November 22, 2024

Today’s Economist: Bruce Bartlett: One Recession Cost Is Lower Social Security Benefits

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

On Sunday, Catherine Rampell of The New York Times reported on the economic difficulties of those in their 50s and early 60s suffering from high unemployment and decimation of their retirement savings by the recession. Many will be forced to take Social Security benefits as soon as they turn age 62. Unfortunately, they may be risking unnecessary poverty in old age as a consequence.

Today’s Economist

Perspectives from expert contributors.

In 2011, 59 percent of those claiming Social Security for the first time were between the ages of 62 and 64, as shown in this figure from a recent Congressional Research Service report.

Social Security Administration, 2012 Annual Statistical Supplement

Historically, the normal retirement age has been 65, but life expectancy has risen over time. In 1940, a man age 65 could expect to live an additional 12.7 years, a woman 14.7 years. Longevity for men at age 65 increased to 17.6 years by 2009 and for women to 20.3 years, according to the National Center for Health Statistics (see Table 22).

Despite rising longevity, Congress created an option for early retirement at age 62 in 1961. It doesn’t appear that a great deal of thought was given to the long-term consequences of the decision. Contemporary reports say Congress was primarily concerned about unemployment among those approaching age 65 and viewed early retirement as a short-run stimulus measure.

According to C. Eugene Steuerle of the Urban Institute, creation of early retirement for Social Security had the unfortunate effect of changing workers’ expectations about the appropriate age at which to cease working. This has reduced lifetime productivity, taxes and retirement savings because workers spent fewer total years working.

Yet according to the 1962 Social Security Trustees report (see Page 6), the budgetary cost of allowing people to retire at age 62 was zero.

The reason is that workers did not receive full benefits at age 62, but 20 percent less than they would get if they waited until age 65. That was thought to be an actuarially fair adjustment so that whether one retired at age 62 or age 65, one received approximately the same aggregate lifetime Social Security benefits.

As the normal retirement age has increased from age 65 to 67, based on legislation enacted in 1983, the same actuarial adjustment has been made, as shown in the table.

Social Security Administration

Thus there is a huge financial price to be paid for drawing Social Security benefits early and an enormous payoff for delaying the decision to claim benefits. Unfortunately, I think many workers have a “use it or lose it” attitude, incorrectly thinking their benefits will be bumped up when they reach the full retirement age or ignorant that their benefits rise when receipt of them is delayed.

The fact is that the lower benefits people get by retiring early continues for their lifetime.

Another cost of taking Social Security before the normal retirement age is limiting the amount of earned income one may receive. Because of something called the earnings test, retirees lose $1 of benefits for every $2 of earnings they receive above $15,120 – equivalent to a 50 percent marginal tax rate on an annual income barely above the minimum wage. There is no loss of benefits for those above the normal retirement age.

What many people do not realize is that the same actuarial adjustment shown in the table continues past the normal retirement age. That is, one’s benefits continue to rise every month that one delays taking them until age 70. Those born in 1943 or later receive 8 percent more benefits a year for every year they wait to draw Social Security benefits past the full retirement age. This is called the delayed retirement credit.

People retiring at age 66 this year would get their full benefit. But if they wait until age 70, they would get 32 percent more. Social Security benefits are thus 57 percent higher at age 70 than at age 62.

The delayed retirement credit is an extraordinarily good deal – where else can one get a guaranteed 8 percent annual return these days? The lower interest rates are, the better deal it is.

Many people learn about the delayed retirement credit only after they have chosen to draw Social Security benefits, and they incorrectly believe they cannot go back. In fact, the Social Security Administration allows people to repay the benefits they have received, in effect resetting the clock.

This is not an option for most people, who lack the large lump-sum of cash they would need even if they knew it would pay off. But for someone who has the cash and simply made a mistake in drawing benefits too early, the payoff can be large, according to Laurence Kotlikoff of Boston University.

To be sure, many people in physically demanding jobs need early retirement, and some who are jobless have no choice but to take them the minute they qualify. But many can afford to wait, perhaps to age 70, before drawing Social Security benefits. Those who draw them too early risk extreme poverty in old age if they outlive their savings or are simply missing an easy way of increasing their retirement assets at a time when low interest rates make it hard for people to obtain interest income.

Article source: http://economix.blogs.nytimes.com/2013/02/05/one-recession-cost-is-lower-social-security-benefits/?partner=rss&emc=rss

Young Women Go Back to School Instead of Work

“I was working part-time at Starbucks for a year and a half,” said Laura Baker, 24, who started a master’s program in strategic communications this fall at the University of Denver. “I wasn’t willing to just stay there. I had to do something.”

Many economists initially thought that the shrinking labor force — which drove down November’s unemployment rate — was caused primarily by discouraged older workers giving up on the job market. Instead, many of the workers on the sidelines are young people upgrading their skills, which could portend something like the postwar economic boom, when millions of World War II veterans went to college through the G.I. Bill instead of immediately entering, and overwhelming, the job market.

Now, as was the case then, one sex is the primary beneficiary. Though young women in their late teens and early 20’s view today’s economic lull as an opportunity to upgrade their skills, their male counterparts are more likely to take whatever job they can find. The longer-term consequences, economists say, are that the next generation of women may have a significant advantage over their male counterparts, whose career options are already becoming constrained.

For now at least, many young women still feel that the deck is stacked against them.

“Almost everyone in my program is female,” said Ms. Baker, who hopes a master’s degree will help her get a job running communications at a nonprofit group. “That’s partly because of the program, but also because as women we feel like we have to be more educated to be able to compete in really any field.”

Women still earn significantly less than men. And in the two and a half years since the recovery officially began, men age 16 to 24 have gained 178,000 jobs, while their female counterparts have lost 255,000 positions, according to the Labor Department.

Apparently discouraged by scant openings, 412,000 young women have dropped out of the labor force entirely in the last two and a half years, meaning they are not looking for work.

Among young men, the labor force fell during the recession but has been flat since the recovery began. Today, across all age groups, an unemployed female worker is 35 percent more likely to drop out of the labor force in the next month than an unemployed male worker.

Some studies suggest that women are pickier about their job choices than men. Already earning lower pay, women are less willing to work when wages fall further, especially if they are able to rely on an employed (and these days, often newly re-employed) husband. Women are also more reluctant to work night or weekend shifts, according to government data on how Americans spend their time, partly because they have more family responsibilities.

“The jobs out there just aren’t very good, and men seem more willing to take them for whatever reason,” said Jonathan L. Willis, an economist at the Federal Reserve Bank of Kansas City. “The women are looking at those same jobs and saying, ‘I’ll be more productive elsewhere.’ ”

Then there are societal influences that affect a person’s willingness to take a lesser job or return to school.

“There is still this heavy cultural message that men should be out there earning money and supporting themselves, and they feel more distressed by losing their breadwinner role,” said Stephanie Coontz, director of research at the Council on Contemporary Families. “We’ve made much more progress overcoming the ‘feminine mystique’ than this masculine mystique.”

While these roles evolve, community colleges are reporting record enrollment.

Both men and women are going back to school, but the growth in enrollment is significantly larger for women (who dominated college campuses even before the financial crisis). In the last two years, the number of women ages 18 to 24 in school rose by 130,000, compared with a gain of 53,000 for young men.

The education gap aside, in some ways young women will already have an advantage over men in the coming decade. Many of the occupations expected to have the most growth, like home health aides and dental hygienists, have traditionally been filled by women. That is not to say that men cannot take those positions, but they may not want to.

“Today young girls are told they can do anything, go into any occupation. But if boys express any interest in traditionally female occupations, they get teased and bullied,” Ms. Coontz said. “Lots of guys are not understanding what’s happening to traditional low-income or middle-income male jobs.”

Jobs in the male-dominated manufacturing industry and in other sectors involving manual labor have been, and still are, in structural decline. These careers can also be hard to maintain indefinitely because youthful strength eventually fades. And now many manufacturing workers do not have pensions to carry them through when their bodies do break down.

“It doesn’t surprise me that in a poor economy women are ramping up their schooling,” said Heather Boushey, an economist at the Center for American Progress, a left-leaning research organization. “The real question is: Why aren’t more men doing that too?”

The main risk in going back to school is the accompanying student loan debt. Tuition increases have been outpacing inflation for years, a trend accelerated by state budget cuts.

“Our funding per student has been cut 25 percent in the last three years,” said Stephen Scott, the president of Wake Technical Community College in Raleigh, N.C., which is one of the fastest-growing community colleges in the country. Consequently, class sizes have risen, and so has tuition. But the students — again, mostly women — still pour in.

“We now have 6,000 students on a waiting list because we didn’t have the resources to offer more classes,” he said.

Those attending more expensive private schools, like Ms. Baker, will have an even tougher time guaranteeing that their educational investment pays off. Including the loans that financed her undergraduate education at Wartburg College in Waverly, Iowa, she will complete her master’s program next year owing about $200,000 in debt.

“I have to have faith that I will eventually get a good job that pays enough to pay my living expenses and pay back my loans,” she said, “and hopefully make me happy in the process.”

Article source: http://feeds.nytimes.com/click.phdo?i=2482af17ea36d9602c9569814151d97d

DealBook: Groupon Files to Go Public

The social buying site Groupon filed on Thursday to go public with plans to raise an estimated $750 million in a highly anticipated debut that comes amid a frenzy for new technology companies like LinkedIn and Yandex.

Groupon, a Chicago-based start-up, has enjoyed a meteoric rise in its short life. Shortly after starting in 2008, Groupon notched revenue of $94 million. Two years later, it had swelled to $713 million.

The company reported $644.7 million of revenue in the first quarter of 2011 alone, with 83 million subscribers across 43 countries, according to its filing.

As its prospects have grown, so has investor interest.

Last year, the company was worth roughly $1.4 billion, based on a fund-raising round led by D.S.T. Global. Groupon spurned a $6 billion bid from Google in December. A month later, the start-up raised nearly $1 billion from large institutional investors like Fidelity Investments and T. Rowe Price. Groupon’s value was pegged at $25 billion just a couple of months ago, based on discussions for the initial public offering.

In a letter to prospective shareholders, Groupon’s chief executive, Andrew Mason, highlighted the company’s growth opportunity but cautioned investors to temper their expectations.

“In the past, we’ve made investments in growth that turned a healthy, forecasted quarterly profit into a sizable loss,” he said. “When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.”

Like many start-ups, Groupon is still struggling to turn a profit. Last year, the company’s loss topped $450 million, compared with $6.9 million in 2009 and $2.2 million in 2008.

It’s unclear when its fortunes will turn. The company warned, under the risk factors in its filing, that it had lost money since its inception and that it expected its operating expenses to grow for some time.

The company’s biggest expense is marketing. Groupon spent $263.2 million on online advertising, subscriber e-mails and the like, compared with just $4.5 million the year before.

“We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis,” the filing said.

Groupon’s investors and early employees stand to reap a windfall in an I.P.O. The company’s largest shareholder, Eric P. Lefkofsky, a co-founder and board member, would be worth billions of dollars. Mr. Lefkofsky owns 64.1 million shares, or roughly 21.6 percent of the company’s Class A common stock. The venture capital firm, Accel Partners, which invested in Groupon in November 2009, owns a 5.6 percent stake. Mr. Mason, who made $180,000 for his base salary last year, controls 7.7 percent of the company.

Groupon, which will trade under the ticker “GRPN,” has hired Morgan Stanley, Credit Suisse and Goldman Sachs as lead underwriters for the offering.

Article source: http://feeds.nytimes.com/click.phdo?i=93ed15141cda9e99025850c9679d6403