Sunday, February 27, 2011

Annals of busted blog posts

I was going to propose an alternative to raising the social security retirement age: reducing the cost of living adjustment (COLA) as beneficiaries get older.  My thought was that as people get older, they spend less. And they do, except for one thing: health care. But that little exception does effectively kill the idea. Here's what I learned from a 2009 paper by Mariacristina De Nardi, Eric French, and John Bailey Jones:
Our model predicts that average out-of-pocket medical expenditures rise from $1,100 at age 75 to $9,200 at age 95. While a 95-year-old in the bottom quintile of the permanent income distribution expects to spend $1,700 on medical expenses, a person of the same age in the top quintile expects to spend $15,800. Medical needs that rise with age provide the elderly with a strong incentive to save, and medical expenses that rise with permanent income encourage the rich to be more frugal.
I was motivated by Ezra Klein's point* that raising the retirement age disproportionately affects lower-income Americans, whose life spans have not increased nearly as dramatically as the more affluent, and is particularly hard on those who perform bodily labor, which becomes increasingly excruciating with age. Better, I thought, to have a viable retirement income earlier, and only lose some growth in the payment gradually.  But never mind...

The Social Security Advisory Board report of July 2001 does put on its menu of options for closing social security's projected deficit the possibility of reducing the COLA formula for beneficiaries above a certain income threshold.  That's just a variant on means-testing for social security benefits.  The utility of this report -- and the relative ease with which social security can be fixed, compared to health care spending -- was brought into sharp focus by Kevin Drum last June:

Social Security is a pretty easy problem to address, and the reason it's easy is that you don't have to limit yourself to a single big solution. In fact, Social Security reform practically cries out for a basket of small, almost imperceptible changes. You could, for example, partially uncap the payroll tax or change the tax rate slightly (or a combination of the two); gradually increase the retirement age to 68; and adjust the inflation calculation for annual benefits slightly. This would fix Social Security's problems entirely and would be barely noticeable for most people.  There are lots of other possibilities, and the more of them you put together the less painful they are. Chapter 4 of this report can help you put together your own plan.
 See especially the chart of menu items on page 25.

* I think it was Klein but couldn't find quite what I was looking for. He makes a related point -- that most people don't hold out till the current full-benefit retirement age of 66 -- in an argument against raising the retirement age here.

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