Social Security Myth-busting 2

Ezra Klein‘s post on Social Security:

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

8 ) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

The conclusions I draw from these numbers are:

1) Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

2) Most opinion elites — Simpson being one good example, and the U.S. Senate being another — show a very strong preference for working as long as possible. Most Americans show a very strong preference for retiring as early as possible. Elites who enjoy their jobs need to be very careful about generalizing their experience to people who don’t enjoy their jobs. More bluntly: Raising the retirement age is the worst of all possible options for reforming Social Security. It’s not only regressive, but it also falls most heavily on those with the worst jobs. Means-testing would be much better.

3) Social Security is fairly stingy and getting stingier. We also know most 401(k)s are underfunded, and the same goes for many defined-benefit pension systems, both public and private. We need to be very careful not to “solve” the Social Security problem by worsening a broad retirement-security problem, and that requires approaching Social Security as part of our retirement-security infrastructure rather than simply as a budgetary question. Here are some ideas on how to do that.

Let’s continue with the Myth-busting:

Claim 1: Social Security is financially non-manageable.

Busted by fact 1 and conclusion 1. More so if we account for the trust fund and economic growth.

Claim 2: Pension reduces incentive to work.

Busted by fact 5 and conclusion 2. High-income workers will tend to stay in the workforce longer, because they have more to gain, while low-income workers, for example janitors, will leave the workforce earlier because they would not be able to continue in that line of work at that age.

Claim 3: Higher life expectancy means social security is non-sustainable due to more and longer payments.

Busted by fact 7 and 8. While higher life expectancy will lead to more and longer payments, the difference is not that big: workers in the bottom half of the income distribution have only an increase of 2 years life expectancy since 1972, while the upper half have an increase of 6 years.  we don’t have to worry the rich about since they have resources to take care of themselves by investing and having saving plans.

Claim 4: It is the responsibility of the individuals to plan and save for their retirements; pension plan distorts saving incentive.

Busted by fact 2 and 4. Many low-income workers will fall into poverty without intervention when they are out of the workforce, and that means their income does not allow them to have a lot of saving. It takes intervention to prevent them from falling int poverty at old age. In addition, US pension only replaces 40% of working-age earnings (26th among OECD), that means the rest will have to be footed by the individuals, thus saving incentive remains.

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