November 18, 2014
Pension Cuts Could Hurt Worker Quality
Cuts in public pensions taking place around the country could reduce the ability of state and local governments to recruit and retain top-quality workers, according to new findings by the Center for Retirement Research, which sponsors this blog.
Economists have long argued that pensions and worker quality are related. Pensions, like paychecks, are a form of compensation, one that particularly appeals to workers with the foresight to value financial security in a retirement still decades away. And these are often better, more productive workers.
To examine the effect of pension generosity on worker quality, the Center’s researchers first had to find good measures of each. For worker quality, they used U.S. Census Bureau survey data on workers who have moved between the public and private sectors. The data show that private-sector wages paid to those leaving government were consistently higher than the private-sector wages of people leaving the private sector to work in government – about 7 percent higher, on average, between 1980 and 2012. This wage difference represents the “quality gap” among workers. …Learn More
November 6, 2014
Taxes and Social Security Progressivity
Social Security’s old-age pensions were designed to replace more of the earnings of retired low-wage workers than of higher-wage workers.
But how is this progressivity affected by the federal income taxes paid by all workers and retirees? A study by economists at the Center for Retirement Research, which sponsors this blog, analyzed this complex issue and found that income taxes have not had any real impact on the overall progressivity of the Social Security program.
To reach this conclusion, the researchers used the actual experiences of older American households contained in survey data linked to their lifetime earnings. There were several different tax effects to consider.
First, the payroll tax that funds Social Security is shared by workers and employers, with differing effects. Although the workers’ payroll tax is deducted from their paychecks, workers must still pay income taxes on that amount.
The payroll tax paid by employers, on the other hand, is transferred directly to the federal government, and no income tax is paid. Although the amount transferred is effectively part of workers’ compensation, they do not have to pay income tax on this portion of their compensation. This reduces the taxable income of all workers, but it is more valuable to higher income workers who pay higher tax rates: a one dollar employer contribution costs a taxpayer in the 35-percent bracket just 65 cents, compared with 90 cents for a lower-paid worker in the 10-percent bracket.
Many low-wage workers pay no income taxes or even receive an Earned Income Tax Credit. But a negative tax rate – in the form of a credit for the lowest-wage workers – means they can’t benefit from the tax exemption implicit in employers’ contributions to Social Security on their behalf. …Learn More
October 30, 2014
Strange Influences on Financial Decisions
It would be nice to think that careful financial planning is behind the critical decision of when to start collecting Social Security benefits.
But psychological traits – perhaps impatience or one’s fear of losing money – can also affect whether an individual claims his benefits right at age 62 or waits a few years to increase his monthly income from Social Security. A new study reveals another powerful influence that can jeopardize financial security: how a person’s dollar benefits might appear on the printed Social Security statement.
Business professors Suzanne Shu at UCLA and John Payne and Namika Sagara at Duke University tested this on people over age 40, controlling for psychological influences on the research subjects, such as their impatience, loss aversion, and expectations of how long they’ll live.
In the first experiment, some people were shown tables presenting their monthly Social Security benefits for each claiming age from 62 to 70 – this layout highlights the significant benefit increases that come with each year of delay.
A second set of subjects saw more complex tables displaying their total potential benefits accumulated over their entire time in retirement, which depends on both the age they first claimed and on how long they’ll live. This presentation emphasized a different aspect of the decision: the later someone claims and the longer he lives, the more money he’ll receive over many years. Die young, however, and the accumulated benefits are higher for those claiming at 62.
The experiment’s outcome was significant. The cumulative tables “make people want to claim earlier” – six months earlier than people shown the tables with monthly benefits – Shu said during a recent presentation. …Learn More
October 21, 2014
Fraud Comes with Aging, Mental Decline
Sometimes research seems merely to confirm the obvious. One example is a new study showing that the cognitive decline that naturally comes with aging makes a senior more vulnerable to fraud.
This isn’t especially surprising, but it is important. Amid a shortage of solid research about fraud among the elderly, this study provides important insight into how and under what circumstances they are increasingly being taken to the cleaners by scammers.
In their study, Keith Gamble at DePaul University and researchers at the Rush University Medical Center used a survey of older Chicagoans known as the Rush Memory and Aging Project, which contains an unusual amount of information about aging, cognition, and financial fraud.
In addition to measuring changes over time in the cognitive functioning of its participating seniors – mostly women – the annual survey asks if they’ve ever been a victim of fraud. It also includes six questions designed to get at their susceptibility to fraud – Do they have difficulty ending a phone call? – and two questions asking about their willingness to take undue financial risks. In this case, the undue risk is whether they’d accept a bet with 50/50 odds that they could either double their annual income or lose 10 percent of that income.
Here are their findings: …Learn More
September 23, 2014
Retirement: a Good State of Mind
Is retirement good for one’s mental health? The evidence is all over the place.
One study concludes that retiring sooner means a higher incidence of dementia. Other studies show it benefits physical health, which can affect one’s state of mind. Research from different countries reach different conclusions about their own retirees’ sense of well-being: the English and Finnish find that retiring improves it, while Korean and U.S. researchers don’t.
Seeking some universal truths about retirement in the Western world, a new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression. The study is based on two comparable sets of surveys of age 50-plus Americans and Europeans taken in 2004, 2006, and 2010.
An analysis of retiree well-being faces some tricky analytical issues, which have plagued past studies and which the new study had to overcome. For one thing, people who are depressed may be the most likely to retire, creating the statistical equivalent of a chicken and egg problem. The new study also had to account for the negative financial consequences of leaving or losing one’s job – which can reduce satisfaction and increase depression – in order to isolate the influence of retirement, independent of its effect of lowering income. …Learn More
September 16, 2014
Canadian Pension Reform: the Long View
Policymakers often worry that increasing government pension benefits won’t necessarily help retirees, if the reforms cause workers to change their behavior in ways that counteract them. For example, some workers might save less if they know pension benefits are rising, offsetting the income boost they’ll get from a larger pension.
However, researchers examining Canada’s pension reform over five decades confirm that they have materially improved the financial well-being of retirees there.
To reach this conclusion, Kevin Milligan of the Vancouver School of Economics and David Wise of Harvard University tracked the financial status of older Canadians from 1960 through 2010. They analyzed some 100,000 families between 55 and 80 years old using Canada’s Survey of Consumer Finances, the Survey of Labor and Income Dynamics, and the Family Expenditure Survey.
They conducted simulations to estimate what benefits would have been if no policy changes had been made since the 1960s. This simulation showed that the poverty rate, based on the incomes of Canadians from ages 70 through 79, would have been 34 percent. But today, in the aftermath of reforms, only 4 percent of older Canadian families are poor. [The researchers did a second simulation based on an alternative poverty measure: how much older Canadians spend on shelter, food, clothing and other goods. This also showed a decline in the poverty rate, albeit smaller.] …Learn More
September 11, 2014
Life Spans Not Falling for Less Educated
A September 2012 article on page one of The New York Times reported “disturbingly sharp drops” in life expectancy between 1990 and 2008 for Americans who do not complete high school – five years less for white women and three years less for white men.
This flatly contradicted past studies documenting rising longevity throughout the developed world. Much was also at stake in this dramatic new finding for U.S. retirement experts concerned about the growing financial pressures on retirees from what they’d assumed were virtually uninterrupted gains in longevity
Everyone wants to live longer, but it’s expensive. So who’s right?
In reaction to the 2012 study, a new group of researchers, funded by the U.S. Social Security Administration, took another run at calculating life spans and found that life expectancy is not on the decline for Americans with the least education.
The researchers, from the University of Michigan and Urban Institute, used the same data as in the 2012 study – U.S. Census data and National Vital Statistics. But they refined the statistical technique. One criticism of the prior paper had been its blunt measure of Americans with the least education, defined simply as those who had not graduated high school.
Yet the segment of the U.S. population that doesn’t graduate high school has shrunk dramatically, becoming an increasingly selective – and disadvantaged – group. That’s a change from the experience of people born a century ago for whom leaving high school to begin working or marry was the norm. …Learn More