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Article Artículo

Actually, Retirement Security is not Looking So Good

Andrew Biggs, an economist at the American Enterprise Institute, had a piece in The Hill telling readers that the private 401(k) system is doing just great, while public pension plans and Social Security are in big trouble. The story is we need not worry about most people’s retirement security, we have to worry about the cost of the public retirement system.

There are a few parts of Biggs’ story that don’t quite hold up. Biggs tells us:

“A 2016 Census Bureau study found that — thanks to a 75 percent increase in benefits from private retirement plans — incomes for the median new retiree rose by 58 percent above inflation from 1989 to 2007. Another new study, from economists at the IRS and the Investment Company Institute, finds that the median retiree has an income equal to 103 percent of their income just prior to retirement, far exceeding the 70 percent “replacement rate” that most financial advisors recommend.”

The Census Bureau study actually was just looking at the retirement income of women, not all new retirees. This matters because the median women retiring in 2007 had far more years in the workforce than the median woman hitting retirement age in 1989. Also, women actually did get some increase in their pay over this period, in contrast to the stagnation in pay for men earning near the median. So it matters hugely that this study was only examining women, not all retirees.

It is also important to note that the use of the term “income” is somewhat misleading in this paragraph. It is including as income withdrawals from IRAs and 401(k)s. This is somewhat problematic since this is drawing down past savings, it does not amount to an ongoing flow. The studies cited by Biggs don’t indicate if the pace of drawdown in the years immediately after retirement can be sustained for a retirement that could last 25 years or more. (Biggs is correct to point out that the money taken out of 401(k)s is largely excluded from other data measuring income. While it is wrong to ignore this money, it is not right to treat it as income in the same way that a traditional defined benefit pension is income.)

CEPR / May 29, 2017

Article Artículo

Affordable Care Act

The Zombie "Young Invincibles" Ride Again in the Washington Post

The "young invincibles" is a myth that got created in the debate over health care reform in 2009 and 2010. Lots of media-types and more than a few policy wonks who should have known better proclaimed the success of Obamacare depended on whether healthy young people signed up for insurance. The argument was that the premium paid by these healthy young people, since they have relatively low health care expenses, would be subsidizing the cost of caring for less healthy older people. If they didn't sign up for insurance there would not be enough money to sustain the system.

The problem with this story is that it really has nothing to do with the people being young. What matters is that they are healthy. And, there are plenty of healthy older people as well. In fact, since older healthy people (ages 55 to 64) pay premiums that are three times as large as those paid by the young, it actually matters much more whether the healthy old sign up for insurance than the healthy young. (The Kaiser Family Foundation did a nice analysis of this issue a few years back showing that even extreme skewing of enrollment by age made relatively little difference to the finances of the system.)

A version of the young invincibles reappeared in a Post article today on the Congressional Budget Office's (CBO) analysis of the new Republican health care proposal. The piece discusses a provision of the bill which would allow insurers to charge different rates for people depending on their health condition if they had allowed their coverage to lapse for more than two months:

"Using information about a patient's history — a practice known as medical underwriting — is intended as punishment in the GOP bill. For some, though, medical underwriting could be an advantage. Younger, healthier people could pay cheaper premiums if their insurers know that they are in good shape overall than if they are simply paying the same rate that everyone else pays."

Including "younger" in this paragraph makes no sense. Insurers are already allowed to charge different rates based on age and, in fact, the allowable gap will expand from the current three-to-one under the Affordable Care Act to five-to-one under the Republican plan. This larger ratio means that healthy older people will actually stand far more to gain by having their insurance based on their health history than healthy younger people.

CEPR / May 28, 2017

Article Artículo

NYT Says Trump Budget "Seeks" to be Balanced

A major and frequent sin of reporting is to tell readers the intentions of politicians. This is bad reporting because the reporter does not know the intentions of politicians, they know what the politicians say and do. When a news story tells its audience that a politician "wants," "believes," or is "concerned" it is making an assertion that the reporter cannot possibly know to be true. The reporter is effectively assuring their audience that what the politician claims as their motive is in fact their motive.

The NYT carried this bad practice a step further in its reporting on the Trump budget. The very first sentence of the piece tells readers:

"...seeks to balance the federal budget through unprecedented cuts to programs for poor and working-class families, effectively pitting them against older Americans who would largely escape the budget ax (emphasis added)."

In this case, we have a reporter telling us the goal of the budget, presumably based on the claims of the politicians who drafted it. The idea that the goal of Trump administration is balancing the budget with this proposal is at least implausible, if not blatantly false. It is also not especially accurate to make the divide described in this sentence between the old and the poor.

On the issue of balancing the budget, the key item here is the assumption that the economy will grow at annual rate of 3.0 percent over the next decade rather than the 1.9 percent rate projected by the Congressional Budget Office. There are very few economists who will support the claim that the economy can sustain anything close to 3.0 percent annual growth for a decade.

CEPR / May 23, 2017