Jane the Actuary General Interest

Revisiting the Minimum Wage and a questionable “seminal study”

Yes, readers, I have gone back to school and am studying economics.  And I’m killing two birds with one stone by writing my commentary on a class-assigned paper in blog format.

The paper in question is, in fact, the 1994 paper which shifted economists’ thinking on the minimum wage, because of its claim that minimum wage boosts had no ill effects on employment and were, basically, “free money.”

Here’s how Vox characterized it:

[F]or years many economists assumed, almost without questioning, that minimum wages destroyed jobs. They might be worthwhile, sure, but you have to weigh the harm they do to the demand for labor against their benefits for workers who remain employed.

In a paper first published by the National Bureau of Economic Research in 1993, Krueger and his co-author Card exploded that conventional wisdom. They sought to evaluate the effects of an increase in New Jersey’s minimum wage, from $4.25 to $5.05 an hour, that took effect on April 1, 1992. (At 2019 prices, that’s equivalent to a hike from $7.70 to $9.15.)

Card and Krueger surveyed more than 400 fast-food restaurants in New Jersey and eastern Pennsylvania to see if employment growth was slower in New Jersey following the minimum wage increase. They found no evidence that it was. “Despite the increase in wages, full-time-equivalent employment increased in New Jersey relative to Pennsylvania,” they concluded. That increase wasn’t statistically significant, but they certainly found no reason to think that the minimum wage was hurting job growth in New Jersey relative to Pennsylvania.

Card and Krueger’s was not the first paper to estimate the empirical effects of the minimum wage. But its compelling methodology, and the fact that it came from two highly respected professors at Princeton, forced orthodox economists to take the conclusion seriously.

And with that in mind, join me as I dig through the meat of the study:  “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.”  (This is not actually the “class assignment”; I will need to distill my thoughts even further into 250 – 300 words, which will be harder!)

The core concept of the study was this:  generally speaking, it’s hard to measure the effects of a change in the minimum wage, because there’s so much much else happening at the same time.  For example, the latest change in the US federal minimum wage occurred at the same time as the “Great Recession.”  But in 1992, New Jersey increased its minimum wage to a level above the federal minimum, $5.05 rather than $4.25, and next-door Pennsylvania did not.  The authors believe that looking at changes in employment patterns, wages, costs, etc., at fast-food chains in those two states provide a means of analyzing the impact of the minimum wage hike.

In order to do so, they (or rather their employees) conducted phone surveys of fast-food restaurants in those two states in late February/early March of 1992, just before the minimum wage hike was implemented, and in November-December 1992, after the April 1992 change had had some time for effects to be seen.  They had, all things considered, reasonable response rates to their surveys (72.5% in PA and 91% in NJ, with different numbers of attempts made in the two states) for the first wave, and bolstered their response rate for the second wave with in-person visits as needed.

Their core findings:

In the New Jersey restaurants, the number of employees per store actually increased during this time frame, even as they decreased in Pennsylvania due to the recession at the time.  At the same time, within New Jersey, among stores which had previously had a starting wage equal to the minimum wage, as well as those stores with a starting wage above the minimum but below the new minimum, the number of employees increased; but in those stores where wages were already above the minimum, employment decreased.

The authors then get mathier.  They perform two regressions, one to estimate the effect on employment of a store being in New Jersey, and another to estimate the effect of a store having previously paid less than the new minimum wage.  This is where my interpretation is a bit marginal, but here goes:

The change in the number of FTE employees per fast-food restaurant in NJ compared to the change in PA, was 2.51.  The regression model calculates, stripping out other impacts, that New Jersey-ness accounted for 2.3 new employees per store.  Having to raise wages (compared to NJ restaurants already paying the new minimum) produced a regression factor of 11.91 times the “wage gap” when controlled for differences in different regions within NJ as well as for differences among the different large chains surveyed; this is a high factor because it gets reduced by this gap-factor, which is .11.

They also perform additional statistical tests by fine-tuning their calculations, for example, excluding New Jersey shore area stores because of their tourist economy, adjusting the weightings of part-time employees in calculating full-time equivalents, etc.  These produce different employment impacts but still the same conclusion, that the minimum wage increase actually increased employment.

The authors also assess whether the minimum wage hike affected other aspects of the restaurants’ operations.  There was an increase in full-time workers in New Jersey, but no significant effect with respect to restaurants who had paid less vs. more in NJ.  There was no statistically-significant change in the restaurants’ opening hours, the free/reduced-price meal benefit, the amount of the first raise or the time until that first raise is given.

They did find that prices in New Jersey increased by 4%, a slightly greater increase than would be needed to make up for the higher wages (taking into account the wage increase and the proportion of the restaurant’s costs due to labor), but they discard this as a relevant consideration because prices increased at the same level regardless of whether an individual restaurant was impacted by the wage hike or not (based on whether their starting wage had been below the new minimum or not).

Finally, they assessed whether the wage increase prevented new stores from opening, looking at broader data, and found no statistically-significant evidence.

After presenting their statistical tests, they propose various explanations.  They consider alternate labor-market theories “monopsonistic and job-search models”), but discard them.  They theorize that employers obliged to pay higher wages may decrease their quality (longer lines, reduced cleanliness) or may shift pricing of some products relative to others, but ultimately conclude with the simple statement that “these findings are difficult to explain.”

So what’s to be made of this?

Their analysis is certainly more useful than one without any “control group” and it’s the new “one weird trick” of economists to find and exploit what they consider to be “natural experiments” (though I suppose “new” is all relative).  It also has, I think, particular merit in looking at employment at specific businesses, rather than at unemployment rates across a region, so as to drill down to the question of “how do employer manage an increased labor cost?”

But there are plenty of deficiencies:

One common gripe of Krueger’s critics (e.g., at the Foundation for Economic Education) is that the time frame of Krueger’s analysis is simply too narrow.  By late February, employers already knew they would need to offer a much higher minimum wage, and would likely have been taking that into account by avoiding hiring and reducing staff with attrition.  It could even be that the increase in employees was an indicator that they found, on average, that they had been too cautious in the period leading up to the hike.  It also seems likely that employers wouldn’t have been sitting on some innovation that would allow them to reduce staff which they would suddenly implement immediately upon increasing wages, but that labor-reduction initiatives would take time, so that the long-term effect of the wage hike would take some time to materialize.  (For example, the free refill was introduced by Taco Bell in 1988, but became commonplace in the 90s.  Was this merely a coincidence that this marketing tactic occurred roughly at the same time as a significant nationwide minimum wage increase, with a phase-in that was driven by the time and effort to remodel locations, or did stores find it more advantageous to reduce worker time in this fashion, when labor increased in cost?  Other changes, such as the self-service ordering kiosk, required advances in technology that will presumably be motivated by higher labor cost but not simply “waiting in the wings.”)

It also seems too simplistic to simply discard the increase in prices just because those prices increased at all New Jersey restaurants, including those which had already been paying higher wages. It would seem fairly reasonable that once the previously-lower-paying restaurants had increased their prices, the rest would follow, or that, if certain franchise owners had a mix of higher- and lower-wage restaurants, they might have raised prices in parallel.  Consequently, this consistent price-hike across stores is not the counter-evidence Krueger claims.

In fact, it would seem to merit a closer review, to identify the characteristics of those restaurants previously paying higher wages, especially because they did not boost their wages to remain a “higher wage employer.”  Were these particularly-profitable restaurants?  Restaurants which had difficulty recruiting employees due to locally-tight labor markets?  For instance, restaurants in wealthier suburbs tend to recruit workers from further away and offer higher wages to make the additional travel time worthwhile.  Would they, in the longer term, have difficulty finding workers without boosting that wage differential?

Lastly, they measure the impact of the wage increase on overall work hours by asking whether the opening hours have changed, whether the number of cash registers have changed, and whether the there is a change in the number of cash registers typically open at 11:00 AM.  But it seems likely that a key way that employers will seek to mitigate the effect of a wage hike is by lower staffing at slower times in the day, either by scheduling employers for fewer hours, or by being readier to send employees home.  And they ask whether employees work on a full- or part-time basis but do not actually ask in their survey what the total or average work hours is at each surveyed store.  Perhaps this is a piece of information that they considered too difficult for store managers to provide, so did not ask it so as to ensure they would receive a response to their request, but without knowing this, we simply cannot know whether the study’s data is what it claims to be.

Now, I’ve said that this is considered to be a key study that shifted the debate about the minimum wage, and, it turns out, it wasn’t without pushback.  Richard Berman of the Employment Policies Institute criticized the study in a 1996 report, “The Crippling Flaws in the New Jersey Fast Food Study,” and Krueger and Card responded with their own criticism of Berman’s criticism, as well as a further study by economists William Wascher & David Neumark (not available without paywall), in 2000.  Krueger finds fault with the attempts by Berman and by Wascher and Neumark to re-do the analysis using better or alternate data sources, but does not directly address Berman’s “crippling flaws” (or if they do so, it is so briefly addressed that I missed it).  What were these flaws?  First, that there were significant numbers of stores with clear data errors, such as shifts in the number of part-time and full-time employees as well as a failure to specify, in the price-increase portion, what defines a “regular hamburger” (is it a Big Mac? A Quarter Pounder?  A dollar-menu basic hamburger?).   EPI researchers went back to many of the surveyed restaurants and could not match the employment numbers, and Berman believes this is simply because of inconsistencies in definition of part vs. full-time and the basic fact that the manager or assistant manager answering the survey would have been juggling multiple duties and relying on memory for these numbers.  In any event, Krueger and Card dial back their claims, from 1994’s statement that “we find that the increase in the minimum wage increased employment” to a more cautious, “the increase in New Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food industry, and possibly had a small positive effect.”

public domain

 

 

 

Jane the Actuary General Interest

Fact vs. Fiction on the Obama Center’s Economic Impact

I’ve long been a critic of the Obama Museum, which will not be a “presidential library” but literally just a museum as well as ancillary services and programming.  But with the construction now beginning, I finally got around to looking at Obama.org‘s projection of economic impact, and it’s worth evaluating.

Short-term jobs (construction)

The building is expected to employ 3,682 people, with a total of $214,635,630 in “labor income,” during the course of construction.  That’s an average of about $60,000 per job — because these are mix of various types of jobs, but all short-term.

Ongoing employment

Ongoing payroll for the Obama Center is forecast as $19 million in payroll.  However, Only 43% of the jobs are expected to be held by South Side Chicagoans, with only 16 people employed in “admissions,” for example, and 10 in “Museum Operations and Administration.”  Security guards and janitorial staff will be contracted out rather than directly employed.

Museum revenue

The consultants predict $3.1 million in revenue for the planned four-star restaurant and cafe, but recognize that only 25% of the revenue will be “new” (that is, that many of the diners would have otherwise eaten elsewhere).  They forecast $6 million in gift shop revenue.  They forecast $110K in “net new” private event spending, because 80% of private events held at the venue would have been held elsewhere in Cook County.

The forecast for museum attendance uses an upper bound based on a hypothetical maximum based on the number of opening hours, fire capacity, average visit length, etc., then multiplied by a factor of 30% to reflect utilization, and a “historical and cultural significance multiplier” of 1.15 (that is, the expectation that the Obama museum will be exceptionally popular) — which, honestly, seems fairly suspect.  The lower bound is calculated based on actual visitors to real-world presidential museums for recent presidents — but using some math which determines that, even though the highest visitor counts from any of these (excluding the first opening year) was 426,000 for the Reagan museum after it became the recipient of Air Force One, the Obama Museum would have 50% more visitors than even this high, because of the greater size of the Chicago metro area and the number of tourists.

Ticket prices are expected to be $18 per adult, $11 for children, $10 for out-of-state students, and free for in-state students.  Parking cost would be $22.  In addition, visitors are forecast to spend on average $5 in food purchases and $10 in the gift shop.

Tourist revenue

Outside the museum, they calculate that visitors will spend

$45 per person for lodging, for in-state out-of-town visitors, or $112 for out-of-state visitors.  Why out-of-state visitors would spend more on their hotels is not clear.

$19 per person in retail spending, for in-state out-of-town visitors, or $56 per person for out-of-state visitors.  This category is not at all clear to me.  Are they saying that people will travel to Chicago specifically for the Obama Museum and, once here, will take in a bit of Magnificent Mile shopping?

$32/$102 per person for spending on food.  Again, the only way this makes sense is if they assume the visit will be motivated by the Obama Museum, rather than it being an add-on to an existing visit.  Or do they “take credit” for longer visits on the assumption that the Obama Museum will be the tipping point in people deciding on Chicago in their vacation planning?

Non-tourist visitors

This was the part that was the biggest surprise:  we kept reading about how the Obama Center will contribute to the public good with conferences of various kinds.  But those aren’t free.  However, it is not clear to me to what extent the registration fees are meant to cover the cost of the event, whether it’s subsidized, whether some participants will have a reduced fee, etc.

Their largest event is planned to be an Annual Summit with 5,000 participants.  Each of them will pay on average $577 for the event (the unround number suggests some would be given reduced rates), for a total revenue of $2.9 million for an event expected to cost the Obama Museum $4.2 million.  Where the additional funds come from isn’t explained — is it from the endowment?

Air Force One non-sequitur

Finally, the document closes with a slide on the “possible impact of Air Force One exhibit” — but this is an appendix and we don’t know what the accompanying talking points were.  Is it meant to suggest that the attendance numbers used for calculating estimates, were overstated?  That they hope to get a similar “big draw” here?  Dunno.

What about the rest of the Center?

The Obama Center won’t just have a museum.

There will be a new public library branch there.  Honestly, it is not at all clear whether the money for this is coming from the Obama Foundation or whether the Public Library is simply using their own budget, and, in fact, whether the space will be provided or rented out.  Similarly, there will be a “program, athletic, and activity center” with “recreation, community programming, and events.”  Will these activities be provided free of charge, for a fee, or by means of the Chicago Park District using this as a site for its programming?

None of these other activities are reflected in the impact calculations; if the generosity of donors worldwide was expected to benefit Chicagoans through use of Obama Foundation funds on these activities, you’d expect to see them taking credit for this.  What’s to be made of its absence?

In any case, the fight against the Museum appears to be over.  What remains is a fight to ensure that public funds are not spent on its ongoing expenses.  But, unfortunately, Chicago being Chicago, and Illinois being Illinois, this is likely to be a losing battle.

Obama – public domain (wikimedia commons). https://commons.wikimedia.org/wiki/File:Barack_Obama_at_Las_Vegas_Presidential_Forum.jpg
Jane the Actuary Retirement

Forbes post, “The Massachusetts ‘Essential Worker’ Pension Boost Proposal Is A Case Study In Public Pension Failures”

Originally published at Forbes.com on August 19, 2021.

 

23 out of 40 Massachusetts state senators support it by signing on as co-sponsors.

126 out of 160 Massachusetts state representatives have done the same.

But the legislation, a bill to pay a bonus retirement credit to in-person public workers in that state, is still a terrible proposal.

The text of the bill, H. 2808/S. 1669, is brief. All employees of the state, its political subdivisions, and its public colleges and universities, a bonus of three years “added to age or years of service or a combination thereof for the purpose of calculating a retirement benefit,” if, at any point between March 10, 2020 and December 21, 2020, they had “volunteered to work or who [had] been required to work at their respective worksites or any other worksite outside of their personal residence.”

During a hearing on July 21, sponsor Rep. Jonathan Zlotnick explained his purpose in bringing the bill forward:

“This was the time when these essential services were most important, the people being asked to perform them were most at risk coming into contact with members of the public and with co-workers. They continued to do their jobs, often exhibiting flexibility and creativity and an effort to ensure that those needs were met. It is in recognition of that effort that we offer this bill.”

However, at the time, Rep. Ken Gordon “questioned Zlotnik on whether or not a financial or fiscal analysis had been conducted relative to the cost that would be incurred if the legislation was signed into law,” and Zlotnick admitted that no such calculation had been made, and “Zlotnik said he recognizes that many details associated with the proposal still need to be contemplated.”

In subsequent reporting, government watchdog group The Pioneer Institute voiced its opposition. In a statement posted on their website, they criticized the broad coverage — acting as an unfunded mandate for municipalities, including workers even if they had worked outside their home for a single day, encompassing both blue collar and white collar workers. They estimate the bill’s cost at “in the billions of dollars” and point to a massive boost even for a single individual, the president of the University of Massachusetts, whose lifetime pension benefit would increase by $790,750.

In response to these objections, Zlotnik “said the bill is still ‘very early in the process’ and said cost would be a ‘major determining factor’ in any bonus payout to public workers, in an e-mail to the Boston Herald.

And left out of Zlotnik’s proposal is a recognition that the state’s main retirement fund is 64% funded, and the teachers’ fund, 52%, as of 2019.

Now, whether this bill ultimately becomes law is still unknown. But, again, 79% of Massachusetts state representatives are on board with their support without taking any interest in the cost of the proposal, and even Zlotnik himself is not troubled by having brought forward a bill with such serious deficiencies. It is not even clear whether he would have pursued any cost analysis, had he not been called out on this. What’s more, nowhere in any of the discussion does Zlotnik or any of the bill’s supporters suggest that among the revisions would be any notion that the state should pay for the added cost up-front.

In fact, regardless of one’s opinions on the various proposals to give teachers, for instance, bonuses for their year of remote teaching, it is nonetheless a far more fiscally responsible choice to make, than this proposal, which is no different than borrowing money for the same purpose. And, again, 126 state representatives and 23 state senators were willing to sign onto this because the symbolism of the gesture was more important than assessing whether it was a financially responsible decision. Will those sponsors be willing to vote down the measure? Will those in power recognize this would be an embarrassment and simply never bring the bill to a vote? One way or the other, this is a prime case study in how pensions become so underfunded, as it is always far more popular to promise benefits than to pay for them.

Update: as of December 2024, this bill was reintroduced in 2023, and as of March 2024, is sitting in committee.

 

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 Uncategorized

Forbes post, “It’s Time To Stop Calling Social Security’s Annual Increase A ‘Raise’”

Originally published at Forbes.com on August 18, 2021.

 

In the news last week, headlined “Social Security could get its biggest raise since the 1980s”:

“Social Security recipients could be in for some good news, as financial experts say a Cost-of-Living-Adjustment, or a COLA, could increase their monthly checks next year.

“Social Security entitlements haven’t gotten a decent boost in decades and the program barely kept up with the cost of living. But next year, those checks could be bigger. . . .

“Inflation is creeping up. While that’s bad for the economy, it’s good if you live on Social Security. Every year, the entitlement benefit millions of people rely on is adjusted to account for inflation. Over the last 20 years, inflation hasn’t been a big issue, so the monthly payment hasn’t gone up all that much. In 2021, the increase was 1.2%, but next year, the Cost-of-Living Adjustment might increase by 6.1%.”

This report comes courtesy of a local NBC affiliate out of Charlotte, WCNC, but we see this sort of rhetoric repeatedly:

At The Motley Fool: “Seniors Could Get a 6.2% Social Security Raise in 2022.”

“Seniors who rely heavily on Social Security often find themselves cash-strapped in retirement. That’s because those benefits aren’t always so generous to begin with, and also, because the raises they get (known as cost-of-living adjustments, or COLAs) are often stingy themselves.

“In 2021, seniors got a 1.3% boost to their Social Security benefits. But next year’s raise is shaping up to be a lot more substantial.”

NASDAQ, “Social Security Recipients Could Get a Big Raise Next Year.”

“Your Social Security income could get a nice boost next year if inflation continues to climb. Every year, Social Security considers changes in the price of goods and services to determine if Social Security recipients deserve a raise.

“Based on changes so far this year, the increase could exceed 4% in 2022. If so, then the increase would be the biggest increase since 2008, when recipients nabbed a 5.8% bump up in retirement income.”

The reality, of course, is this is not actually good news. These adjustments to Social Security benefits are merely meant to keep benefits in line with inflation, and workers themselves will expect pay increases that match inflation to be owed to them, and deem a raise at CPI level to be no real “raise” at all.

And, in fact, high inflation is still bad news for seniors, even if the CPI adjustment is meant to hold them harmless. Despite the decline in pensions for new workers, traditional defined benefit pensions remain an important source of retirement income, with 56% of retirees reporting a pension in a Federal Reserve study in 2017 (thanks to Retirement Income Journal for the link), and, although states like Illinois are notorious for their guaranteed, fixed annual increases, not all states offer CPI adjustments, and CPI adjustments are exceedingly rare in the private sector.

In addition, according to that same study, 58% of retirees report savings in an IRA or other retirement savings account, and 53% report other forms of savings. While, generally speaking, investing in stocks is considered to be a good way to ensure your money doesn’t lose ground to inflation, retirees are instructed to shift their assets away from stocks and into bonds, for example, with a rule of thumb such as the “100 minus age” rule, that would instruct 75 year olds to keep 25% of their assets in stocks. And it goes without saying that assets in fixed income investments (other than TIPS, with their low investment return) have no inflation protection.

And, again, those outlets are reporting a CPI increase of 6.1%. That’s substantial. Presuming that the inflation rate is consistent across various types of spending (rather than reflecting a “market basket” tilted toward young people or families), that’s a loss in value, in fixed pensions and investments, of 6.1%.

Do politicians and pundits shrug it off because retirees are, well, old? Because they deem anyone with savings or non-CPI-adjusted pensions to be “rich” and unworthy of concern, a matter of collateral damage in the quest for economic goals which produce inflation as a consequence? Remember that prior to the election, Congressional Democrats began pushing for the Federal Reserve to explicitly make reducing racial inequality a part of its mission, stating that they believed that the Fed had “raised interest rates too quickly in the past,  hurting the job prospects of Black and Hispanic workers, who are often the last to get hired” — which suggests (though, to be sure, doesn’t directly state) that the Fed should be more tolerant of inflation in order to reduce the unemployment rate to even lower levels with a reduction for even those groups with the highest unemployment rates, and which, in turn, suggests a level of support for policies meant to benefit “the disadvantaged” of one sort or another, regardless of the degree of inflation they trigger.

The bottom line is that a high Social Security annual increase is not something to celebrate. It’s time to stop calling it a “raise” and treat it as what it is, an adjustment meant to hold retirees harmless, which may or may not be effective at its goal depending on personal circumstances.

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, “Do Teachers And Public Workers Without Social Security Lose Out? A New Analysis Says, ‘Sometimes’”

Originally published at Forbes.com on August 2, 2021.

 

Conventional wisdom says that the reason for public sector pension plans’ poor track record on funding levels is that benefit levels are simply too high, causing politicians to kick the can down the road perpetually. In Illinois, for example, “Tier 1” teachers can retire at any age, after 35 years of service, without any reduction to their benefit, and receive 75% of their pay with automatic 3% increases each year. As a bonus, they can add to their service calculation two years of unused sick leave, as well as non-vested time spent teaching out-of-state, if they pay the employee contribution (but not the employer cost) for that service. You simply can’t beat that in the private sector, even considering Social Security benefits.

But that’s not always true. Illinois is one of 15 states which do not cover some or all of their employees in Social Security. Although these plans ought to provide benefits that are the equivalent of the combination of Social Security and a private-sector retirement plan, federal law requires that, at a minimum, they must provide benefits at least as good as those provided by Social Security, and has established a “Safe Harbor” formula that determines whether plans comply with these rules: if a plan pays a benefit of at least 1.5% of pay, averaged over the last three years of service, and beginning no later than Social Security retirement age, then the plan is considered “qualified” and the state/town/school district can opt out of Social Security.

This is a very narrow test, though, and individual teachers in those plans can end up losing out. The test allows states to establish vesting periods, in some cases in excess of what federal law permits for private sector plans, such as 10 years in Connecticut, Georgia, Illinois, and Massachusetts. (Strictly speaking, Social Security has a sort of “vesting” in its coverage requirements, but those are met by work history over multiple employers.) The test doesn’t question whether the benefits provide by the plan exceed the contributions required from the employees. It doesn’t take into account teachers who withdraw their contributions and lose their benefits. And it doesn’t require a cost-of-living adjustment, without which fixed-income pensions will lose ground relative to Social Security even if benefits are equal at retirement.

At the same time, some workers in these plans will get a full Social Security benefit even if they leave their public sector job before earning a vested benefit, or if their benefit is so low they take their refund of contributions instead, simply because they will have met their 35 years of Social Security earnings history required for a full benefit, and because Windfall Elimination Provisions don’t apply for retirees who worked for public sector employers if they don’t actually have public sector pensions. That’s not to say there are positives to the failings in public sector plan design, but that Social Security itself mitigates those failings.

It is with this in mind that the Center for Retirement Research published a brief in April summarizing its authors’ research on the question of how workers in these plans fare, overall, taking into account all of those systems’ workers, not merely those with careers long enough to benefit from the systems’ generosity for full-career employees. They used a set of assumptions to calculate workers’ lifetime pension wealth, and a counterfactual Social Security wealth, to calculate, across all employees in a system and their likelihood to make it to retirement, and based on the benefits available for newly hired employees (taking into account, that is, reductions for new tiers), the “wealth ratio” for a given plan. And, in fact, nearly half of those plans, or 43%, did not have benefits that were as good as Social Security, on average for all workers, using this more sophisticated analysis.

To be clear, that’s the percentage of plans; the authors did not provide an analysis of what percentage of workers ended up with lower-than-Social Security lifetime benefits. They did, however, perform their analysis for certain sample workers, finding that in 74% of plans, a low earner would be better off with Social Security.

And the authors did not provide a listing of which of the plans in their study were relatively more or less generous, nor whether more generous plans were more or less funded than the parsimonious ones, nor — considering that they evaluated only new hires’ benefits — whether those which are low, are low because those are plans which had historically been low, or reflect new benefit cuts in response to low funding ratios.

But even with those limitations, this study is an important data point, especially for those of us, including, yes, myself, who believe that a key piece of Social Security, and public pension, reform is for all Americans to participate in our national old-age social insurance system.

And if you ask yourself, “how can benefit plans which are so expensive that politicians can’t fund them properly, have such poor results in this analysis?” that demonstrates, in part, the extent of the inequality between some workers and others, that you get with these sorts of plans.

 

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.