It’s odd — June 21, 2016
Behavioral economics and retirement savings — March 26, 2016

Behavioral economics and retirement savings

This NYT article about using behavioral nudges to get people to save more is fine, so far as it goes. But it’s another example of policies which go through an outrageous amount of complexity to encourage people to do the right thing, instead of doing the right thing for them.

There are a lot of potholes on the way to a happy retirement. First is to save enough. Second is to save in appropriately diversified vehicles (e.g., index funds). Third is to choose a mix of assets that’s appropriate for your particular stage of life — e.g., more stocks when you’re young, and more bonds when you near retirement. Fourth is to not outlive your savings; the way to do this would be to buy an annuity, but the annuity market (as I understand it) is not as well developed as the rest of the retirement-savings industry.

So then we (as a society) compile all of this knowledge about financial best practices, then try to convince people to use it, then outsource preparations for retirement to employers, then encourage employers to nudge their employees into doing the right thing. Not only is this ineffective; it’s infuriating and exhausting.

Until fairly recently, we tried another outsourcing approach: encourage employers to provide pensions (“defined-benefit retirement plans,” in the jargon, as opposed to “defined contribution” plans like 401(k)s). Pensions required employers to set aside money today for their employees’ retirement, but this of course presents a problem: what if the employer goes out of business before paying out those retirement benefits? To address this possibility, we built a regulatory infrastructure to try to regulate these pensions. If all else failed, we created a government agency as a backstop.

Somehow the straightforward approach of just providing strong retirement benefits to all Americans, then paying for those benefits with progressive taxes, hasn’t yet taken hold. In the U.S., “inflation-protected retirement annuity with survivor benefits, paid for through taxes” is pronounced “Social Security.” Social Security is expected to be part of a three-legged stool, the other two legs of which are pensions (nowadays IRAs and 401(k)s) and private savings. Those other two legs are increasingly weak: the overall national private saving rate has been declining for decades, and briefly went negative in 2005. That savings rate already includes 401(k) and IRA contributions, so one of the legs of that stool is practically nonexistent. As for the 401(k) leg: only 66% of private employers even offer retirement benefits, and only about 3/4 of the people who have access to them use them. I can’t find statistics on how much people contribute to such plans, but the amount must be less than the low overall savings rate. [1]

In this light, behavioral workplace nudges to get people to save more seem like a last-gasp rearguard effort. If we, as a society, believe that saving for retirement is important, why don’t we, as a society, reflect this belief in our policies? The standard nudgey answer is “libertarian paternalism”: set appropriate defaults on retirement savings, and allow people to override those defaults if they wish. It seems pretty clear that libertarian paternalism doesn’t work. Libertarian paternalism seems like nothing so much as resignation in the face of a hostile political climate; it resembles the early Obama administration, hoping against all evidence that the GOP would take half a loaf. “Conservatives and liberals disagree on a lot of things,” I imagine libertarian paternalists saying, “but surely they’ll agree on market-friendly solutions like behavioral nudges.”

Even if these nudges worked, Social Security would still be better. First, there are enormous economies of scale from administering Social Security centrally rather than outsourcing pension management to millions of employers. Second, those employers can’t be expected to be any good at choosing retirement options for their employees. My employer makes software; it doesn’t make retirement funds. Why would we expect my employer to be any good at offering 401(k)s? Why would it want to offer 401(k)s? It wants to make software and it wants to lure talented employees with high salaries; all else is noise.

Social Security isn’t perfect. It’s not progressively taxed, for one thing: it’s a flat tax, and you don’t contribute on any dollars you earn above $118,500. It’s regressive on what’s paid in, but progressive in what’s paid out: higher earners can expect to get back a smaller fraction of what they paid into Social Security than lower earners do. And it only pays out $1,335 per month on average, which still amounts to 39% of elderly people’s income. So it needs to be more generous and more progressive. But it’s a start, and the infrastructure is already in place. Removing the taxable maximum would be a hard-fought battle, but would be comparatively easy to implement once we’d made the decision to do so.

I like to imagine a thought experiment. Back in 1970, I imagine someone told my parents (who weren’t yet parents) that in 50 years they would be nearly four times as wealthy as they were back then. My imaginary interlocutor would then ask my parents what to do with that windfall. They might have felt perfectly well off with the income they were earning back then, so the thought of quadrupling it might have seemed outrageous. Maybe they should set some of it aside for retirement? Set aside even more of it and allow themselves to retire early? How about setting aside some of it to provide the world’s best universities, for free? There’d be a long list of choices they could make. They could choose to buy a larger house, though maybe they’d look around at the house they have and think, “No, this is a fine size house; we’ll choose to spend our money on other things” (unlike Americans as a whole, whose homes are 42% larger at the median than they were in 1973).

Like Odysseus tied to the mast, every decision that my parents made in their mid-twenties would bind them in their working years and on into retirement, and the binding would be handled through the tax code. Would they lament the money that never made it to their wallets, but rather was spent on social goods? Rather than after-tax paychecks that were on their way to quadrupling, they’d get free university educations for their children, and they’d have enough money to retire comfortably. A lot of the arms races that we fight with our neighbors would never have been fought: rather than build a larger house simply because that’s what everyone around us does, and because we must keep up with the Joneses, the tax code would disarm everyone at once. To the extent that we build larger homes out of an arms-race mentality, rather than because any individual person wants a larger home, this multilateral disarmament would help everyone.

Of course this story isn’t complete. For one thing, real per-capita disposable personal income doesn’t capture the story of rising income inequality over the last 30-40 years; the story of American growth hasn’t been a story of rising tides lifting all boats. A more accurate measure might be median household income, which has barely budged since the early 80s. This may, in fact, strengthen my story. Which do we prefer, as a society: quadrupling our income, but putting most of that extra income into a few hands, or sharing it more broadly and investing in our future through strong public universities, public-health spending, and basic research that helps everyone?

The story of increasing wealth may also be missing a key component: health care. Maybe our parents would have loved to have set aside money to build for the future, but they didn’t have that choice: much of what would have gone into their pockets as increased wages went, instead, into health-care costs borne by their employers. First, I have my doubts that this was actually a problem: the real disposable personal income number already factors in the health-care CPI. And second, the fact of rising health-care costs in the U.S. results, at least in part, from our fragmented system of care. That is, rising health-care costs have been very much a social choice. Imagine again that our parents, bound like Ulysses, were asked in the early 70s to make a choice: organize medical spending in a deliberate way (à la the VA medical system, or à la Medicare), or continue with the chaotic and spectacularly inefficient way we’ve organized it.

Barney Frank is supposed to have said that “government…is simply the name we give to the things we choose to do together.” Let’s get back to thinking of things we can do better together, as a society. Social Security is a good start, but it’s just a start.

[1] – I don’t know whether home equity is counted in the NIPA definition of savings. Even if it is, I’m a little confused about how owners’ equity is counted. How could equity be cut in half and then return to trend? In any case, equity per capita only hit a peak of about $45,000, so it alone won’t rescue Americans’ savings rates. And we can’t compare savings rates to equity amounts; that’s comparing a flow to a stock. The relevant comparison would be either the rate of change in equity to the rate of change in savings, or the total amount of savings to the total amount of equity. I can’t figure out a quick way to do the former; the latter doesn’t seem particularly valuable.

A cynical take on limiting Social Security eligibility — October 22, 2015

A cynical take on limiting Social Security eligibility

Eric Laursen today describes the GOP desire to limit Social Security only to those people who are too sick to work, then goes into the research describing why it’s not so easy to identify who’s too sick to work. He doesn’t say so (Jacob Hacker does, I believe in The Great Risk Shift), but the same is true of income variability. We might have a mental model of “the poor” as those who always and everywhere have low income, and there may be such people, but there are a great many more who suffer periodic negative shocks to their income. (Same sort of thing is true of “the homeless”; see Malcolm Gladwell.)

So here’s my cynical take:

  1. Sorting out eligible from the ineligible requires huge administrative overhead rather than simple age-based eligibility. This is exactly what the GOP wants: a Federal program that works poorly. Two examples of the GOP playbook come to mind here. First, consider their demand that abortions be allowed only when the mother’s life is in danger. Along with all the other things we could say about this, just imagine the regulatory and legal overhead it creates; how many times will doctors be sued because they allowed an abortion when the mother’s life wasn’t at risk? Even if they always win those lawsuits, a great many doctors will opt out of providing abortions purely to avoid a lawsuit.

    Second, I think of Bill Kristol’s famous memo on defeating the Clinton health-insurance initiative, particularly this:

    “Health care will prove to be an enormously healthy project for Clinton… and for the Democratic Party.” So predicts Stanley Greenberg, the president’s strategist and pollster. If a Clinton health care plan succeeds without principled Republican opposition, Mr. Greenberg will be right. Because the initiative’s inevitably destructive effect on American medical services will not be practically apparent for several years–no Carter-like gas lines, in other words–its passage in the short run will do nothing to hurt (and everything to help) Democratic electoral prospects in 1996. But the long-term political effects of a successful Clinton health care bill will be even worse–much worse. It will relegitimize middle-class dependence for “security” on government spending and regulation. It will revive the reputation of the party that spends and regulates, the Democrats, as the generous protector of middle-class interests. And it will at the same time strike a punishing blow against Republican claims to defend the middle class by restraining government.

    What possible interpretation of this paragraph could there be other than “it will work, so we have to defeat it”?

    The ease of separating eligible from ineligible is one of the big arguments for single-payer health care, by the way. Hospitals will no longer have to employ teams of people who specialize in dealing with individual insurers; there will be just the one insurer. And identifying eligibility is easy: you’re a citizen, so you’re eligible. There may be other knocks against single-payer health care, but low administrative overhead is one of its main selling points.

  2. There’s a maxim that “a program for the poor becomes a poor program”. A great way to remove mass support from Social Security is to isolate its constituency. If it’s those people over there who get Social Security rather than you and me, then we’re less willing to fight for what’s ours. If this model is right, then increasing the generosity of Social Security — so long, of course, as the funding increases commensurately — might raise its likelihood of survival, by increasing the political support behind it.

    Consider: when the average Social Security benefit is $1335 a month, you and I might fight for it; but if it gives us a hefty monthly payout in retirement, we might fight a lot harder. What would “hefty monthly payout in retirement” mean? Well, the usual story is that you should save enough to earn 80% of your pre-retirement income in retirement. Median household income nationwide is $53,046 per year. 80% of that is $3,536.40. How hard would you be willing to fight for Social Security if you knew that you’d be receiving $3500 per month from it in retirement?

    And that’s not at all an insane number to expect. Social Security was assumed to be part of a three-legged stool of retirement savings: your company’s pension, your savings, and Social Security. Pensions have significantly weakened, and 401(k)s have not kept up. (I’ll want to look around for the numbers: total assets held in defined-benefit retirement vehicles and total assets held in defined-contribution vehicles over time.) As for the saving rate: I’ve not looked into how it’s defined, but this quick FRED graph doesn’t say anything optimistic. So why not increase the monthly Social Security payout to 80% of the monthly median household income?

    My model of political support might be wrong, of course: that maxim needs to be backed up by empirical support. But enough people believe it’s true that I read a book a few years ago, a significant part of which was devoted to understanding why Medicaid is still alive. Shouldn’t Medicaid have become “a poor program” long ago?

The more our welfare-state programs apply to everyone, I believe, the more politically secure they’ll become. And along the way, they’ll be cheaper to administer. We should all want these things.

Elizabeth Warren on the insane drive to cut Social Security — November 19, 2013

Elizabeth Warren on the insane drive to cut Social Security

> The call to cut Social Security has an uglier side to it, too. The Washington Post framed the choice as more children in poverty versus more seniors in poverty. The suggestion that we have become a country where those living in poverty fight each other for a handful of crumbs tossed off the tables of the very wealthy is fundamentally wrong. This is about our values, and our values tell us that we dont build a future by first deciding who among our most vulnerable will be left to starve.

Thank you, Senator Warren (via Matt Yglesias). I’m really proud to have voted for you.

Social Security and Medicare are unjust: sure. So let everyone have them! — December 3, 2012

Social Security and Medicare are unjust: sure. So let everyone have them!

There are at least two possible reactions to the realization that a lot of your Federal taxes transfer money from the young to the old (Medicare, Social Security, etc.). One is to argue that this is unjust and try to cut these programs. Another is argue that this is unjust, and therefore to *expand* them: eliminate the injustice by making the benefit available to everyone. Expand Medicare to everyone. Make Social Security available to people 50 and older. After all, we’re a more prosperous country than we were when Social Security was passed; shouldn’t we reward ourselves for our productivity by providing official support for greater leisure?

It seems like people (e.g., “the execrable Robert J. Samuelson”) only ever take the first option: we must cut Social Security. But why? We’re wealthier than we’ve ever been! (That’s disposable personal income per capita, where disposable personal income is defined as personal income minus taxes. Personal income, in turn, is what you’d expect.) Social Security is an unjust transfer? Sure it is! So make it more just and let more people have it; problem solved.

As it happens, the government has been keeping close watch over productivity statistics since after World War II. If I’m looking at the right data series, and I think I am, aggregate productivity — that is, output per hour of labor — is 4.6 times what it was just after the war. The miracle of compounding, brothers and sisters! Imagine if we as a society had made the decision to take half of that productivity and plow it into our own leisure at the end of a lifetime of hard work. We’d still have the standard of living of postwar America — the most prosperous time this country has ever known. We’d just be able to enjoy more of it.

I’m sure I’m missing important pieces here. For instance, maybe Social Security does now indeed consume twice as much of every person’s paycheck as it did back then; maybe we’ve quite kept up with the productivity gains. Chart A in a summary of the latest Trustees’ Report, for what it’s worth, says that even in their fevered dreams, the actuaries can’t conceive of Social Security consuming more than about 6.5% of GDP.

You could certainly continue working past age 50 under this idea. By all means! You can continue working under the current system. Some people will choose not to, however. And I’m sure the hardworking Social Security actuaries have plenty of good estimates of the benefit level that would induce x many millions of people to drop out of the workforce.

Not that Social Security is any kind of panacea. It pays out an average of $1,230 per month. Even with that meager payout, Social Security constitutes the majority of retirement income for the poorest 60% of retirees; retirees are poor. Social Security is a way to keep people out of poverty; it’s not a retirement with dignity.

Likewise with Medicare: despite liberals’ love for the program, and our desire that everyone be allowed to buy into it, it’s by no means salvation. Marilyn Moon goes into great and fascinating detail about this in her [book: Medicare: A Policy Primer], of which I desperately need to write a review. Moon’s take, which is woefully rare, is to look at Medicare from the perspective of the beneficiaries; too often we look at it only from the perspective of the Federal budget. From the beneficiaries’ perspective, Medicare is a den of complexity. It’s not the single-payer health-care system of our dreams, and it leaves too many retieees (who are, again, by no means wealthy) paying a significant portion of their disposable income toward medical care. In the single-payer system that I think most liberals imagine, you’d pay some amount in taxes, and that would be that. No one expects me to pay a Department of Defense co-pay if the country gets invaded: my taxes are supposed to do the job on their own.

Decades of bludgeoning by the Republican Party has left us with the mistaken impression that we’re a poor country, and that the only thing we can do is cut cut cut. We’re not; we’re an astoundingly wealthy country. What is that wealth buying us? (Well, other than $1.121 trillion to fly money to the Middle East, drop it out of planes, and blow it up.) Wealthy societies should be willing to spend more on health care: a year of life is worth more to us than a year of life in a poorer country — indeed, worth more to us than a year of life to our relatively impoverished 1960s selves. (That’s the fundamental argument underneath David Cutler’s excellent [book: Your Money Or Your Life], which I’ll review soon if I know what’s good for me.)

Wealthy societies should also, at some point, decide whether to convert some of their hard-won gains into leisure. We never seem to have had that discussion. Even opening up this discussion in “libertarian”-friendly ways — like allowing people to contribute money to their Social Security now to buy themselves extra retirement income — would be a worthwhile place to start.

Instead all our discussions are of a crabbed and nervous and desiccated sort. We act as though we’re a poor country. Every politician likes to say that he opposes the story of U.S. decline, but this incessant poverty drumbeat says quite the opposite.

Remembering Managerial Dilemmas — July 8, 2012

Remembering Managerial Dilemmas

A conversation with a friend over brunch reminded me of a really thought-provoking book I reviewed a few years back, namely Gary Miller’s [book: Managerial Dilemmas: The Political Economy of Hierarchy].

The basic idea in Miller is that, if your organization (company, team, university, whatever) is judged on the basis of how it performs overall, then everyone has an incentive to slack and let everyone else do the work. But since everyone is subject to the same incentives, everyone slacks and the whole thing goes to shit (technically speaking).

Likewise, your company has every incentive to screw you and not, say, invest in educating you; after all, why pay for you to get a master’s degree if you’re just going to take their investment to another job?

Somehow both sides need to agree to disarm: the company needs to credibly (and in a certain sense irrationally) signal that it’s going to support its employees, even though it has no guarantee that they’ll reciprocate; and employees need to credibly (and in a certain sense irrationally) signal that they won’t slack, even though they have no guarantee that the company will reward them.

Turns out it’s a hard problem. I don’t recall Miller talking about this at all, but it seems clear to me that government has a role to play here: since companies can’t be trusted to supply me with a pension that will help me in my old age, let’s make Social Security really good. And since companies can’t be trusted to pay for my master’s degree, let’s have the government subsidize advanced degrees. There are obvious problems with this, but it’s not clear that they’re worse than the economy as she already works.

Paul Ryan and “libertarianism by default” — May 22, 2011

Paul Ryan and “libertarianism by default”

I’ve feared for a while that my generation would become libertarians by default: the social safety net has been so thoroughly worn down that there’s little social contract left; I fear that people expect Medicare and Social Security to be gone by the time they retire. If that’s what people expect, then they stop lobbying to strengthen Social Security and just look out for #1. Republicans, meanwhile, have never stopped trying to destroy Social Security. Current retirees will never let Social Security end, but maybe my generation will. My parents’ generation expects Social Security to be there, and many of them have pensions. My generation might well expect Social Security to die, and we all have very weak 401(k)s instead of reliable pensions. So we may not know what to lobby for, because we’re not used to having a social safety net to fall back on. We may not know what we’re missing until it’s gone. Hence libertarianism by default: the libertarianism of apathy.

This is all just speculation about what might happen, of course. This generation might turn out to be just as passionate about liberal causes as was FDR’s generation — particularly after watching several bubbles and crashes over just the last decade. Certainly *I* think that this calls out, more than ever, for more active management in the economy, and particularly for more protection against the business cycle. I think a lot of people my age think the same way. Now if only our elected representatives would stop merely trying to prevent the death of Social Security, and instead take the fight to the Republicans.

These thoughts have all been bubbling for a while. They were brought to a boil by a terrific short piece in the New Republic (via Matt Yglesias). Well worth your time.

There is no Social Security crisis — March 18, 2011

There is no Social Security crisis

Repeat after me: there is no Social Security crisis. Ladies and gentlemen, let’s turn the microphone over to the Congressional Budget Office from July of last year:

CBO estimates the 75 year actuarial balance to be -0.6 percent of gross domestic product (GDP); that is, under current law, the resources dedicated to financing the program over the next 75 years fall short of the benefits that will be owed to beneficiaries by about 0.6 percent of GDP. That figure is the amount by which the Social Security payroll tax would have to be raised or scheduled benefits reduced for the systems revenues to be sufficient to cover scheduled benefits. In other words, to bring the program into actuarial balance over the 75 years, payroll taxes would have to be increased immediately by 0.6 percent of GDP and kept at that higher rate, or scheduled benefits would have to be reduced by an equivalent amount, or some combination of those changes and others would have to be implemented.

Once the temporary Social Security tax reduction goes away, we’ll be back to 7.65% for OASDI + Medicare Part A. So what the CBO is telling us is that we could increase the tax from 7.65% to 8.25% immediately and solve the problem for the next 75 years.

CBO also lays out some policy options, and how much of the 0.6%-of-GDP gap each of them would close. One option is to eliminate the cap on the Social Security payroll tax, so that income above $106,800 would also pay the 6.2% OASDI tax. If we did this, the 0.6% gap would close by … wait for it … 0.6%. (See the chart on page xi.)

Now then. You typically hear it said that people will have to work longer in order to close the gap. “Working longer” means “delaying when people can receive Social Security retirement benefits,” which in turn (because people have finite lives) means “decreasing the total amount that people will receive in retirement benefits over their lives.” That’s the whole point: make them work longer so that Social Security pays out less.

Since Social Security is the major source of income for a large fraction of Americans (I’ll find a citation for that; I just saw it cited the other day), and it’s not the major source of income for wealthy people, “increasing the retirement age” is another way of saying “decreasing benefits for the poor and middle-income Americans.” The CBO says that doing this would close about half the gap. (See the same chart on page xi.)

On the other side, we could tax higher-income earners. Taxing income above $107,000 would affect approximately the top 13% of tax returns, and would solve the entire Social Security “problem” in one fell swoop.

So, to review, two available options are

  • increase the retirement age, which, virtually by definition, is equivalent to cutting benefits for poor and middle-income earners, and would solve half the problem.

  • remove the cap on Social Security taxes, which would affect the top 13% of tax returns and solve the entire problem.

Please keep this in mind whenever you hear some Very Serious Person intone that we’ll all need to tighten our belts and work longer to keep Social Security afloat.

A quick note on life expectancies — August 24, 2010

A quick note on life expectancies

The next time you hear someone say that the Social Security retirement age needs to go up because “back when Social Security was started, people weren’t expected to live much past retirement age,” first point out to them that the terminology is confusing: “life expectancy” means “life expectancy at birth.” Life expectancy at birth goes down if you die in the crib. What’s actually important, when setting the retirement age, is your life expectancy at age 65. Since we’ve made big strides on reducing child mortality, life expectancy at birth has gone way up; life expectancy at age 65 has only gone up by a little less than six years across all races and sexes, and has only gone up by a bit less than three years for black men. See the tables (with sources linked) below.

A couple other things to note:

* Suppose we’re in a recession when you’re in your late 60s. You get laid off. How likely do you think it will be that you’ll get re-hired? (Though as a friend mentioned the other night: employers may refuse to hire older folks because they know that their new employees will only be working until they hit 65; an increase in the retirement age might make employers think they can get a few more productive years out of them, thereby making age discrimination less of a problem.)

* There’s a gap in life expectancy by income, which the figures by race and sex don’t necessarily capture. (Though since race and sex affect income — women and black people are paid less — the life-expectancy numbers based only on race and sex may already capture an income effect. What we want is are models that predict life expectancy as a function of race, sex, and income, holding each constant while the other varies.)

I’ve had a book in my queue for a while, namely [book: Working Longer: The Solution to the Retirement Income Challenge], which seems to address these issues. I’ve had a visceral resistance to reading it — namely that if someone suggests I work later in life, I might suggest in response that they perform an anatomical sexual impossibility. But I’ll overcome that resistance and read it for you, out of affection.

Life expectancies, 1939-1941:
All White men White women Black men Black women
At birth: 63.62 62.81 67.29 52.26 55.56
At age 65: 77.80 77.07 78.56 77.21 78.93
Life expectancies, 2006:
All White men White women Black men Black women
At birth: 77.7 75.7 80.6 69.7 76.5
At age 65: 83.5 83.1 84.8 80.1 83.6