ability to
pay benefits is a function of political will more than the
pecuniary intricacies of governmental trust fund accounting. The
article then critically examines the components of the long-term
financial situation of Social Security, including the use of
economic growth rate assumption's that are extremely low by
historical standards. It then analyzes several different
possible responses, including reallocating governmental
expenditures, changing the formula for calculating initial
retirement benefits, increasing the cap on Social Security's
payroll tax, and raising the retirement age, among others.
Finally, the article notes that folks who would prefer to depend
on their own individually managed retirement assets have a
mechanism already available in the form of the Individual
Retirement Account, a mechanism that is superior to President
Bush's proposal for individual Social Security accounts in
several dimensions.
______________________________
W O R K I N G P A P E R Abstracts
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"Reducing the Risk of Investment-Based Social Security Reform"
BY: MARTIN S. FELDSTEIN
National Bureau of Economic Research (NBER)
Harvard University
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=656581
Paper ID: NBER Working Paper No. W11084
Date: January 2005
Contact: MARTIN S. FELDSTEIN
Email: Mailto:msfeldst@nber.org
Postal: National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138 UNITED STATES
Phone: 617-868-3905
Fax: 617-868-7194
ABSTRACT:
This paper describes the risks implied by a mixed system of
Social Security pension benefits with different combinations of
pay-as-you-go taxes and personal retirement account (PRA)
saving. The analysis shows how these risks can be reduced by
using alternative private market guarantee strategies. The first
such strategy uses a blend of equities and TIPS to guarantee at
least a positive real rate or return on each year's PRA saving.
The second is an explicit zero-cost collar that guarantees an
annual rate of return by giving up all returns above a certain
level. One variant of these guarantees uses a two stage
procedure: a guaranteed return to age 66 and then a separate
guarantee on the implicit return in the annuity phase. An
alternative strategy provides a combined guarantee on the return
during both the accumulation and the annuity phase. Simulations
are presented of the probability distributions of retirement
incomes relative to the 'benchmark' benefits specified in
current law. Calculations of expected utility show that these
risk reduction techniques can raise expected utility relative to
the plans with no guarantees. The ability to do so depends on
the individual's risk aversion level. This underlines the idea
that different individuals would rationally prefer different
investment strategies and risk reduction options.
JEL Classification: H0, H3, H5
______________________________
"Options to Balance Social Security Funds Over the Next 75 Years"
BY: VIRGINIA P. RENO
National Academy of Social Insurance (NASI)
JONI LAVERY
National Academy of Social Insurance (NASI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=678549
Date: February 2005
Contact: VIRGINIA P. RENO
Email: Mailto:vreno@nasi.org
Postal: National Academy of Social Insurance (NASI)
1776 Massachusetts Avenue, NW
Suite 615
Washington, DC 20036-1904 UNITED STATES
Phone: 202-452-8097
Fax: 202-452-8111
Co-Auth: JONI LAVERY
Email: Mailto:jlavery@nasi.org
Postal: National Academy of Social Insurance (NASI)
1776 Massachusetts Avenue, NW
Suite 615
Washington, DC 20036-1904 UNITED STATES
ABSTRACT:
Social Security is in excellent financial shape over the next
decade; it is running surpluses while the rest of the federal
government is running deficits. If the Trustees' "best
estimates" for the next 75 years hold true, Social Security
funds will fall short of benefit costs in about 2042. In that
year, taxes coming in will be sufficient to pay 73 percent of
benefits promised under current law. Many options are possible
to ensure that all legislated benefits can be paid. This brief
explores a variety of changes that eliminate all or part of the
shortfall. Removing the cap on wages subject to Social Security
taxes - now $90,000 - would bring in enough new money to
eliminate the deficit. Price-indexing the benefit formula would
reduce benefits enough to erase the deficit. Many combinations
of changes would remedy the projected shortfall for 75 years and
beyond. The brief also notes how proposals to create individual
Social Security accounts differ from plans to bring about
long-term solvency.
______________________________
"The Life-Cycle Personal Accounts Proposal for Social Security:
An Evaluation"
BY: ROBERT J. SHILLER
Yale University
Cowles Foundation
ICF at Yale School of Management
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=703221
Paper ID: Yale ICF Working Paper No. 05-06; Cowles Foundation
Discussion Paper No. 1504
Date: April 2005
Contact: ROBERT J. SHILLER
Email: Mailto:robert.shiller@yale.edu
Postal: Yale University
Cowles Foundation
Box 208281
New Haven, CT 06520-8281 UNITED STATES
Phone: 203-432-3708
Fax: 203-432-6167
ABSTRACT:
The life-cycle accounts proposal for Social Security reform has
been justified by its proponents using a number of different
arguments, but these arguments generally involve the assumption
of a high likelihood of good returns on the accounts. A
simulation is undertaken to estimate the probability
distribution of returns in the accounts based on long-term
historical experience. U.S. stock market, bond market and money
market data 1871-2004 are used for the analysis. Assuming that
future returns behave like historical data, it is found that a
baseline personal account portfolio after offset will be
negative 32% of the time on the retirement date. The median
internal rate of return in this case is 3.4 percent, just above
the amount necessary for holders of the accounts to break even.
However, the U.S. stock market has been unusually successful
historically by world standards. It would be better if we adjust
the historical data to reduce the assumed average stock market
return for the simulation. When this is done so that the return
matches the median stock market return of 15 countries 1900-2000
as reported by Dimson et al. [2002], the baseline personal
account is found to be negative 71% of the time on the date of
retirement and the median internal rate of return is 2.6
percent.
JEL Classification: H55
______________________________
"Social Security, the Government Budget and National Savings"
BY: PETER A. DIAMOND
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=700383
Paper ID: MIT Department of Economics Working Paper No. 05-09
Date: March 17, 2005
Contact: PETER A. DIAMOND
Email: Mailto:pdiamond@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
Room E52-344
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Phone: 617-253-3363
Fax: 617-253-7804
ABSTRACT:
The overlapping generations model pioneered by Paul Samuelson is
used to address an issue in Social Security. In the 1983 Social
Security reform, Congress chose to build a substantial trust
fund, with principal and interest both to be used for later
benefits. That is, Congress chose payroll tax rates higher than
pay-as-you-go levels while the baby-boomers were in the labor
force in order to have payroll tax rates lower than
pay-as-you-go while the baby-boomers were retired. The impact on
national capital of these higher payroll taxes, with the implied
trust fund buildup, has been controversial. The impact depends
on the response of the rest of the government budget as well as
the responses of individuals to these government actions. It
also depends on the effects of future tax changes as well as
initial tax changes. This paper explores a simple model
distinguishing two types in each cohort - life-cycle savers and
nonsavers, and allowing an income tax change to offset a
fraction of the additional revenue from any payroll tax change.
Analyzing a permanent trust fund increase, even if the unified
budget is always balanced, the trust fund buildup increases
national capital initially when payroll taxpayers have a lower
propensity to save out of payroll taxes than income taxpayers do
out of the income tax, as is plausible. The long run impact on
capital depends on the fraction of the payroll tax revenue
increase that is offset by an income tax decrease.
JEL Classification: H55, H20
______________________________
"Changes in the Physiology of Aging During the Twentieth Century"
BY: ROBERT W. FOGEL
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=693094
Paper ID: NBER Working Paper No. W11233
Date: March 2005
Contact: ROBERT W. FOGEL
Email: Mailto:rwf@cpe.uchicago.edu
Postal: University of Chicago
Graduate School of Business
Center for Population Economics
5807 South Woodlawn Av.
Chicago, IL 60637 UNITED STATES
Phone: 773-702-7709
Fax: 773-702-2901
ABSTRACT:
One way to demonstrate how remarkable changes in the process of
aging have been is to compare health over the life cycles of 3
cohorts. For the first cohort, born between 1835 and 1845 (the
Civil War cohort), life was short and disabilities were common
even at young ages. Other factors contributing to lifelong poor
health were widespread exposure to severely debilitating
diseases and chronic malnutrition. Fewer of the World War II
cohort, born between 1920 and 1930, died in infancy and most of
the survivors have lived past age 60 without developing severe
chronic diseases. Members of this cohort have experienced better
health throughout their lives largely due to their lower
exposure to environmental hazards before birth and throughout
their infancy and early childhood. Members of the cohort born
between 1980 and 1990 have a 50-50 chance of living to age 100.
The average age at onset of disabilities has continued to rise,
so members of this cohort can expect to remain healthy at later
ages. Adopting a healthy life style early can help to prevent or
postpone disability at older ages.