Federal Employees' Retirement System Act of 1986

In June, President Reagan signed the Federal Employees' Retirement System Act of 1986 (Public Law 99-335), which establishes the Federal Employees' Retirement System (FERS) for employees hired after December 31, 1983. The program, which goes into effect on January 1, 1987, features a defined benefit retirement plan to augment mandatory coverage under social security. It also permits FERS participants to contribute up to 10 percent of their earnings, on a tax-deferred basis, to a thrift savings plan, with partial matching by the Government. This article describes the provisions of the new system, including survivor annuities and disability benefits. It also explains how employees covered under the Civil Service Retirement System may freeze their earned benefits under that program and transfer to FERS during the period July-December 1987.     

Evaluating the initial impact of eliminating the retirement earnings test

Under the retirement earnings test, Social Security benefits are reduced if earnings exceed specified amounts, although the benefit reduction is partly offset by future benefit increases. By imposing a tax on the earnings of beneficiaries, the earnings test provided a disincentive for them to supplement retirement income by working. The Senior Citizens Freedom to Work Act of 2000 eliminated the earnings test for Social Security beneficiaries who have reached the full retirement age. This article presents the first study of labor force activity (earnings and employment) among individuals aged 65-69 before and immediately after this sudden rule change. Drawing on Social Security administrative data, the author examines three widely expected reactions: increased return to work, increased hours worked, and accelerated applications for old-age benefits. The analysis finds that removing the retirement earnings test: Encouraged some workers to increase their earnings. The increases in earnings are large and significant among higher earners but are not statistically significant among lower earners. Had little effect on employment. Removing the earnings test appears to have had no immediate, significant effect on the employment rate of older workers. Employment of older people may be affected in the longer run, however. Slightly increased the pace of applications for benefits. Applications rose about 2 percent in the 65-69 age group in 2000. The overall acceleration will probably be small, however, because most individuals in this age group apply for benefits before reaching the full retirement age. Although the current analysis captures the effects of retaining older workers in the labor force, these initial results may not capture all the effects of eliminating the retirement earnings test, however, for two reasons. First, the analysis covers only a single year--the year the earnings test was eliminated. Since eliminating the earnings test may have had little effect on people who had already retired, its full effect may not be apparent for several years. Second, the analysis applies only to workers aged 65-69. Eliminating the earnings test for people above the full retirement age may also encourage younger workers to delay retirement and therefore increase their labor supply. Further analysis will therefore be required to determine the longer-run impact of eliminating the retirement earnings test.     

Lifetime distributional effects of Social Security retirement benefits

This article presents three measures of the distribution of actual and projected net benefits (benefits minus payroll taxes) from Social Security's Old-Age and Survivors Insurance (OASI) for people born between 1931 and 1960. The results are based on simulations with the Social Security Administration's Model of Income in the Near Term (MINT), which projects retirement income through 2020. The base sample for MINT is the U.S. Census Bureau's Survey of Income and Program Participation panels for 1990 to 1993, matched with Social Security administrative records. The study population is grouped into 5-year birth cohorts and then ranked by economic status in three ways. First, the population is divided into five groups on the basis of individual lifetime covered earnings, and their lifetime present values of OASI benefits received and payroll taxes paid are calculated. By this measure, OASI provides much higher benefits to the lowest quintile of earners than to other groups, but it becomes less redistributive toward lower earners in more recent birth cohorts. Second, people are ranked by shared lifetime covered earnings, and the values of shared benefits received and payroll taxes paid are computed. Individuals are assumed to split covered earnings, benefits, and payroll taxes with their spouses in the years they are married. By the shared covered earnings measure, OASI is still much more favorable to persons in the lower income quintiles, although to a lesser degree than when people are ranked by individual covered earnings. OASI becomes more progressive among recent cohorts, even as net lifetime benefits decline for the entire population. Finally, individuals are ranked on the basis of their shared permanent income from age 62, when they become eligible for early retirement benefits, until death. Their annual Social Security benefits are compared with the benefits they would have received if they had saved their payroll taxes in individual accounts and used the proceeds to buy either of two annuities that provide level payments from age 62 until death: a unisex annuity that is based on the average life expectancy of the birth cohort or an age-adjusted annuity that is based on the worker's own life expectancy. On the permanent income measure, OASI is generally more favorable to people in higher income quintiles. Moreover, it is particularly unfavorable to those in the lowest quintile. Because people in the lowest quintile have a shorter life expectancy, they receive OASI benefits for a shorter period. This group would receive greater benefits in retirement if they invested their payroll taxes in the age-adjusted annuity. OASI is more favorable to them than the unisex annuity, however, OASI is becoming more progressive in that the net benefits it provides drop more rapidly among higher income quintiles than lower ones. This article also examines how OASI affects individuals by educational attainment, race, and sex. On both the lifetime covered earnings and the permanent income measures, OASI is more favorable to workers with less education and more favorable to women. The results by race and ethnicity are mixed. When people are ranked by the present value of their shared lifetime covered earnings, OASI appears more favorable to non-Hispanic blacks and Hispanics than to non-Hispanic whites. When people are ranked by shared permanent income in retirement, however, OASI produces negative returns for both non-Hispanic blacks and non-Hispanic whites in the most recent birth cohorts, with non-Hispanic blacks faring relatively worse. The changes across cohorts occur partly because of changes in tax rates and benefits, but more importantly because of changing demographics and earnings patterns of the workforce. Of particular importance is the increasing share of beneficiaries who receive worker benefits instead of auxiliary benefits as wives or widows. OASI benefits are based on the lifetime covered earnings of current or former married couples, as well as on earned retirement benefits of individuals. The reduced importance of auxiliary benefits (due to the higher lifetime covered earnings of women) and the increased proportion of divorced retirees make OASI more progressive--even as net benefits decline--for current and future cohorts than for cohorts who retired in the 1990s. Analysis of these findings suggests that simulations of policy changes in Social Security must take into account the decreasing importance of auxiliary benefits across birth cohorts and the complex changes in individuals' marital histories.     

Participation in voluntary individual savings accounts: an analysis of IRAs, 401(k)s, and the TSP

New voluntary individual savings accounts have been proposed by some as a part of, or in addition to, Social Security. The success of these proposals would depend greatly on how many workers participate. This paper compares participation rates in three existing voluntary individual account-type plans--Individual Retirement Accounts (IRAs), 401(k)s, and the federal Thrift Savings Plan (TSP)--to clarify expectations about who might participate in a voluntary individual account system. It finds that participants in IRAs, 401(k)s, and the TSP tend to be disproportionately male, higher earners, older, full-time workers, and either white or nonblack minorities compared with the population at large. Differences in earnings explain much of the difference between participation rates of men and women, however, but less of the difference between participation rates of workers of different races. Whether participation in a new system of voluntary individual accounts would resemble participation in IRAs, 401(k)s, or the TSP would depend on a number of factors. For instance, the population covered by 401(k)s and the TSP is much smaller than that covered by Social Security. Average earnings are also higher among 401(k) and TSP participants than for workers covered by Social Security, which, based on these findings, suggests that participation rates could be lower in a universal system. Participation would also depend on many other factors, however, such as the extent of matching contributions or other financial incentives, the investment options available, and the amount of education provided to potential participants.     

Coping with the demographic challenge: fewer children and living longer

Due to demographic changes, the U.S. Social Security system will face financial challenges in the near future. Declining fertility rates and increasing life expectancies are causing the U.S. population to age. Today 12 percent of the total population is aged 65 or older, but by 2080, it will be 23 percent. At the same time, the working-age population is shrinking from 60 percent today to a projected 54 percent in 2080. Consequently, the Social Security system is experiencing a declining worker-to-beneficiary ratio, which will fall from 3.3 in 2005 to 2.1 in 2040 (the year in which the Social Security trust fund is projected to be exhausted). This presents a significant challenge to policymakers. One policy option that could help keep the Social Security system solvent is to reduce retirement benefits, either by raising the normal retirement age or through life expectancy indexing, to reflect the fact that people are living longer. However, these reductions in benefits have the potential to harm economically vulnerable retirees. Other options, such as progressive price indexing proposals, explicitly protect the retirement benefits of low lifetime earners. Still other options would seek to raise additional revenue for the system. Since individuals will be living longer in retirement, many policymakers believe it is important to encourage older workers to delay retirement so that they can maintain a quality standard of living throughout their retirement. One proposal to encourage continued work would be to increase the early eligibility age for Social Security benefits from age 62 to age 65. This could possibly hurt individuals who need to retire from physically demanding jobs but would ensure that people receive higher benefit amounts once they were able to fully retire. Other proposals that could promote more work at older ages include expanding phased retirement options and reforming pension and defined contribution systems to create incentives to work and save.     

Characteristics of individuals with integrated pensions

Employer pensions that integrate benefits with Social Security have been the focus of relatively little research. Since changes in Social Security benefit levels and other program characteristics can affect the benefit levels and other features of integrated pension plans, it is important to know who is covered by these plans. This article examines the characteristics of workers covered by integrated pension plans, compared to those with nonintegrated plans and those with no pension coverage. Integrated pension plans are those that explicitly adjust their benefit structure to help compensate for the employer's contributions to the Social Security program. There are two basic integration methods used by defined benefit (DB) plans. The offset method causes a reduction in employer pension benefits by up to half of the Social Security retirement benefit; the excess rate method is characterized by an accrual rate that is lower for earnings below the Social Security taxable maximum than above it. Defined contribution (DC) pension plans can be integrated along the lines of the excess rate method. To date, research on integrated pensions has focused on plan characteristics, as reported to the Bureau of Labor Statistics (BLS) through its Employee Benefits Survey (EBS). This research has examined the prevalence of integration among full-time, private sector workers by industry, firm size, and broad occupational categories. However, because the EBS provides virtually no data on worker characteristics, analyses of the effects of pension integration on retirement benefits have used hypothetical workers, varying according to assumed levels of earnings and job tenure. This kind of analysis is not particularly helpful in examining the potential effects of changes in the Social Security program on workers' pension benefits. However, data on pension integration at the individual level are available, most recently from the Health and Retirement Study (HRS), a nationally representative survey of individuals aged 51-61 in 1992. This dataset provides the basis for the analysis presented here. The following are some of the major findings from this analysis. The incidence of pension integration in the HRS sample is 32 percent of all workers with a pension (14 percent of all workers). The HRS can also identify integrated DC plans, a statistic that is not available from BLS data. The rate of integration for workers with only DC plans is 8 percent. After controlling for other variables, several socio-demographic characteristics are significantly related to the incidence of integration. The probability of having an integrated pension is 4.6 percentage points less for men compared to women. Non-Hispanic blacks are 6.4 percentage points less likely than non-Hispanic whites to have integrated pensions. Union members are 14 percentage points less likely to have integrated pensions, while workers with less than a graduate level education are at least 15 percentage points more likely to have a pension that is integrated. Some earnings and pension characteristics are also significantly correlated with pension integration. Earnings are positively related, with the probability of having an integrated pension increasing by 2 percentage points for an increase of $1,000 in annual pay. An even larger effect comes from earning at or above the Social Security taxable maximum. Workers at or above this income level are 10 percentage points more likely to have an integrated plan, but for those with more than one plan the probability of pension integration goes up by 13 percentage points.     

Retirement and wealth

The decision to retire is related to the decision to save and to a number of other decisions, including decisions of when to claim Social Security benefits and what share of assets to hold as pensions, Social Security, and in other forms. This article explores the relationships among these various decisions and then explains why it is important to take them into account when attempting to understand the effects of changing Social Security and related policies on retirement outcomes. To understand how Social Security benefits affect retirement behavior, and the implications of changing such features as the Social Security early retirement age, the Social Security Administration and others have begun to estimate and use single-equation models of retirement. We explain why the kind of simple model they use is likely to provide a misleading guide for policy. Even if one's primary interest is in the relationship between Social Security policy and the decision to retire, it is important to incorporate other key decisions into the analysis. These simple models relate the probability of retiring to measures of changes in the value of Social Security benefits when retirement is postponed. The basic problem is that because the omitted factors are related systematically both to retirement outcomes and to the measured reward to postponing retirement, a simple retirement equation credits the effects of the omitted factors to the included measures of changes in Social Security benefits. New policies will change the relationship between retirement and the increase in the value of Social Security benefits with postponed retirement, resulting in incorrect predictions of the effects of new policies. When we fit single-equation retirement models, we find a variety of evidence that important behaviors have been omitted. These models include variables measuring the age of the respondent. These age variables suggest there is a sharp increase in the probability of retirement at age 62. This is a sign that even though the equations include measures of the increase in the value of Social Security with delayed retirement, the cause of the increased retirement behavior at age 62 has not been included in the model. In addition, the estimated effect of a variable measuring the future value of Social Security and pensions on retirement suggests that if the Social Security early retirement age were to be abolished, more people would retire earlier rather than later--a counter-intuitive prediction. There is even more direct evidence of the need for a more comprehensive model of behavior. We show that if individuals' preferences for leisure time were unrelated to their preferences for saving, then a simple retirement equation would yield an unbiased estimate of the effects of Social Security on retirement. An implication of such a model is that those who retire earlier for particular reasons would also save more for those same reasons. But when we estimate an equation with wealth accumulated through 1992 as a dependent variable, together with the simple retirement equation, we do not observe that the factors associated with earlier retirement are also associated with higher saving. These and related findings suggest that those who wish to retire earlier also have a weaker preference for saving, a relationship that is ignored in the simple model and can only be measured in a more complex model. Still other evidence also warns of internal inconsistencies in the simple retirement equations that are being estimated. Social Security incentives are often measured by the increment in the value of benefits associated with deferred retirement, but the incremental value depends on when benefits are claimed. Our findings show that those who retire completely are claiming their benefits too early to be maximizing the expected value of the benefits. Yet the measures of Social Security benefit accrual used in these retirement models often include the increase in the value of benefits from deferred claiming in their measure of the gain to deferring retirement. On the one hand, early retirees are seen not to defer benefit acceptance despite the actuarial advantage. On the other hand, later retirees are said to defer their retirement in order to gain the advantage of deferring benefit acceptance. Our empirical analysis is based on data from the first four waves of the Health and Retirement Study (HRS), a longitudinal survey of 12,652 respondents from 7,607 households with at least one respondent who was born from 1931 to 1941. Our analysis also uses linked pension and Social Security data together with respondents' records from the HRS. We also evaluate a number of specific features of retirement models and suggest improvements. We develop a measure of the future value of pensions and Social Security--the premium value--that is not subject to a problem plaguing other measures in that it handles the accrual of benefits under defined contribution plans very well. We also introduce a new definition of retirement status that blends information on objective hours worked with subjective self-reports of retirement status. Our findings also explore the effects of Social Security incentives on partial retirement and consider the importance of incorporating partial retirement in any study of the relation of Social Security to retirement behavior.     

A benefit of one's own: older women's entitlement to Social Security retirement.

This article explores differences in Social Security eligibility and benefit levels for older men and women using survey data from the Health and Retirement Study combined with administrative records on actual work histories and Social Security rules. We are able to determine the fully insured status of those persons, how close they are to meeting eligibility criteria when they are not fully insured, and their prospects for benefits. Around three-quarters of older women nearing retirement today will be fully insured for Social Security old-age benefits on the basis of their own accounts, but the rest would need substantial extra employment to rise above the eligibility threshold. Further, two-thirds of older married women who are fully insured have sufficient lifetime earnings to translate into an age-65 primary insurance amount worth at least half their husband's, but the other one-third can expect no additional retirement benefit from contributing to Social Security late in life. Finally, most wives will not be able to improve their benefits by working more under current rules. These results have mixed implications regarding the potential impact of women's rising labor force attachment on eventual retirement benefits. Working more years could increase women's chances of becoming eligible for Social Security benefits, but that effect is likely to be small. Furthermore, even when women do become fully insured according to the rules, not many wives will receive a higher benefit at the margin. The reason is that married women still receive higher Social Security benefits as a spouse than they do on the basis of their own work record. In fact, the net benefit from Social Security due to additional work is negative once one takes into account the Social Security contributions the women paid while employed. Benefits paid to widows are even more likely to be based on the spouse's work history rather than on the woman's. Hence, the rising labor market attachment of women in the future may increase their eligibility for benefits but will produce only modest (and often negative) impacts on their old-age Social Security benefits under current rules.     

Social Security's special minimum benefit

Social Security's special minimum primary insurance amount (PIA) provision was enacted in 1972 to increase the adequacy of benefits for regular long-term, low-earning covered workers and their dependents or survivors. At the time, Social Security also had a regular minimum benefit provision for persons with low lifetime average earnings and their families. Concerns were rising that the low lifetime average earnings of many regular minimum beneficiaries resulted from sporadic attachment to the covered workforce rather than from low wages. The special minimum benefit was seen as a way to reward regular, low-earning workers without providing the windfalls that would have resulted from raising the regular minimum benefit to a much higher level. The regular minimum benefit was subsequently eliminated for workers reaching age 62, becoming disabled, or dying after 1981. Under current law, the special minimum benefit will phase out over time, although it is not clear from the legislative history that this was Congress's explicit intent. The phaseout results from two factors: (1) special minimum benefits are paid only if they are higher than benefits payable under the regular PIA formula, and (2) the value of the regular PIA formula, which is indexed to wages before benefit eligibility, has increased faster than that of the special minimum PIA, which is indexed to inflation. Under the Social Security Trustees' 2000 intermediate assumptions, the special minimum benefit will cease to be payable to retired workers attaining eligibility in 2013 and later. Their benefits will always be larger under the regular benefit formula. As policymakers consider Social Security solvency initiatives--particularly proposals that would reduce benefits or introduce investment risk--interest may increase in restoring some type of special minimum benefit as a targeted protection for long-term low earners. Two of the three reform proposals offered by the President's Commission to Strengthen Social Security would modify and strengthen the current-law special minimum benefit. Interest in the special minimum benefit may also increase because of labor force participation and marital trends that suggest that enhancing workers' benefits may be a more effective means of reducing older women's poverty rates than enhancing spousal or widow's benefits. By understanding the Social Security program's experience with the special minimum benefit, policymakers will be able to better anticipate the effectiveness of other initiatives to enhance benefits for long-term low earners. This article presents the most recent and comprehensive information available about the special minimum benefit in order to help policymakers make informed decisions about the provision's future. Highlights of the current special minimum benefit include the following: Very few persons receive the special minimum benefit. As of December 2001, about 134,000 workers and their dependents and survivors were entitled to a benefit based on the special minimum. Of those, only about 79,000 received a higher total benefit because of the special minimum; the other 55,000 were dually entitled. (In effect, when persons are eligible for more than one type of benefit--that is, they are dually eligible--the highest benefit payable determines total benefits. If the special minimum benefit is not the highest benefit payable, it does not increase total benefits paid.) As of February 2000, retired workers who were special minimum beneficiaries with unreduced benefits and were not dually entitled were receiving, on average, a monthly benefit of $510 per month. That amount is approximately $2,000 less than the annual poverty threshold for an aged individual. Special minimum benefits provide small increases in total benefits. For special minimum beneficiaries who were not dually entitled as of December 2001, the average special minimum monthly PIA was just $39 higher than the regular PIA. Most special minimum beneficiaries are female retired workers. About 90 percent of special minimum beneficiaries are retired workers, and 77 percent of those retired workers are women. The special minimum benefit has never provided poverty-level benefits. Maximum payable special minimum benefits (unreduced for early retirement) equal 85 percent of the poverty level for aged persons, down from 96 percent at the provision's inception. Major public policy considerations raised by this analysis include the following: Social Security benefits alone do not protect all long-term low earners from poverty. Low earners with 30 years of earnings equal to the annual full-time minimum wage who retired in selected years from 1982 to 2000 received benefits that were 3.9 percent to 20.1 percent below the poverty threshold, depending on the year they retired. For 40-year earners, the range was 3.9 percent to 15.3 percent below poverty. Furthermore, in 1993, 29.2 percent of retired-worker beneficiaries who were poor had 30 or more years of coverage. The size of the universe of persistently low earners with significant attachment to the covered workforce is unknown. Available research that examines two 28-month periods suggests that only 4 percent to 6 percent of full-time, full-period earners had below-minimum wages for more than 12 consecutive months. Targeting enhanced benefits only toward long-term, regular workers who are low earners is difficult under the current Social Security program. All else being equal, if total wage-indexed lifetime covered earnings are the same for both a full-career low earner and for a high earner who has worked only occasionally, then their Social Security benefits will be identical. Social Security has no information on number of hours worked, hourly wages, or other information that could distinguish between two such persons.     

Projections of economic well-being for Social Security beneficiaries in 2022 and 2062

Policymakers considering potential changes to the Social Security program need to be able to assess how such changes would affect the economic well-being of future retirees. The first step to understanding these effects is to determine the well-being of future retirees under the current Social Security system. To this end, this article projects the retiree populations aged 62 or older in 2022 and 2062 using the Social Security Administration's MINT (Modeling Income in the Near Term) model and assesses their well-being. Because no one measure can fully capture whether future retirees will have adequate resources to meet their needs, we employ several indicators to assess retirement prospects. In addition, because current-law Social Security promises cannot be financed from current-law taxes, we project an alternative 2062 baseline that adjusts Social Security benefits downward to reflect the amounts that current-law taxes can support. Our results illustrate the importance of using several measures when assessing the well-being of future Social Security beneficiaries. When using absolute measures, retirement well-being will improve for Social Security beneficiaries in 2062 compared with those in 2022. Median per capita income of Social Security beneficiaries is projected to increase by a third (in real terms) between 2022 and 2062, with a corresponding decline in projected poverty rates. In addition, median financial wealth will increase between 2022 and 2062. Relative measures of well-being, however, suggest a decline in well-being between Social Security beneficiaries in 2022 and those in 2062. The share of beneficiaries who have low income relative to their peers, measured as the share whose income-to-needs ratio is less than half of the median ratio, will increase over time. In addition, income replacement rates are projected to fall between 2022 and 2062, indicating a decline in how well-being during retirement compares with that during the working years. And although median financial wealth will increase between 2022 and 2062, it will actually fall relative to economy-wide average wages. Projected improvements over time would lessen, and declines would be exacerbated, if instead of assuming the payment of currently scheduled Social Security benefits we assumed that benefits would be reduced according to what is payable under current-law taxes. Regardless of which measure of well-being is used, certain groups fare worse than others, including beneficiaries who never married, nonwhites, beneficiaries without a high school degree, and those with fewer years of labor force experience and low lifetime earnings. These vulnerable groups are likely to be more dependent on Social Security benefits for their retirement income. As a result, they fare particularly poorly under the assumption that Social Security benefits are reduced to reflect what is payable under current-law taxes.     

Income change at retirement

Less than one-fourth of SIPP retirees made the transition from full-time work and no benefit receipt to benefit receipt and no work during the 32 months of the 1984 SIPP panel, and these full retirees appear to differ economically from those who had not fully retired during the 32 months. Income declined to 60 percent of preretirement levels for those who received Social Security benefits and employer pensions, and to 46 percent for those who received only one type of benefit after ceasing full-time work. Family income cushioned the decline. About one-third of retirees had larger changes in income shortly before or after observed retirement transitions than right at the retirement transitions. Larger changes in income were associated with changing one's work effort. Asset income was quite variable across the entire panel. A monthly view of persons in various stages of retirement has brought into sharper focus than has previously been recognized the many paths into retirement, often over an extended period of time, during which status may change back and forth. A one-time or occasional extension of the SIPP to perhaps a 5-year period for the near-retirement-age population would increase the proportion of retirees for whom the full process is observed in such great detail. Alternatively, information on the timing of changes in labor-force and pension status may be collected in a proposed new Retirement History Study that calls for interviewing persons at 2-year intervals over a 10-year period for a more accurate picture of the retirement process.     

Using data for couples to project the distributional effects of changes in Social Security policy

Under Social Security program rules, the aged receive Social Security benefits either as retired workers, spouses, divorced spouses, or widow(er)s. Retired-worker benefits are paid to workers who have 40 quarters of coverage over their lives. Auxiliary benefits are paid to spouses, divorced spouses, and widow(er)s of retired workers. Spouse benefits are computed using the earnings history of the current spouse for individuals who are married when they apply for benefits. Divorced spouse and widow(er) benefits are computed using the earnings history of the ex-spouse or deceased spouse with the highest PIA. A large number of retired women are entitled to auxiliary benefits. Some women receive only auxiliary benefits, while the majority of women have their retired-worker benefit supplemented by auxiliary benefits. Because the level of Social Security benefits can reflect the relative lifetime earnings of both spouses, as a couple, using individual data to estimate Social Security benefits will tend to underestimate actual benefits, particularly for women. However, detailed data for couples are often difficult to obtain. There is currently no known single data source that includes both marital and earnings history information. As a result, many researchers resort to estimating Social Security benefits using individual data or aggregate data, such as the average earnings of men and women. The Social Security Administration's Office of Research, Evaluation, and Statistics, with substantial assistance from the Brookings Institution, the Urban Institute, and the RAND Corporation, is developing a model that overcomes this problem by using the marital and earnings histories of both marital partners to estimate Social Security benefits. The Modeling Income in the Near Term (MINT) model projects retirement income (Social Security benefits, pension income, asset income, and earnings of working beneficiaries) from 1997 through 2031 for current and future Social Security beneficiaries using a unique data source--the Survey of Income and Program Participation (SIPP)--matched to Social Security Administration records. Using MINT data, this article establishes the importance of using data for couples rather than individuals by examining the impact of changing Social Security benefits to reflect 40 years of lifetime earnings rather than the 35 years required under current law. We compare the effect of this policy change on married women by estimating their benefits with data for couples and with individual data. Results indicate that: Using individual data overestimates the projected reduction in retirement benefits brought about by the policy change and makes the effects on women look more severe than they actually are. Because older birth cohorts are more likely than younger cohorts to receive auxiliary benefits based on their husbands' average lifetime earnings, the bias created by using individual data is projected to be much larger for older cohorts than for younger cohorts. This article emphasizes the importance of using data for couples to estimate Social Security benefits, particularly for women. Although our focus is on married women, using data for couples is just as important for calculating the retirement benefits of divorced and widowed individuals. For individuals who are divorced or widowed at retirement, their Social Security benefits are based on their own earnings history, as well as the earnings histories of each of their previous spouses.     

The sensitivity of proposed Social Security benefit formula changes to lifetime earnings definitions

Several Social Security proposals have included benefit formula changes that apply to earners above a specified percentage of the combined male and female (unisex) lifetime earnings distribution. The unisex distribution is an average of two disparate groups with large lifetime differences in labor market participation. This study finds that if Social Security's median unisex average indexed monthly earnings (AIME) amount is used to define an earnings threshold below which benefits will be held roughly unreduced, the percentage of fully insured men subject to benefit reductions (70 percent) exceeds the unisex estimate of the population subject to benefit reductions (50 percent) by 20 percentage points. If policymakers wish to adjust future benefits and focus benefit reductions on middle or high primary or full-time wage earners in a household, the male, rather than unisex, AIME would come closer to achieving such a goal.     

The evolution of Japanese employer-sponsored retirement plans

This article examines the development of Japanese voluntary employer-sponsored retirement plans with an emphasis on recent trends. Until 2001, companies in Japan offered retirement benefits as lump-sum severance payments and/or benefits from one of two types of defined benefit (DB) pension plans. One type of DB plan was based on the occupational pension model used in the United States before the adoption of the Employee Retirement Income Security Act of 1974 (ERISA), but lacked the funding, vesting, and other protective features contained in ERISA. The other type of DB plan allowed companies to opt out of the earnings-related portion of social security, commonly referred to as "contracting out." Landmark laws passed in 2001 introduced a new generation of occupational retirement plans to employers and employees. One law increased funding requirements and enhanced employee protections for employer-sponsored DB plans, while a second law introduced defined contribution (DC) plans for several reasons, chiefly to increase retirement savings and help boost Japanese financial markets. These laws complemented earlier changes in the tax code and financial accounting standards already affecting employer-sponsored retirement plans. As a result, new retirement plan designs will replace most prereform era company retirement plans by 2012. In 2001, the experience of 401(k) plans in the United States, where 42 million participants had accumulated more than $1.8 trillion in assets over 20 years, attracted considerable attention among Japanese lawmakers finalizing provisions of the DC pension law. Even with government support and encouragement from the financial services industry, Japanese companies have not adopted these new DC plans in large numbers. As a result, occupational retirement plans in Japan have remained predominantly DB-a surprising development in light of the shift in a number of countries from DB to DC plans observed in recent decades. However, recent proposals to make DC plans more attractive to employers in Japan are likely to be implemented in the near future. This article summarizes the Japanese retirement system, with an emphasis on private-sector employees, and the complementary role played by voluntary employer-sponsored retirement plans; describes the financial pressures that faced retirement plan sponsors in the late twentieth century and the factors motivating the reform of Japanese voluntary retirement plans; examines the 2001 legislative changes that have transformed company retirement plans; and concludes with a review of trends and recent developments in employer-sponsored retirement plans since the implementation of the 2001 pension laws.     

Who is "62 enough"? Identifying respondents eligible for Social Security early retirement benefits in the Health and Retirement Study

Workers are not instantly eligible for Social Security retirement benefits on their 62nd birthdays, nor can they receive benefits in the month they turn 62. This note discusses how well researchers can do using data from the Health and Retirement Study (HRS) to identify respondents old enough to receive and report early Social Security retirement benefits. It shows that only some workers aged 62 at the time of an HRS interview will be "62 enough" to have received a Social Security benefit and reported it in the survey. In general, workers become eligible for a retirement benefit the month after they turn 62, and they may receive their first payment the month after that. Until recently, payments were received very early in the month, but in mid-1997 and later, the Social Security Administration (SSA) staggered benefit payments over the course of a month. Therefore, many beneficiaries will not be able to report the receipt of their first benefit payment until the third month after their birthday in more recent HRS interviews. This note describes the best approach for approximating the pool of HRS respondents who are old enough to have reported the receipt of their first retirement benefit. It then applies the procedure to an analysis by Burkhauser, Couch, and Phillips, who used the 1994 HRS data to distinguish between those who took early retirement benefits upon turning 62 and those who postponed the receipt of benefits. Because these authors did not provide for respondents who were not "62 enough" to receive a benefit at the time of the interview, they understated the proportion of respondents who took retirement benefits at age 62.     

Projecting retirement income of future retirees with panel data: results from the modeling income in the near-term (MINT) project

Cross-sectional data capture only a point in time and miss individual changes in earnings, labor force participation, marriage, fertility, and health. Because panel data follow individuals over time, they do not have this problem. The problems or concerns with cross-sectional data may be compounded when these data are used to make projections. Iams and Sandell (1997) found that using panel data on earnings explained much more variation in future earnings than using cross-sectional survey data. Panel data are also needed to estimate Social Security benefits, especially for women. Because of auxiliary benefits paid to spouses, ex-spouses, and widow(er)s of entitled workers, an individual's Social Security retirement benefit depends not only on his or her earnings history, but also on his or her marital history and the earnings histories of current and previous spouses. When we compare projected unreduced Social Security benefits with what they would be if we didn't have marital history or earnings history data for men, we find that: Benefits computed using only earnings histories are not very different from benefits computed using both earnings and marital histories. Benefits computed using only current earnings and marital histories underestimate benefits for those in earlier birth cohorts and overestimate benefits for those in the most recent birth cohort. Benefits computed without either marital or earnings histories underestimate benefits for all birth cohorts, but by much more for earlier cohorts than for more recent cohorts. For women we find that benefits computed without marital or earnings histories underestimate benefits in all birth cohorts. The largest differences are for women in earlier birth cohorts. Using both marital and earnings histories to estimate unreduced Social Security benefits, we find that men are projected to continue receiving higher benefits than women, although the gap is expected to narrow as the baby boomers near retirement age. We also look at the composition of projected total income available at retirement for those with incomes in the 45th-55th percentiles of the income distribution and find that: Total income at retirement is projected to be larger for men than for women in every birth cohort. Women are projected to receive the largest share of their total income from Social Security benefits. Men are projected to receive the largest share of their total income from other income sources, although this share declines as the baby boomers near retirement age.     

Effect on benefits of earnings at ages 65 or older, 1995.

A major policy issue for the Social Security program is the treatment of earnings of persons who have attained retirement age. This article discusses the retirement test and recomputation of benefit provisions, and provides statistical data for 1995. In 1995, about 806,000 persons aged 65-70 had significant earnings resulting in the withholding of benefits by the retirement test. About 1,659,000 persons aged 65 or older realized an increase in their benefit amount because of their earnings.     

The social security earnings test and work incentives

The labor supply and benefit claiming incentives provided by the early retirement rules of the Social Security Old Age benefits program are of growing importance as the Normal Retirement Age (NRA) increases to 67, the labor force participation of Older Americans rises, and a variety of reforms to the Social Security system are considered. Any reform needs to take into account the effects and rationale of the Social Security Earnings Test and the Actuarial Adjustment Factor, which are likely to be widely misunderstood due to the relatively little attention paid by policymakers and researchers to the fact that Americans are willing to work while receiving benefits. We describe these incentives and emphasize that individuals who claim benefits before the NRA but continue to work, or return to the labor force, can reduce the early retirement penalty by suspending the collection of monthly benefits if they earn above the Earnings Test limit. We then argue that the Earnings Test can be distortionary and is costly to administer, and that these characteristics are inflated by the lack of information given to Older Americans regarding the consequences of working while receiving retirement benefits. We present results from statistical models of labor force exit behavior using data from the Health and Retirement Study showing the relevance of these incentives, and investigate the importance of informational asymmetries among beneficiaries regarding benefit withholding using a dynamic life‐cycle model of labor supply and benefit claiming. We then use the latter framework to compare the behavioral and welfare implications of a removal of the Earnings Test to the policy of providing more information regarding the Earnings Test and the adjustment of the rate of benefit pay to Older Americans. © 2007 by the Association for Public Policy Analysis and Management     

The growth in Social Security benefits among the retirement-age population from increases in the cap on covered earnings

Analysts have proposed raising the maximum level of earnings subject to the Social Security payroll tax (the "tax max") to improve long-term Social Security Trust Fund solvency. This article investigates how raising the tax max leads to the "leakage" of portions of the additional revenue into higher benefit payments. Using Health and Retirement Study data matched to Social Security earnings records, we compare historical payroll tax payments and benefit amounts for Early Boomers (born 1948-1953) with tax and benefit simulations had they been subject to the tax max (adjusted for wage growth) faced by cohorts 12 and 24 years older. We find that 43.2 percent of the additional payroll tax revenue attributable to tax max increases affecting Early Boomers relative to taxes paid by the cohort 12 years older leaked into higher benefits. For Early Boomers relative to those 24 years older, we find 53.5 percent leakage.     

The retirement prospects of divorced women

For decades, policymakers have discussed how to remedy the high poverty rates of older widows. Yet older divorced women are more likely to be poor than older widows, and historical divorce and remarriage trends suggest that in the future a larger share of retired women will be divorced. This article uses the Social Security Administration's Modeling Income in the Near Term (version 6) to project the retirement resources and wellbeing of divorced women. We find that Social Security benefits and retirement incomes are projected to increase for divorced women and that their poverty rates are projected to decline, due in large part to women's increasing lifetime earnings. However, not all divorced women will be equally well off economic well-being in retirement varies by Social Security benefit type.