JOHN INFRANCA, New York University, New York University - School of Law
Email: jji213@nyu.edu

Because Social Security and Supplemental Security Income (SSI) benefits are essential to meet basic needs, the Social Security Act protects these benefits from garnishment or attachment by creditors. Nevertheless, when benefits are deposited in a bank account, beneficiaries may find that their accounts have been temporarily frozen, or worse, permanently garnished by their financial institution at the behest of a creditor under provisions of state law. Because the government encourages direct deposit, over 80 percent of Social Security and SSI recipients receive their benefits electronically. This paper reviews state efforts to strengthen protections for Social Security and other exempt benefits. Although these state efforts have achieved some success, continued reliance on a patchwork of state regulations will produce inconsistent results.

The paper then proposes a five-part federal legislative and administrative policy solution to ensure that Social Security and other exempt federal benefits remain safe from garnishment, attachment, and freezes when they are deposited in a bank.

This Working Paper was completed with support from the National Academy of Social Insurance and the Rockefeller Foundation through their Strengthening Social Security for Vulnerable Groups project.

L.SCOTT MULLER, affiliation not provided to SSRN

Researchers David Autor and Mark Duggan have hypothesized that the Social Security benefit formula using the average wage index, coupled with a widening distribution of income, has created an implicit rise in replacement rates for low-earner disability beneficiaries. This research attempts to confirm and quantify the replacement rate creep identified by Autor and Duggan using actual earnings histories of disability insured workers. The article examines the actual benefit levels and replacement rates that workers would receive if they became disabled over the 1979 to 2004 period and to see if these rates are, in fact, rising. The article also uses an alternative, more representative index to assess the "earnings history" and "bracket" effects and examines their combined effect on replacement rates. The results generally support the earlier research and suggest that disability replacement rates are rising for many insured workers, although the effect may be somewhat smaller than that suggested by Autor and Duggan.

RANDALL P. MARIGER, U.S. Treasury Department
Email: randall.mariger@do.treas.gov

Being fair to future generations requires that Social Security be reformed in a manner that prefunds a significant share of future Social Security benefit payments. All serious reform plans have this property. Prefunding is done exclusively in the Social Security trust fund in some plans, and it is done partly in personal retirement accounts (PRAs) in others.

The consequences of prefunding Social Security in the trust fund are controversial and not well understood. The key question is whether Social Security surpluses are offset by smaller non-Social Security surpluses; if they are, and if the offset is 100 percent, then Social Security surpluses are not truly saved and prefunding intended to make Social Security fair to future generations is neutralized by a non-Social Security fiscal policy that is less fair to future generations. This paper makes this important point concrete by simulating the response of non-Social Security fiscal policy to two alternative Social Security reforms that differ only with regard to the breakdown of prefunding in the trust fund and prefunding in PRAs. The reforms simulated are the Nonpartisan Reform Plan proposed by Jeffrey Liebman, Maya McGuineas, and Andrew Samwick, and a version of that plan that prefunds exclusively in the trust fund. If Social Security surpluses are not saved, it is found that NRP's PRAs increase the net benefits of government to future generations by about 0.6 percent of GDP; that is, future generations enjoy some combination of lower non-Social Security taxes and higher non-Social Security government spending that amounts to about 0.6 percent of GDP in every year.

The paper also reviews budget politics over the past 30 years and concludes that there is a substantial probability that trust fund accumulations are largely offset by reduced non-Social Security surpluses.

The implications of these findings for Social Security reform are explored. If budget politics precludes the possibility that Social Security surpluses are saved, then large dividends would be paid if an alternative means of effectively prefunding Social Security could be found. If politics also precludes that possibility, then it would be rational to compromise other Social Security reform objectives so as to reduce trust fund accumulations. Specifically, relative to a first-best reform with effective prefunding, smaller benefit levels would be appropriate.

RANDALL P. MARIGER, U.S. Treasury Department
Email: randall.mariger@do.treas.gov

Being fair to future generations requires that Social Security be reformed in a manner that effectively prefunds a significant share of future Social Security benefit payments. All serious reform plans have this property. Prefunding is attempted exclusively in the Social Security trust fund in some plans, and it is attempted partly in personal retirement accounts in others.

Many analysts believe that Social Security surpluses are offset all or in part by lower non-Social Security surpluses. If the offset is 100 percent, then running Social Security surpluses does not increase the government's capacity to pay future Social Security benefits. In this case, reforms that rely on trust fund accumulations to make Social Security fair to future generations do so at the expense of a non-Social Security policy that is less fair to future generations.

The evidence on whether or not trust fund accumulations pay down federal debt is of two general types: formal statistical analyses of historical budget data, and informal observations of budget politics. Mariger (2008) reviews the recent history of budget politics and concludes that there is a substantial probability that Social Security surpluses are in large part offset by smaller non-Social Security surpluses. To complement that study, this paper attempts to draw out statistical evidence from budget data.

It is concluded that the budget data is essentially silent on the question of whether Social Security surpluses are truly saved. The reason is that the regression model specification is necessarily approximate, Social Security surpluses show little independent year to year variation, there are only 37 years of data, and spurious correlations mask the true relationships.

JONATHAN GRUBER, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER)
Email: gruberj@mit.edu
KEVIN MILLIGAN, University of British Columbia - Department of Economics, National Bureau of Economic Research (NBER)
Email: kevin.milligan@ubc.ca
DAVID A. WISE, National Bureau of Economic Research (NBER), Harvard University - John F. Kennedy School of Government
Email: dwise@nber.org

This is the introduction and summary to the fourth phase of an ongoing project on Social Security Programs and Retirement Around the World. The first phase described the retirement incentives inherent in plan provisions and documented the strong relationship across countries between social security incentives to retire and the proportion of older persons out of the labor force. The second phase documented the large effects that changing plan provisions would have on the labor force participation of older workers. The third phase demonstrated the consequent fiscal implications that extending labor force participation would have on net program costs - reducing government social security benefit payments and increasing government tax revenues. This volume presents the results of analyses of the relationship between the labor force participation of older persons and the labor force participation of younger persons in twelve countries. Why countries introduced plan provisions that encouraged older persons to leave the labor force is unclear. After the fact, it is now often claimed that these provisions were introduced to provide more jobs for the young, assuming that fewer older persons in the labor force would open up more job opportunities for the young. Now, the same reasoning is often used to argue against efforts in the same countries to reduce or eliminate the incentives for older persons to leave the labor force, claiming that the consequent increase in the employment of older person would reduce the employment of younger persons. The validity of such claims is addressed in this volume.

JEFFREY B. LIEBMAN, Harvard University - John F. Kennedy School of Government, National Bureau of Economic Research (NBER)
Email: jeffrey_liebman@harvard.edu
ERZO F. P. LUTTMER, Harvard University - John F. Kennedy School of Government, National Bureau of Economic Research (NBER), Institute for the Study of Labor (IZA)
Email: erzo_luttmer@ksg.harvard.edu
DAVID SEIF, affiliation not provided to SSRN

A key question for Social Security reform is whether workers currently perceive the link on the margin between the Social Security taxes they pay and the Social Security benefits they will receive. We estimate the effects of the marginal Social Security benefits that accrue with additional earnings on three measures of labor supply: retirement, hours, and labor earnings. We develop a new approach to identifying these incentive effects by exploiting five provisions in the Social Security benefit rules that generate discontinuities in marginal benefits or non-linearities in marginal benefits that converge to discontinuities as uncertainty about the future is resolved. We find clear evidence that individuals approaching retirement (age 52 and older) respond to the Social Security tax-benefit link on the extensive margin of their labor supply decisions: we estimate that a 10 percent increase in the net-of-tax share reduces the two-year retirement hazard by a statistically significant 2.1 percentage points from a base rate of 15 percent. The evidence with regards to labor supply responses on the intensive margin is more mixed: we estimate that the elasticity of hours with respect to the net-of-tax share is 0.41 and statistically significant, but we do not find a statistically significant earnings elasticity.

ALAN J. AUERBACH, University of California, Berkeley - Department of Economics, National Bureau of Economic Research (NBER), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: auerbach@econ.berkeley.edu
RONALD D. LEE, University of California, Berkeley - Department of Demography, National Bureau of Economic Research (NBER)
Email: rlee@demog.berkeley.edu

We evaluate several actual and hypothetical sustainable PAYGO pension structures, including: (1) versions of the US Social Security system with annual adjustments of taxes or benefits to maintain fiscal balance; (2) Sweden's Notional Defined Contribution system and several variants developed to improve fiscal stability; and (3) the German system, which also includes annual adjustments to maintain fiscal balance. For each system, we present descriptive measures of uncertainty in representative outcomes for a typical generation and across generations. We then estimate expected utility for generations based on simplifying assumptions and incorporate these expected utility calculations in an overall social welfare measure. Using a horizontal equity index, we also compare the different systems' performance in terms of how neighboring generations are treated.While the actual Swedish system smoothes stochastic fluctuations more than any other and produces the highest degree of horizontal equity, it does so by accumulating a buffer stock of assets that alleviates the need for frequent adjustments. In terms of social welfare, this accumulation of assets leads to a lower average rate of return that more than offsets the benefits of risk reduction, leaving systems with more frequent adjustments that spread risks broadly among generations as those most preferred.

VINCENZO GALASSO, University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER), Centre for Economic Policy Research (CEPR)
Email: vincenzo.galasso@uni-bocconi.it
ROBERTA GATTI, World Bank - Development Research Group (DECRG)
Email: rgatti@worldbank.org
PAOLA PROFETA, University of Bocconi
Email: paola.profeta@unibocconi.it

In the last century most countries have experienced both an increase in pension spending and a decline in fertility, We argue that the interplay of pension generosity and development of capital markets is crucial to understand fertility decisions. Since children have traditionally represented for parents a form of retirement saving, particularly in economies with limited or non-existent capital markets, an exogenous increase of pension spending provides a saving technology alternative to children, thus relaxing financial (saving) constraints and reducing fertility. We build a simple two-period OLG model to show that an increase in pensions is associated with a larger decrease in fertility in countries in which individuals have less access to financial markets. Cross-country regression analysis support our result: an interaction between various measures of pension generosity and a proxy for the development of financial markets consistently enters the regressions positively and significantly, suggesting that in economies with limited financial markets, children represent a (if not the only) way for parents to save for old age, and that increases in pensions amount effectively to relaxing these constraints.

SHINICHI NISHIYAMA, Georgia State University - Risk Management & Insurance Department
Email: shinichi.nishiyama@cbo.gov
KENT A. SMETTERS, U.S. Department of Treasury, University of Pennsylvania - Insurance & Risk Management Department, National Bureau of Economic Research (NBER), U.S. Congressional Budget Office
Email: smetters@wharton.upenn.edu

The United States Social Security system is fairly unique in that it explicitly allows for a progressive formulation of retirement benefits by assigning a larger replacement rate to workers with small preretirement wages. In contrast, the public pension systems in other countries often replace a constant fraction of preretirement wages, although the length of the "averaging period" is typically shorter relative to the U.S. This paper examines the ex-ante optimal U.S. Social Security benefit structure using the model developed in Nishiyama and Smetters (2007). On one hand, progressivity in the benefit structure provides risk sharing against shocks that are difficult to insure privately. On the other hand, progressivity introduces various marginal tax rates that distort labor supply. Rather surprisingly, we find that the ex-ante best U.S. Social Security replacement rate structure is fairly "flat." Intuitively, the relatively long averaging period used in the U.S. system formulation already provides some insurance against negative idiosyncratic shocks, but in a manner that is more efficient than explicit redistribution.