Retirement Security Program

Next Social Contract event in Encore | 'Averting a Bust for Boomers'

Communications — Fri, 27 Jun 2008 07:43:00 -0400

The New America Foundation’s panel today, “Averting a Bust for the Boomers: The State of Retirement Preparedness and How to Improve It,” blew up the popular image of baby boomers as healthy, wealthy and wise (at least about their finances)...LINK

NY Times Profiles New America's Ten Big Ideas Event with Sen. Clinton

Communications — Wed, 31 Jan 2007 19:43:00 -0500

At a conference devoted to “big ideas” for the nation’s future, Senator Hillary Rodham Clinton said this morning that compromise need to be “a goal – not a dirty word” in politics and government, remarks that reflect her own pragmatic style but that are more moderate than the views of some of her rivals and hard-core elements of the Democratic primary electorate.With some of her 2008 presidential opponents offering sharply partisan messages, and another of them, Senator Barack Obama of Illinois, seeking to transcend partisanship, Mrs. Clinton staked her place in the middle of the political rhetoric as she tries to appeal to broad swaths of the American electorate – even at the risk of alienating some Democratic primary voters.“I don’t think Americans are looking for some kind of group-hug bipartisanship – I think they’re looking for leaders who can get back to reality-based policy-making,” she said at the New America Foundation’s “Ten Big Ideas for a New America” conference in Washington, a few blocks from the Capitol.“The answer is not that we’re going to get rid of partisanship — as long as there are human beings jousting for influence and position,… more

Michael Calabrese

Operations — Mon, 17 Apr 2006 09:45:00 -0400

Vice President and Director, Wireless Future Program

As Vice President of the New America Foundation, Michael Calabrese directs the Wireless Future Program and helps to guide the Foundation's work related to retirement security and the Next Social Contract Initiative. Previously, Mr. Calabrese served as Director of Domestic Policy Programs at the Center for National Policy, as General… more

Addressing the Decline of Traditional Pensions

Communications — Wed, 15 Mar 2006 22:00:00 -0500

A New America Event
03/15/2006 - 11:00am

As the House-Senate conference takes up the pension funding and reform bill this month, the conversation about how best to update the nation's retirement saving system is far from over.

The pending pension bill may achieve some important improvements, but it does little to address the fact that American workers are clearly not saving enough: A majority of the workforce does not participate in an employer-sponsored plan, an increasing number of large companies are freezing their traditional pension… more

Nonpartisan Social Security Reform Plan

Fiscal Policy — Wed, 14 Dec 2005 00:00:00 -0500

The three of us -- former aides to President Clinton, Senator McCain, and President Bush -- did an experiment to see if we could develop a reform plan that we could all support. The Liebman-MacGuineas-Samwick (LMS) plan demonstrates the types of compromises that can help policy makers from across the political spectrum agree on a Social Security reform plan. The plan achieves sustainable solvency through progressive changes to taxes and benefits, introduces mandatory personal accounts, and specifies important details that are often left unaddressed in other reform plans.

The plan also illustrates that a compromise plan can contain sensible but politically unpopular options (such as raising retirement ages or mandating that account balances be converted to annuities upon retirement) -- options that could realistically emerge from a bipartisan negotiating process, but which are rarely contained in reform proposals put out by Democrats or Republicans alone because of the political risk they present.

For the complete document, please see the attached PDF version below.

Promises, Promises

Cecille Isidro — Mon, 04 Apr 2005 00:00:00 -0400

If somebody owes you $10, the next best thing to having the cash itself is probably having a written IOU. After all, the IOU will make it harder to forget the liability, and also might give you evidence to use in court should the borrower attempt to shortchange you.

The Social Security system is loaded with a confusing mishmash of IOUs, both implicit and explicit. Reforms tend to rearrange the liabilities in this crazy quilt. Do the labels on the IOUs matter?

Social Security faces an unfunded liability of $4 trillion over the next 75 years. The liability is $11.1 trillion in perpetuity. Some dismiss infinite timelines as absurd. The concept is an easy target: It's difficult enough to get people to care about the fiscal situation over the next 75 years; why should they care about Social Security benefits in the year 2500? But that's not the point. The infinite horizon is necessary to ensure that any Social Security fix is a permanent one as opposed to the many temporary patches that are floated -- patches that would leave the system out of balance beyond the truncated window.

As the Social Security Trustees point out, "Overemphasis on summary measures for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not move toward a sustainable system." The 75-year unfunded liability increased by $300 billion over the past year and the infinite gap increased by $600 billion. So right now the American people have an implicit liability of about $11 trillion. The liability is implicit since there is not an explicit IOU for the whole shortfall sitting in any filing cabinet.

The unfunded liability is the amount of money that we would need to put away today in order to generate a large enough revenue stream to fill in the growing gap between program benefits and revenues. It is important to understand that this implicit liability is completely different from other types of debts, such as the government debt owed the public. Unlike a government debt resulting from borrowing, this implicit debt is not binding because participants have no legal right or claim to their Social Security benefits. While the benefits have been promised (or implied), they are not owed, need not be paid, and can be changed at any time.

That is exactly what all of Washington is talking about. The most straightforward way to eliminate the unfunded liability would be to reduce those promised benefits, bringing them into line with what the program can afford. (The other option is to raise taxes.) Price-indexing benefits, for instance, would reduce the unfunded liability to essentially zero.

Most of the plans that have been put forward to eliminate Social Security's unfunded liability also include an individual account component. And since most do not include a plan for how to pay for the accounts, they feature some additional level of borrowing.

The borrowing that would take place to jump-start a system of privately owned individual accounts would create a new explicit debt. A dollar diverted into such an account would, ignoring dynamic effects, lead to the issuance of a dollar's worth of Treasurys on the open market -- an additional dollar of debt for the government. Opponents of reform often point to this and assert that the government's asset position would be worsened.

In response, proponents have made the case that the new dollar of explicit debt would not be problematic because the accounts would include offsets to traditional benefits; every new dollar of explicit debt would be counterbalanced by a dollar less of implicit debt. Furthermore, the dollar borrowed by the government would also be saved in the accounts, so again, barring feedback effects, national saving wouldn't be altered.

On one hand, this argument makes perfect sense. There is some level of explicit debt that is appropriate in creating accounts that are part of a comprehensive reform plan that achieves sustainable solvency. Such borrowing would spread over time some of the costs of reform and would likely have positive effects on separating Social Security from the rest of the budget.

However, a one-for-one trade between explicit and implicit debt is not clearly a deal worth making. For one thing, financial markets may be pricing in the assumption that unsustainable benefit levels will be reduced by more than that. If that's the case, borrowing to create accounts could have adverse effects on markets.

Secondly, explicit debt is for real. Unless one is willing to devalue it with high inflation, it can never be changed. There exists the very real risk that the part of the plan that reduces future benefit levels would not materialize and the deal would end up with a new explicit debt and the continuation of a staggeringly high implicit debt. Never underestimate the power of the senior lobby -- especially with the baby boomers joining their ranks.

An increase in explicit debt is not clearly problematic. The bigger the corresponding reduction in the implicit debt the better the deal -- if one wants to be confident that the long-run balance has truly been reached.

Some reform plans also include "guarantees" of some level of benefit in the future. The purpose of the guarantees is to insulate account holders from excessive financial risk by putting a floor on the downside of owning accounts. If the purpose of fixing Social Security is to remove some of the risk for future participants being forced into a plan with large and unaffordable liabilities, the effect of creating guaranteed benefits would be to put that risk right back on participants -- this time in the form of a contingent liability. After all, taxpayers will foot the bill if necessary.

It is worth noting that "guarantee" in this situation is a meaningless term. Congresses today cannot bind the hands of future Congresses. Benefits will always be subject to change whether they are promised, guaranteed, chiseled in stone, or written on embossed paper. This goes for current benefits just as much as it does for so-called guaranteed benefits. Benefits can be altered at any time.

When it comes to Social Security there's no such thing as a free lunch and no such thing as a guarantee.

Nonetheless, for political reasons guarantees would likely be honored -- again because the constituency that would be claiming them is so powerful. On the liability spectrum, these contingent liabilities would then fall somewhere between the system's current implicit liabilities and the explicit liabilities that would result from borrowing.

Recently, some have been floating the idea of fixing only part of Social Security's shortfall. That is not a high enough standard. If we end up with an explicit liability and limited and possibly tenuous future savings then the job of putting Social Security on a sustainable path will be left undone.

The Forgotten Issues in Social Security Reform

Communications — Tue, 29 Mar 2005 19:00:00 -0500

A New America Event
03/29/2005 - 12:00pm

The world today is very different than when Social Security was created. A number of issues should be considered when thinking about how to reform Social Security, including:

Should we update benefits to reflect changes in family status and economic well-being of the elderly?

Can our children really afford to finance our spending such a large portion of our life in retirement?

Should Social Security reform be used to help strengthen the economy through increased work and saving?

How should we think about Social… more

Forget Accounts for a Moment: How Do We Fix Social Security?

Communications — Tue, 22 Mar 2005 23:00:00 -0500

A New America Event
03/22/2005 - 12:03pm

The debate about how to reform Social Security has been dominated by the fight over whether to create individual accounts and whether or not the system faces a "crisis." The central issue, what policy changes to make to address the system's long-term deficits, has been all but ignored. An esteemed group of experts will discuss many of the various options to fix Social Security, with no mention of accounts.

Hung Up on Words

Cecille Isidro — Fri, 18 Mar 2005 00:00:00 -0500

The discussion over how to fix Social Security is filled with words that are getting too much attention. Privatization is one. Focus groups apparently don't like that word, and supporters of private accounts have taken to using the words "personal accounts." Why get so hung up on what you call it? The issue is whether individual ownership of Social Security savings is a good idea or not.

Crisis is another. Crisis is a relative term so there is no right or wrong here, but all serious policy experts believe Social Security has over-promised what it can deliver and that changes should be made sooner rather than later. Furthermore, arguing that the system is in crisis in no way strengthens the argument that accounts should be part of the solution, just as arguing there is no crisis does nothing to argue against accounts.

The current misplaced obsession is with the term "carve-out," a term that has very questionable economic content. Opponents of account-based reform proposals have drawn a line in the sand over using existing payroll taxes to fund individual accounts, or "carving' out accounts from Social Security. While many like the idea of "add-ons," or layering an account on top of Social Security, they are vehemently opposed to diverting part of the payroll tax to fund the accounts. Many supporters of reform, on the other hand, are just as wed to the so-called carve-out method.

But the fight over the diversion of the payroll tax bypasses the issues that are actually at the heart of the debate.

Logically, one can think about Social Security reform as having two steps. First, a reform needs to restore balance. Second, a reform might alter the structure of the system to include private accounts. The real questions then, are: 1) Should we fix Social Security through tax increases or spending cuts? and 2) How much of the program should be in the form of traditional benefits and how much should be income generated from individual accounts?

To the first question -- one must determine the appropriate level of resources to devote to Social Security. Currently 11 percent of covered wages are devoted to paying benefits. This is projected to climb to over 19 percent. To honor benefits promises, we have to raise taxes. To contain the cost of the system from going beyond current levels, we will have to cut benefits from what has been promised. With few exceptions, those who prefer "carve-outs" want to devote fewer resources to Social Security, and those who prefer "add-ons" prefer more. However, this question is not determined by whether funds are diverted to pay for the accounts, but rather, how Social Security solvency is achieved.

Question two is also straightforward. Individually owned accounts shift part of the Social Security system from a defined benefits system, where participants receive a benefit based on a formula related to their contributions, to a defined contribution system, where benefits are based on contributions and the returns from investing. Supporters of private accounts believe that individuals will value the ownership and control over their money that the current defined-benefit system does not offer. Opponents prefer the communal, redistributional, and risk-sharing elements of the current system. So, figuring out how much of the program should be defined benefit vs. defined contribution is the second key question.

More often than not, these two questions get grouped together, greatly confusing the issues. One could easily construct a Social Security reform plan that used part of the existing payroll tax to finance individual accounts while closing the total Social Security deficit through other tax increases. So while accounts would be carved out, more resources in total would be devoted to Social Security.

Likewise, a plan could be constructed where accounts were added-on while the Social Security deficit was closed by price indexing benefits, or some other such benefit cut. Conceivably, both traditional benefits and total benefits could be lower under this scenario with add-on accounts than they would be under the carve-out reform.

Clearly, looking at the revenue stream for individual accounts in a vacuum does little good. Dollars are fungible and one cannot analyze the effects of creating accounts without also considering how Social Security would be balanced. It is completely legitimate to argue about the optimal level of benefits, and the extent to which they should be defined benefit vs. defined contribution, but whether the money should be carved, added, diverted, augmented, pasted, or cauterized, does little to further the discussion.

Social Security in Your Mailbox

Cecille Isidro — Fri, 11 Mar 2005 00:00:00 -0500

Companies considering new product launches often try out different beta versions of their products on focus groups. The practice is a sound one. No matter how attractive a concept may be, there is no telling whether you have a winner until it takes the form that the customer will see.

With such a process in mind, it is useful to pause for a moment to consider the practical appearance of the product that Social Security reformers are advocating. If optional personal accounts are available, they present choices and possibilities to citizens. How will these be conveyed? What will workers see? What will guide their decision making?

The logical place to start is with the official "Your Social Security Statement," sent out by the Social Security Administration (SSA). Every covered worker receives an annual statement from the SSA that informs them of their estimated benefits under current law. Between the disclaimers that benefit levels could change due to changes in earnings patterns or Social Security law, the statement lays out past earnings, taxes paid, and estimates of likely benefits. For example, a statement might show that a typical worker would be eligible for retirement benefits of $19,600 a year if they retired at the normal retirement age.

If optional private accounts existed, this mailing would have to change. Instead of simply informing a worker what current law implies her benefit would be, the statement would reflect her choice about whether to participate in the accounts or remain in the traditional system. If she opts to stay in the current system, she would get a benefit calculation much like today's. If she opts to place some of her payroll tax in an account, things would change.

The first way the form would change is that along with reporting what she could expect in traditional benefits (an amount that would be lower because she had shifted some of her funds into an account) it would have to report the current value of her accumulated contributions. Like a bank account or a mutual fund statement, the mailing would have to list the market value of existing assets.

As the current statement includes a projection about future benefits, the statements for account owners would also need to contain some type of projection about likely final balances at retirement in order to help participants with their retirement planning. This presents something of a design challenge. Financial returns are highly uncertain, and the presentation of a single expected return for a private account could be misleading. Moreover, the financial returns would depend on asset-allocation choices. Whereas the SSA could assume the same allocation over time, the more likely scenario is that the worker would shift more of her portfolio from stocks to bonds as she approached retirement.

Since returns can vary so much, it would be useful to present a representative expectation -- but one should draw on the historical distribution of returns as well. In this case, and depending on reform specifics, a worker would see a form that tells them the following for each of the choices that they might make: (We base the numbers in this example on the benefit-adjustment proposal that has been floated by the administration, our own back-of-the-envelope calculations, and historical returns.)

If you're an average wage worker entering the workforce today, you could retire at age 65 with a promised annual benefit of $19,600 (in today's dollars). If you put one-third of your payroll taxes into a personal retirement account, your government payment would be reduced to around $12,600. However, your projected account balance at retirement would be $165,000.

There is significant uncertainty concerning the exact amounts. In particular, some percentage of the time, the account returns will be so disappointing that the account will not be able to finance a full replacement of benefits. It would be important to include a warning that includes something like a range of account values that might occur 95 percent of the time. Also, the base calculation might not be best based on historical returns, since most financial observers now agree that the equity premium has been declining over time. Our intent here is not to nail the best possible estimate of the numbers, but rather, to sketch what the typical worker might see.

We leave it to customer-service experts to decide whether such information is best delivered in words or a table, but it should be presented separately for a broad range of possible choices by the worker.

Finally, many proposals call for a forced annuitization of some or all of a private account. Should such a proposal become law, it would also be important to indicate what type of monthly payment could be expected from the annuity. There might be the need to include options for single and joint annuities depending on marital status.

The two types of statements would also help create a document to assist workers in making the initial decision about whether to open an account. If reform passes, workers will be faced with a choice to pass up some of the government benefit in exchange for more direct ownership of their assets. Seeing a comparison of government benefits to a hybrid benefit -- some from the government, some from accounts under different returns assumptions -- would assist with that decision.

It will be important that the new statements reflect both the likely scenario of what workers can expect in retirement and the information that returns can vary dramatically. Critics of personal accounts might use that variability as a reason to argue for steering clear of accounts and sticking to the current system. However, keep in mind there is significant risk in each of the systems; investment risk under an accounts-based system and the political risk that benefits will change under the current system. That is why page one of the current statement carries the warning that there won't be enough younger people working to pay all of the benefits owed to those who are retiring and that changes will have to be made. Either way, there is no such thing as a risk-free system; the purpose of the Social Security statement should be to lay out the likely retirement benefit for a worker while reminding them there are no guarantees.

Viewed in this manner, it is almost difficult to see what all the fuss is about. Currently workers have no choices. Reform adds choices, including the possibility of sticking with the old system. If the old Social Security statement were compared to the proposed one in a focus group, it is our bet that a very large number of individuals of all ages and political persuasions would prefer the new statement.