Here’s something I didn’t know. Claims that Americans don’t save enough for retirement are based on measures of retiree income that … don’t include most of their income.
Oy vey. How the heck does that work?
Big name insider Andrew Biggs and outsider Sylvester Schieber* have the reason.
The story is largely based upon data from the Current Population Survey … Data from the Current Population Survey, or CPS, form the basis of the Social Security Administration's Income of the Aged publication series—which is widely cited as showing that Americans' inadequate retirement incomes … But the CPS fails to count most of the income Americans … as well as significantly understating the percentage of current American workers who are saving for retirement.
The CPS measures the sources and amounts of income received by American households, including income from retirement plans. The Census Bureau's definition of income, however, includes only payments made on a regular, periodic basis. So monthly benefits paid from a defined benefit pension or an annuity are counted as income, while as-needed withdrawals from 401(k)s or IRAs are not.
Think about that: only regular, periodic, inflows and outflows get counted.
There are no windfalls that get socked away that get counted for retirement: no bequests, no big bonuses or commissions, no severance packages, not even lottery or gambling winnings.
And, all those big ticket purchases that seniors make with lump sums (because, after all, that’s the smart way to buy stuff): the cars, the condos, the vacations, the elective surgeries … don’t count either.
The scale of this nonsense is astounding:
For 2008, the CPS reported $5.6 billion in individual IRA income. Retirees themselves reported $111 billion in IRA income to the Internal Revenue Service.
Oops. We didn’t count 95% of that category.
The CPS suggests that in 2008 households receiving Social Security benefits collected $222 billion in pensions or annuity income. But federal tax filings for 2008 show that these same households received $457 billion of pension or annuity income.
Oops! We missed over half your income.
It gets worse:
Even that is not the whole story—because tax filings do not include distributions from Roth plans, since those distributions are not taxable.
Now that’s sneaky: let’s figure out a plan to help retirees lower their taxes, and then when they divert money in that direction, we won’t count it when declaring there’s a problem that didn’t exist before. Ummm … yeah … worked like a charm as near as I can figure.
Then there’s this:
Tax figures omit pension and IRA distributions to low-income retirees who do not file annual tax forms.
You mean that person I was talking to just yesterday, who has everything paid for, and on who on paper is considerably richer than me, and actually saves money from the income that’s so “meager” she doesn’t have to file taxes anymore … doesn’t get counted at all? But, she’s rich, right? So the government is going around saying we’re not going to count her on the positive ledger at all, but we will count her on the negative ledger, even though she’s clearly in the 1%? Wha wha what??
Well, maybe this is a new problem. Not so:
… The agency has known for nearly 20 years that CPS data ignored much of the retirement income paid out by pensions and IRAs, and that the underreporting of this income was a growing problem. The agency's own policy analysts have been increasingly forthright in pointing out the shortcomings of the CPS in measuring retirement income. … [emphasis added]
Nevertheless, Social Security Administration summary reports developed from CPS data continue to be published. They are widely cited as justification for expanding Social Security and shifting away from the 401(k) and IRA saving system that today produces more income for retirees than does Social Security. Based on this faulty data, activists propose enlarging Social Security, which itself is dramatically underfunded, currently operating in deficit, and facing depletion of its trust fund in fewer than 20 years.
* Biggs was formerly principal deputy commissioner of the Social Security Administration. He’s the inside guy. Schieber is the former chairman of the Social Security Advisory Board. He’s the outside guy.
Healthcare insurance is expensive. This is why most people who have been going without it are relatively healthy.
And some unhealthy people have gone without coverage too, because of various conditions which amount to … insurance companies can’t break even covering them.
The goal of Obamacare is to get the latter group into the healthcare system. To pay for this, they need more of the former group in the system too.
The thing is, that former group — the healthy people who really don’t want to buy insurance — will need to be enticed.
So a basic yet understated goal of Obamacare is to sweeten the deal for people who know healthcare insurance is likely to be a bad purchase. This gets their money, and hopefully excess money, into the system. That excess can be used to cover the expenses of the less healthy.
Now, those people may be pretty willing to buy through healthcare exchanges, because they’re being offered a product they couldn’t obtain before. The thing is: if they buy too much, the system will run short of funds.
So, it’s critical to discourage those people from consuming too much healthcare. John Goodman:
… This means that to make ends meet they must overcharge the healthy and undercharge the sick. It also means insurers have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses) by, in effect, making their plans less appealing to the sick.
How do you do both of these at the same time? First, offer lower prices to attract the healthy. Second, require high deductibles to discourage the sick from using “free” healthcare. Third, eliminate as many expenses from coverage as you can: like specialists, trauma centers, and the latest pharmaceuticals that lack generic alternatives.
This is the water balloon problem of command and control policy decisions raising its ugly head once again. Economic problems are like water balloons: squeeze one end, and you get a bulge in a different spot. The squeeze here is opening up healthcare insurance plans to everyone at the same price. The bulge is the change in the plans from something that people liked to something they will like less.
And the game politicians play is called “Watch me squeeze one end while I blame others for the bulge”. Don’t fall for it.
The hot topics this winter are income inequality and income mobility. Obama is expected to stress these in his State of the Union address. And this weekend, world financial leaders are meeting in Davos where those subjects are on the table.
Income mobility refers to the ability of people to move out of the income strata that they are born into.
In researching this, the population is divided into fifths: quintiles. Perfect income mobility would mean that no matter which quintile you were born into, you had a 20% chance of ending up in any of the quintiles.
One problem with discussions about this is the lack of an answer of “compared to what?” No one has a theory of why perfect income mobility would be desirable that’s much deeper than … well … that it sounds nice. Anyway, that’s what we have to go on.
Also, to the extent that wealth can earn income, it isn’t clear that we should ever expect perfect income mobility. To the extent that the children of the wealthy can inherit that wealth, and its income earning potential, we shouldn’t see perfect income mobility. (On the other hand, some people see that as a reason for confiscatory estate taxes, even though those tend to be unpopular across the spectrum of wealth: everyone wants to preserve the chance that if they get rich, they can leave the money to their kids).
Anyway, there’s new research out by some huge names in the field. Their most important finding is that the progressive trope that it’s gotten harder for the poor to become rich over the last generation is not true. The authors even admit that they believed this prior to doing the research.
Instead, their results show that while it is harder for the poor to become rich in the U.S. than in many other developed countries, it hasn’t gotten any harder. This article is summarized in both the January 23 issue of The New York Times entitled “Upward Mobility Has Not Declined”, and in The Wall Street Journal’s “New Data Muddle Debate on Economic Mobility".
The results won't fit neatly into either party's political arguments.
"One way to look at this is 'We fought this whole thing to a bloody draw,' " said David Autor, an economics professor at the Massachusetts Institute of Technology who reviewed the study. "Someone else could say, 'Public policy accomplished nothing.' That leaves lots of room for people to think their favorite hypothesis is correct."
Just like poverty measures, we can also talk about relative mobility (can you be rich if your parents aren’t?), or alternatively we can talk about absolute mobility (can you be richer than your parents?).
The chart shown above is about relative mobility: if you’re born poor, you can get rich, but the odds aren’t great … but at least they haven’t gotten worse. Of course, recall the point I made above: it’s not clear how far off of 20% each of these should be.
But, when we look at absolute mobility, the data suggests that the odds are still very good that you’ll be richer than your parents:
Absolute mobility has continued to improve in recent decades because incomes have risen; median family income is about 12 percent higher today than in 1980, adjusted for inflation. As a result, most adults today have more income at their disposal than their parents did at the same age.
Yet the growth rate of absolute mobility has slowed, as economic growth has slowed to a disappointing level over the last 15 years.
Here’s a video of that car — a refitted, and street-legal, 1972 Datsun sedan — called White Zombie. It’s time in this race: a quarter mile in 10.4 seconds, has only been beaten by 5 gas powered cars … ever.
First off, who’s Larry Summers? He is a very well-known macroeconomist, professor at Harvard, and former Chief Economist at the World Bank. He’s also the most prominent economist connected to the Democratic Party. He served in the Clinton administration, and ended up as Secretary of the Treasury. He was also involved early in the Obama administration, where he served as Director of the White House’s National Economic Council.
But, Summers is also the macroeconomist who is not popular with the progressive side of the Democratic party. First, Summers was President of Harvard, and was forced out for voicing an opinion that is politically incorrect but not terribly controversial outside of academia. Second, Summers offended many White House staffers by pointing out (repeatedly) that, for want of a better term, they needed more adult supervision. Third, Summers was Obama’s first choice to head the Federal Reserve, but his name was removed because progressives wouldn’t support him.
So, what’s in Summers’ essay? Broadly, he’s worried that technological improvement is reducing opportunities for those with less skills. Historically, this is a new thing. Technology has generally augmented the productivity of workers. But we’re starting to see signs (disturbing if they hold) that technology is starting to substitute for labor.
This relates to my first post of the semester, where I argued that as a country we’re in the unusual position of getting more output with less effort. Everywhere in our lives that’s considered a good thing, but when the macroeconomy does that … we’re no longer quite sure.
Part of this relates to an unusual change in who works. It used to be that the richer you were, the less likely you were to work: your income would be high enough that earning more wasn’t as worthwhile as having more leisure. This has changed over the last few decades: now the people who are the most productive work the most hours. Again … this is good in almost all contexts … but when it happens at the macroeconomic level, we’re not so sure.
This has led to a new and evolving problem: non-employment rather than unemployment. Consider the chart (sorry about the sizing, it’s embedded inside a very large frame):
The unemployment rate hasn’t changed that much over the last 60 years, but non-employment rate has increased fairly steadily.
The “what” of this is an amazing feat: we can support more people who aren’t working. That’s been a goal of human existence forever. But the “how” of this is problematic: how is it that, given that comparative advantage says there’s a role for everyone to specialize in something, we can’t find a worthwhile use of these folks’ time.
Summers’ explanation for this is that technology is allowing us to create capital that doesn’t complement labor, but rather substitutes for it.
Now, what makes economics a solid social science is when you take an assumption like that and figure out what new results emerge:
Real GDP will rise.
Wage will fall.
The share of GDP paid to owners of capital will rise.
Of course, this is the story of the last 30 years in the U.S. and many other countries.
Then, he splits his argument into three parts (and, I think, does a poor job of noting that for readers). There are:
Sectors where capital doesn’t substitute well for labor, because skills are important. This is the traditional story. People in these sectors do well when the macroeconomy gets richer. Think accounting.
Sectors where capital can substitute for labor, because skills don’t matter much. This is the new story outlined above. Here, production goes up, but incomes fall, and employment declines. This might work out well, unless our demand is limited for that production. Think agriculture.
Sectors that accumulate labor. By construction, this has to be ones that 1) don’t require too many skills, and 2) have weaker productivity gains so that demand isn’t readily met. Think healthcare.
Plausibly, the third sector becomes more important. But it also becomes expensive because productivity growth is hard to come by, making it easy to bid up prices.
People in the first sector do OK in this world. People in the second sector do badly, but they’re a vanishing breed. People in the third sector don’t do well either: their wages stagnate because productivity gains are hard to come by, but both the prices of their sector and the first sector may get harder to afford.
I’m not sure what to make of all of this. But I found it to be an interesting and provocative point of view.
Cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.
We Americans care for horses, we ride horses, and we even put them to work. But we don’t eat horses in the United States. And we shouldn’t be gathering them up and slaughtering them for people to eat in far-off places.
I like horses too. But I’m open-minded enough to recognize this position as … blinkered from other moral considerations.
Here’s the language Senator Landrieu inserted into the bill:
Slaughtering horses is inhumane, disgusting, and unnecessary, and there is no place for it in the United States.
Yes, you got that right: the formal position of the U.S. government is going to be based on disgust. Oooh … the objectivity amazes.
Perhaps this doesn’t bug you. It should.
Owning horses is a financial burden, no matter how beautiful the creatures are. This makes the financial questions an intimate part of the moral calculus. Ignoring that because it’s “just money” is a common excuse, but as noted above this position is morally blinkered.
Exactly what is a horse owner supposed to do with a horse they can no longer afford to feed? Sell it? What if there are no other buyers? Free it? We already cull mustang herds because there isn’t enough forage to sustain them. Donate it? To who? Senator Landrieu?
How about shoot it? Ah … there’s the ticket. A dollar for a bullet, for the gun you hopefully already have. Then what?
I live in ranch country. It is permissible here to bring dead livestock to our landfill. I have seen horses dumped there off the back of trailers. This isn’t quite as antiseptic as having your dog or cat put down at the vet. And, the owner has to both forgo any value that they might have gotten from the horse, and put out their own money and effort. Is it morally realistic to expect everyone to do this?
Now, let me tell you about the local news this week. They found a mare and foal that were malnourished. No one knows who they belong to. No doubt they were abandoned by their owners.
Here’s the thing: the mare and foal had starved to the point where the collapsed onto the ground, and froze to the soil. They were freed, but the mare died yesterday.
This is what happens when you don’t have viable options to recoup some of your investment in a horse.
The problem with ignoring the fact that a horse is an investment is that all investments have salvage value. In the case of a horse, this is what the slaughterhouse will pay for the animal you no longer want. You may not agree with the moral position of someone who does that. But, having taken that position, you must recognize that your moral position has impinged on someone else’s financial decision: in a very real sense you are taking away money that they could use to feed their kids.
The thing is, we’re used to salvage value. This is what we get when we sell a home that we’ve lived in, to some new owner who will also live in it. Can you imagine what our neighborhoods would look like if the government took a moral position that zeroed out the salvage value that homeowners get from a sale? Your neighborhood would look like a war zone.
Abandoned horses were a fairly common thing around here during the financial crisis, and as the story shows, they still occur from time to time. This blinkered, feel-good, decision out of D.C. is going to lead to a lot more cruelty to horses than any reasonably humane abattoir every will. I really think we need to start calling people like Senator Landrieu moral retards until they get this.
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