Entitlement Reform and the Future of Pensions Conference on Reimagining Pensions: The Next 40 Years The Wharton School May 1, 2014 C. Eugene Steuerle Benjamin H. Harris Pamela J. Perun
Basic Theme Reform of entitlements inevitable Our entitlement and private pension systems do not deal adequately with economic and demographic trends. Various positive forces are at play in the economy Economic growth Providing additional resources though now committed poorly Rise in supply and demand for older workers => Constructing reform around 3 goals: (1) Better targeting of retirement resources to needier & older (2) Removal of obstacles to employment of older workers (3) Building up the second tier (private) of retirement support
Spending on major health and retirement programs 25.0 20.0 15.0 10.0 5.0 0.0 2077 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 2071 2073 2075 2079 Medicaid, CHIP, and ACA Medicare Social Security
Health Spending as a Share of Total and per Capita GDP Growth 2005-2020 (Percent) Total Per Capita 33.4 25.4 21.3 17.9 1970-1990 1990-2010 Source: CMS National Health Expenditure data. GDP data from CBO and Federal Reserve Economic Data. URBAN INSTITUTE
Why Social Security Reform Is Inevitable 7 6 5 4 Social Security Cost and Income Income (including interest on surpluses) Cost Income (excluding interest on deficits) Percentage of GDP 3 2 1 Income Cost Trust Fund 0-1 -2-3 Source: 2013 OASDI Trustees' Report and Statistical Supplement. Projections assume Intermediate Cost Scenario. Yearly income only.
A typical couple can expect to receive Social Security benefits for a decade longer than in 1940. Expected Years of Retirement Benefits, Earliest Retirement Age Couple (at least one partner living) and Individuals 35 Years of Benefits (life expectancy at ERA) 30 25 20 15 10 5 Couple Individual 0 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Year Cohort Turns 65 Notes: Calculations based on mortality data from the 2013 OASDI Trustees' Report. Calculations for a couple assume that at least one partner is still living. ERA was set at 62 for women in 1956 and men in 1961. C. E. Steuerle and C. Quakenbush, Urban Institute 2013.
Labor Force Participation Rate All Adults Source: Congressional Budget Office, 2014. Budget and Economic Outlook.
Dependence Upon Social Security and Medicare Lifetime Social Security and Medicare Taxes and Benefits at Age 65 Married Couple Earning the Average Wage ($44,800 each in 2013 dollars) Medicare Social Security Values are in constant 2013 dollars. 1,350,000 985,000 1,002,000 638,000 181,000 635,000 747,000 123,000 385,000 154,000 37,000 311,000 39,000 272,000 219,000 18,000 201,000 481,000 624,000 600,000 821,000 712,000 Taxes Benefits Taxes Benefits Taxes Benefits Taxes Benefits 1960 1980 2010 2030 Year Couple Turns 65 Source: C. E. Steuerle and C. Quakenbush, Urban Institute, 2013. Based on earlier work with Adam Carasso and Stephanie Rennane. Calculations based on data from Social Security and CMS trustees reports and supplements. Totals are expected present values at age 65 and assume a constant 2 percent real discount rate.
No Growth in DB Assets, 2007-13 Total Financial Assets in Defined Benefit Plans, 2007 to 2013 ($ trillions) Source: Barbara A. Butrica, 2013, "Retirement Plan Assets." Calculations using the2013 Flow of Funds Accounts of the United States and the Russell 3000 Index Notes: The chart shows balances at the end of each quarter in current year dollars. r: revised p: preliminary
But 25% Growth in DC Assets, 2007-13 Total Financial Assets in Retirement Accounts, 2007 to 2013 ($ trillions) Source: Barbara A. Butrica, 2013, "Retirement Plan Assets." Calculations using the2013 Flow of Funds Accounts of the United States and the Russell 3000 Index Notes: The chart shows balances at the end of each quarter in current year dollars. r: revised p: preliminary
Distribution of Tax Expenditures for Employer-Based Retirement Plans, 2013 Percentage of tax units claiming deduction 72.2 Share of total benefit 71.4 55.7 39.1 9.6 25.1 0.5 3.0 8.0 17.0 Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-1e)
Real median net worth of near-retiree households (ages 54-65) 2007 $104,00 0 1989 24,000 2010 $47,000 Source: Author s calculations using Survey of Consumer Finances
Opportunities at Hand Economic growth provides significant increases in incomes and revenues over time Only imbalance between automatic spending growth and unwillingness to pay our bills hides opportunities Employment rates among those in late middle age, e.g. 65 70, are rising rapidly Despite obstacles Both incentives to retire Inappropriate signals that we are old in late middle age
An age of austerity? Or opportunity? Changes in GDP, Spending, and Taxes per Household, 2014 v. 2024 (2014 dollars) 2014 2024 Change GDP 141,000 168,000 27,000 Direct Spending 29,000 38,000 9,000 Discretionary 10,000 9,000 (1,000) Mandatory 17,000 23,000 6,000 Net Interest 2,000 6,000 4,000 Tax Expenditures 10,000 13,000 3,000 Taxes 25,000 30,000 6,000 Deficit 5,000 8,000 3,000 Source: Urban Institute, 2014. Estimates based on CBO, OMB, and Census projections. Figures rounded to the nearest $1,000.
Growth in Labor Force Participation Among the Elderly 45 Participation Rates: Trustees' Assumptions versus Actual (Men, Ages 65-69) 2012 40 35 BLS Historical Data SSA Projections 200 2009 30 2000 25 20 1986 1992 1987 15 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085 Source: Bureau of Labor Statistics and authors' compilations of data from Social Security Actuary.
Reported Health Status of Americans by Age, 2011 Fair or Poor Good to Excellent 75 years and over 28.6 65-74 years 21.5 Age 45-64 years 16.4 18-44 years 6.4 0 20 40 60 80 100 Percent Source: U.S. Department of Health and Human Services, Center for Disease Control, Summary Health Statistics for the U.S. Population: National Health Interview Survey, 2011 Vital Health Statistics 10(255).
Reforms Suggested Forces at Play: (1) Orientation More to Poorer and Older Social Security reform can be oriented to: Those with fewer resources Those who are older Today: every smaller shares to the old Vast expansion of years of benefits inures mainly to higher earners Income inequality grows when additional work concentrated among higher income
Reforms Suggested Forces at Play: (2) Stop Discouraging Work at Older Ages Social Security discourages work by: Signaling start of old age when one-third of an adult life remains An earnings test interpreted as a tax Confusion over how to buy a higher-value annuity Cash replacement looking adequate in 60s but turning inadequate in 80s & 90s None of this is necessary regardless of overall size of the system
Reforms Suggested Forces at Play: (3) Increase Adequacy of Private Retirement Assets for a Much Larger Share of the Population Current tax subsidies can be reshuffled To favor middle-class and poor more To take much greater advantage of behavior Opt out Retention of employer & government payments in retirement solution Annuitization And much more Moving beyond an employer-sponsored Perhaps critical within small firms & workers with low wages or scattered work histories Potential reform efforts already underway Reform best when coordinated with Social Security reform