Jane the Actuary Retirement

Forbes Post, “Too Old To Work, Too Young To Retire? ‘Everyone Just Works Longer’ Isn’t An Easy Fix”

Originally published at Forbes.com on May 24, 2018.

 

It’s taken as a given these days: The current state of affairs with respect to Social Security solvency and Americans’ retirement savings rates inevitably means that Americans will have to work longer, whether that’s to the Social Security Full Retirement Age, or to age 70, or even later.  But’s it not that simple: workers will need to be healthy enough to continue working, and they’ll need jobs available for them.

Let’s back up briefly: readers may be familiar with the concept of the Old Age Dependency Ratio, defined as the ratio of older dependents (people older than 64) to the working-age population (those ages 15-64), expressed as the proportion of dependents per 100 working-age population.  For example, in 1950, there were 14 retirement-aged people for each 100 people of working age; in 2015, 25; and the relative number of older people increases to 33 in 2025 and in 2075, there are projected to be 49 retirement-aged people for each 100 people of working age, according to the OECD.  To be sure, this isn’t as bad as most OECD countries (the most extreme:  Greece, Japan, Korea, and Portugal, each with over 75 oldsters per 100 working-age people in 2075) but it remains a considerable source of worry.

And, as ratios go, both sides impact the changes over time.  There are relatively fewer people of working age, when the birth rate drops.  There are relatively more people of retirement age when longevity increases.  (And incidentally, but perhaps best reserved for another article, in the real world it also matters greatly how many of those people of hypothetical working age, are actually working — vs. spending increasingly many years in schooling to earn more credentials, for instance, or out of the labor force for childrearing or video gaming purposes.)  Whether one has many, few or no children, clearly enough, doesn’t necessarily have anything to do with whether older Americans are able to work later in life.  But we tend to assume that increased longevity more or less automatically means that these longer-lived older Americans will be able to defer retirement for the necessary number of years to keep retirement finances in balance.

To the extent that Americans choose to retire just because they’ve reached an arbitrary age at which it’s traditional to do so, it’s all well and good.  If it’s reasonable to spend a given portion of your adult lifetime working, and the remainder out of the labor force engaging in rest and relaxation, it’s fair enough that as one’s life expectancy increases, so too should your working lifetime.  It may even be that the current fears of roadblocks in the form of employers who will age-discriminate, will fade; Tyler Cowen, writing last week at Bloomberg, expressed confidence that as the relative proportion of the population who fit into the mold of desirable younger workers, decreases, those companies which succeed in best adapting to an older workforce will be the most successful:

I would suggest that the ability to spot, mobilize and deploy older workers is the next biggest source of competitive advantage in the U.S. The sober reality is that many companies should retool their methods to fit better with the experience and sound judgment found so often in older workers. That also will involve a retooling of the glamour notion to valorize the young less and the idea of maturity more. HR departments may have to work harder to help older workers keep up with new technologies.

But that gets us, with apologies for the longwinded preamble, to the greater question:  will American workers be healthy enough to continue working?  It is, after all, important to recognize that increases in life expectancy are not necessarily paired with the number of years of “healthy life expectancy.”  In fact, the data is mixed.

There exists a metric developed by the World Health Organization, the Healthy Life Expectancy, or HALE, which is intended to measure the average number of years of “healthy life” at birth, or at a given age.  According to this measure, the data for which is available beginning in 2000, American’s HALE is indeed improving.  In 2016, men had 16.7 years of “healthy life,” on average, ahead of them at age 60, compared to 15.4 years in 2000.  Women had 19.0 years, compared to 18.0 in 2000.  To be sure, these numbers are lower than elsewhere (Japan:  18.6/22.9; Canada:  19.4/21.6, etc.) but it suggests that, on average, the ability remains for older workers to, well, work.

But according to a recent report by the Population Reference Bureau, which itself compiles the results of multiple recent studies, according to some indicators, Americans are less well positioned to keep working, than was the case with the prior cohort of retirees, due to greater incidences of disability, including that caused by obesity.  One study found that:

Obese individuals face a greater likelihood of having physical limitations. . . . Although baby boomers are less likely to smoke, have emphysema, or have heart attacks, they are more likely to be obese or have diabetes or high blood pressure than the previous generation at similar ages, they report.

Another study reported that

adults in their late 50s today are in poorer health than their parents’ generation was at the same age, even though the younger group will have to work longer to collect full Social Security benefits.

However, there are some bright spots.  One of them is that dementia, surprisingly, is declining in incidence, not in absolute numbers of the elderly affected (because the number of elderly is increasing to such a degree) but in the proportion of the elderly so affected.

The other bright spot is that continued employment, far from harming ailing would-be retirees, may help them retain their health.  Studies are difficult to come by, because it’s a chicken-and-egg-type situation, since those who are in poor health are more likely to retire early in the first place.  But one study compared memory test scores of older Americans to older Europeans; the later-working Americans’ scores, on average, were higher, which is consistent with a working thesis of “use it or lose it,” that is, that the mental stimulation of work helps stave off cognitive decline.  Another study found that later-retiring French retirees were less likely to develop dementia than early retirees.  On the other hand, other studies found that blue collar workers’ cognitive function was boosted due to retirement “perhaps through more opportunities for intellectual stimulation than their workplaces” and that retirees might be using their leisure time to “practice better health habits,” for example, by exercising more.

The bottom line is that there is no ready answer to the question of how successfully Americans will be able to work later.  But what is clear is that the question of Social Security’s financial stability, or of Americans’ retirement security in general, can’t be looked at as its own silo.  Instead, it’s interconnected with a number of larger issues around the broader economy and culture.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes Post, “The Social Security Trust Fund Is Real – But So What?”

Originally published at Forbes.com on May 5, 2018.

 

Stop me if you’ve heard this one before:  “Social Security would be doing just fine if the thieving politicians hadn’t stolen all the money from the Trust Fund that we paid in to earn our benefit checks.”

Or maybe this:  “The Trust Fund is just an accounting gimmick, nothing more, and Social Security is broke.”

Who’s right?

The Trust Fund is real.

Well, sort of.

The Social Security Administration does indeed invest its surpluses, that is, the revenues from FICA taxes, taxes on Social Security benefits, and interest credited to the fund, less benefits paid out, into government bonds.  And if you or I, or, say, a pension fund, happened to exist in government bonds, we wouldn’t consider that investment to be “fake,” or the money to have been “stolen” from us.  It’s real money, and we’d have a real right to that money.  In the same fashion, the Trust Fund will redeem its bonds when it begins to run deficits.

But that’s not the end of the story.

Consider that the trust fund is not a matter of “us” saving for “our retirement.”  There was, to be sure, a real element of building up surpluses during the early years of the program, though not to the degree that would truly make it an advance-funded program, rather than only partially-so.  In any event, the Trust Fund was virtually depleted in 1983, and the system would have been unable to pay full benefits but for FICA contribution increases beginning in 1977 and accelerated in a 1983 bipartisan reform bill, which also raised the retirement age to 67 and otherwise stabilized the system’s finances.   The funds which have built up since then are the moderate excess of revenues over payouts following the tax hike, not a true pre-funding as you’d see, for example, in a private-sector pension plan.  Its function is really just, in principle, to smooth out spending over time.

The trouble is, though, that one can outline what the Trust Fund “is” in terms of accounting and financing, but people tend to look at this in a moral sense.  The Trust Fund is the embodiment of American workers’ conviction that, having paid taxes during their working lifetime, they have a moral right to their Social Security benefits, or, more generally, to a retirement free of financial worry.  And this is not the case.

Consider this alternative:  what if, in the 1983 Social Security reform, rather than building up surpluses, Congress had decided that any surpluses would be become general tax revenues and any deficits would be paid directly through tax revenue?  Functionally, there would have been little difference, other than bookkeeping, between building up a fund, nominally, that is immediately funneled into government spending, and doing so directly, and between bonds being redeemed, in the future, requiring new borrowing to fund the redemptions (or running a budgetary surplus — in some alternate universe, anyway), or just borrowing directly.

Alternately, what if Congress had simply decided that FICA taxes would vary each year, determined by the projected Social Security payouts each year?  We would not be discussing the depletion of a fund, but instead, perhaps, would be complaining at the prospect of our FICA taxes growing ever higher.

What would the economy of the United States have looked like in the past several decades had there not been FICA surpluses used to buy (or “buy” with scare-quotes if you like) government bonds?  Consider that the Social Security Trust Fund (in combination with the Disability Trust Fund), at the end of 2016, “owned” 13% of the total National Debt (the link includes a detailed breakdown of what entities own what portion of U.S. debt).  Did the availability of the Trust Fund as a debt-purchaser, help hold down interest rates, keep government borrowing affordable, and keep the deficit lower than it otherwise would have been?  Or did this simply enable Congress to defer dealing with deficits when they might otherwise have been motivated to make hard decisions?

Or consider our Neighbors to the North.  Canada, after all, has a Trust Fund, but the nature of the fund is radically different:  it is a real investment fund, holding a wide variety of assets,  including private equity and real estate holdings (they fully or partially own Petco, Univision, and Neiman Marcus, for instance).  Their long-term planned asset mix is 55% equities, 20% fixed income securities (largely government bonds) and 25% real estate.  (Readers can learn more at the Canada Pension Plan Investment Board website.)  In addition to providing a higher rate of return over time than the interest credits of the U.S. Social Security Trust Fund, the very nature of the Canadian fund is wholly independent of the government.  What’s more, although the Canada Pension Plan has historically been more-or-less pay-as-you-go just as in the U.S., they have actually just recently implemented a benefit increase, which is being phased in slowly enough to be wholly pre-funded by a payroll tax increase.

The surplus that generated the Trust Fund were a missed opportunity.

To be fair, there have been worries about the prospect of the government of the United States managing a sovereign wealth-type fund of such a massive size.  Could an investment board truly make decisions impartially?  Would the government be too heavy-handed, attempt to micromanage the companies in which it invested — for example, by monitoring executives’ salaries for “fairness” or requiring a sufficient number of female or ethnic-minority board members?  Maybe.  But there would have been an alternative — the time would have definitely been ripe for an alternate Social Security system, in which the pre-funded component from those surpluses could have been in the form of individual accounts or pooled but nongovernmental funds (hmmm . . . where have I heard that before?).  Such a system would have allowed for the buildup of real advance funding for retirement, rather than leaving us worried about the future.

But the “Real-ness” of Trust Fund is a bit academic.

The bottom line is that whether the Trust Fund is “real” or just a fiction on paper, in the end, doesn’t matter.  Whether the Trust Fund uses its assets to pay retirees, and the federal government has to borrow, to pay back that debt, or whether the government has to pay those benefits directly, it’s still the case that money has to be found — and the amount of money which will have to be found, for retirement benefits, Medicare, and other expenses, is forecast to grow dramatically.  A January paper from the Brookings Institute provides some very sobering numbers:  due to the aging of the American population, federal spending on the elderly is forecast to grow from the current (2017) level of 20.5% of GDP, up to 29.4% in 2046 — and that’s not 29.4% of government spending, but 29.4% of our total economic output.  And this isn’t just a temporary “hump” due to the Baby Boom.  The author states:

Although we often talk about aging as arising from the retirement of the baby boomers, that is somewhat misleading. The retirement of the baby boomers represents the beginning of a permanent transition to an older population, reflecting the fall in the fertility rate that occurred after the baby boom and continued increases in life expectancy. Because aging is not a temporary phenomenon, we can’t simply smooth through it by borrowing. Instead, it is clear that population aging will eventually require significant adjustments in fiscal policy—either cuts in spending, increases in taxes, or, most likely, some combination of the two.

What should the policy response be to future impact of an aging population?  The paper acknowledges that such forecasting is uncertain, and offers various options but does not promise any easy solution — because there is no easy solution on offer.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.