GAYLE REZNIK, Social Security Administration
Email: Gayle.Reznik@ssa.gov
DAVID A. WEAVER, Social Security Administration
ANDREW G. BIGGS, American Enterprise Institute
Email: andrew.biggs@aei.org

Using the Social Security Administration's MINT (Modeling Income in the Near Term) model, this paper calculates the marginal returns to work near retirement, as measured by the increase in benefits associated with an additional year of employment at the end of an individual's work life. With exceptions for certain population subgroups, the analysis finds that marginal returns on Social Security taxes paid near retirement are generally low. The paper also tests the effects on marginal returns of a variety of potential Social Security policy changes designed to improve incentives to work.

VIRGINIA P. RENO, National Academy of Social Insurance (NASI)
Email: vreno@nasi.org
JONI LAVERY, National Academy of Social Insurance (NASI)
Email: jlavery@nasi.org

Declining home values, lost savings, and corporate pressures to cut pension costs are undermining retirement security for seniors. At the same time, job losses, pay cuts, and mortgage foreclosures are jeopardizing workers’ dreams of a secure retirement. The recent stock market collapse has resulted in the loss of $2 trillion in private retirement funds. In light of the current financial crisis, Social Security is more important than ever. Hidden in the shadows of the unemployment and home foreclosure figures of the Great Depression were elderly parents dependent on their adult children for support. When those children lost their jobs, seniors lost this support. When those children lost their homes, so did their parents who generally resided with them. Thanks to Social Security, this is one problem the country does not now face. By exposing the profound vulnerability of rank and file Americans to the risks of a market economy, the financial crisis points to the need to address the adequacy of Social Security to help retirees and families offset losses elsewhere. A window exists to shape public policy to strengthen Social Security to better meet the needs of elders, people with disabilities, and working families in the 21st century.

BENJAMIN A. TEMPLIN, Thomas Jefferson School of Law
Email: btemplin@tjsl.edu

This comment responds to Neil H. Buchanan, "Social Security and Government Deficits: When Should We Worry?" (Cornell Law Review, Vol 92, p. 257, 2007). Professor Buchanan is not alone in questioning whether a Social Security funding crisis actually exists. Despite widely accepted predictions by the Social Security Administration, there is a small but growing cadre of respected scholars who are rightly skeptical of actuarial figures geared to motivate policymakers toward a certain political agenda. However, even if Professor Buchanan and others are correct that there is no funding crisis, does that preclude prudent policymakers from applying sound money management principles to invest the Social Security Trust Fund in higher-performing assets? Professor Buchanan prefers to maintain the status quo with regard to structural changes in Social Security financing, though he suggests that a more progressive Federal Insurance Contributions Act (FICA) tax would fulfill distributive justice objectives. These objectives are legitimate, but policymakers should couple any such strategy with a rethinking of how we invest the Social Security Trust Fund. The 1983 amendments to the Social Security Act, which created the current Trust Fund, transformed Social Security's financing from a purely nonfunded system to a partially funded system. If Professor Buchanan is right about the funding needs of Social Security, then an opportunity exists through prudent investment to move to a fully funded system without painful tax hikes or benefit cuts.

STELLA L. SMETANKA, University of Pittsburgh - School of Law
Email: sls6@pitt.edu

This article addresses a problem often faced by poor individuals who receive Social Security benefits because of an identified physical or mental disability, or both, that is so severe that it prevents such individuals from working. Despite the permanent nature of one’s disability, a beneficiary may decide at some point that he or she would like to try to work. It is this event, although not only this event, that most often triggers the problem of overpayments for beneficiaries of government disability benefits.

This article demonstrates the complex nature of the overpayment situation and how it necessitates legal representation. Hiring a lawyer, however, is virtually impossible in most cases since an overpaid benefits recipient is already in the minus column and can rarely afford representation. Thus, unlike the disability claimant who successfully seeks benefits initially and whose counsel receives at least 25% of the past-due benefits, the disabled beneficiary has the most at stake but the least ability to challenge an overpayment.

The purpose of this article is to urge greater transparency within the Social Security Administration to inform both SSD and SSI recipients of how work and other income will impact their benefits. The article also asserts that local SSA offices must be outfitted with better record-keeping techniques to ensure that recipients who report changes are credited with those reports. This article contends that part of the process is that the SSA must provide recipients with clarity of information regarding what amounts they may earn without losing their SSD benefits, and what specific income may jeopardize the benefits of SSI recipients. Local offices must assign a specific employee to handle reports of income and resources, and must encourage recipients to call this person with any questions. This employee must answer the phone, or must tell callers when they will return their calls. All of these initiatives will help prevent the eventual overpayment situation, which is both costly to the Social Security Administration and stressful to the recipient.

KEVIN WHITMAN, U.S. Social Security Administration
Email: Kevin.Whitman@ssa.gov

As of 2009, Social Security's Old-Age, Survivors, and Disability Insurance program limits the amount of annual earnings subject to taxation at $106,800, and this value generally increases annually based on changes in the national average wage index. This brief uses Modeling Income in the Near Term (MINT) projections to compare the distributional effects of four options for raising the maximum taxable earnings amount beyond its scheduled levels. Two of the options would raise this value so that it covers 90 percent of all covered earnings and two would remove the maximum completely. Within each set of options, the proposals are differentiated by whether the new taxable amounts are used in computing benefits. Most workers would not be affected by these proposals, but some higher earners would experience a substantial increase in taxes. Correspondingly, benefit increases are largely isolated to higher earners, although the return in benefits for taxes paid would also decline. Because the proposals are targeted toward high earners, Social Security's progressivity would increase.

JOHN GEANAKOPLOS, Yale University - Cowles Foundation
Email: john.geanakoplos@yale.edu
STEPHEN P. ZELDES, Columbia Business School, National Bureau of Economic Research (NBER)
Email: spz1@columbia.edu

One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded.

In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach - the approach currently used by the Social Security Administration in generating its most widely cited numbers - ignores risk and instead simply discounts "expected" future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value. Effectively, market valuation uses a discount rate that incorporates a risk premium.

Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is "wage-indexed": future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits.

We find that the difference between market valuation and "actuarial" valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits is only 4/5 of that implied by the actuarial approach. Ignoring cohorts over age 60 (for whom the valuations are the same), market value is only 70% as large as that implied by the actuarial approach.