Andrew G. Biggs

Comparing Federal and Private Sector Compensation

Public sector compensation has come under increased scrutiny from politicians and the media, but comprehensive technical comparisons of federal and private compensation have been largely absent from the discussion. Drawing from the academic literature and using the most recent government data, this report measures the generosity of federal salaries, benefits, and job security. Compared to similar private sector workers, we estimate that federal workers receive a salary premium of 14 percent, a benefits premium of 63 percent, and extra job security worth 17 percent of pay. Together, these generate an overall federal compensation premium of approximately 61 percent. Reducing federal employee compensation to market levels could save taxpayers roughly

Measuring and Communicating Social Security Earnings Replacement Rates

77 billion per year.

The Public Pension Quadrilemma:The Intersection of InvestmentRisk and Contribution Risk

Financial advisors commonly use earnings replacement rates to assist workers in their retirement planning. Policymakers and analysts use them to gauge the adequacy of Social Security benefits and other retirement income in allowing retirees to maintain preretirement living standards. In recent years, the Social Security trustees regularly published replacement rates that have been widely interpreted as the extent to which Social Security benefits replace earnings of workers at various points in the lifetime earnings distribution. However, the trustees’ replacement rates are calculated differently than those generally used for retirement planning purposes possibly leading to confusion among policymakers and others regarding how much of workers’ earnings are replaced by Social Security and how much those workers need to save on their own for retirement. Financial planners calculate replacement rates by comparing an individual’s retirement income to that same individual’s pre-retirement earnings, generally earnings in the years immediately preceding retirement. The Social Security Administration, by contrast, effectively calculates replacement rates by comparing retiree incomes to the incomes of contemporaneous workers. This latter measure is often used in other countries, but differs both qualitatively and quantitatively from the more common replacement rate calculations used for financial planning purposes. We find that replacement rates calculated on a financial planning basis are generally higher than those published by the Social Security trustees and that Social Security benefits generally replace somewhat more of individual workers’ earnings than the trustees’ rates suggest.

Fiscal Solutions: A Balanced Plan for Fiscal Stability and Economic Growth

Pension plans for state and local government employees seek to achieve four main financing goals: maintain sufficient funds to pay benefits; keep contribution costs low for sponsoring governments and employees; stabilize contributions from year to year, to assist in budgeting; and stabilize costs from generation to generation, a precept known as intergenerational equity. Pension plan stakeholders generally believe that as an article of faith, a plan can satisfy these goals with prudent management.

How Financial Advisers and Defined Contribution Plan Providers Educate Clients and Participants about Social Security

Our country faces a serious fiscal crisis. According to President Obama’s National Commission on Fiscal Responsibility and Reform, the nation is on an unsustainable fiscal path, with spending well above tax revenue. The Congressional Budget Office projects that, under current policies, federal debt will soar from 62 percent of annual GDP in 2010 to 87 percent in 2020 and 185 percent in 2035. The plan presented here represents the collaboration of its four authors and does not reflect the position of the American Enterprise Institute or any other organization. The individual authors do not fully agree with every provision of the plan, but we join in presenting it as a way to address the fiscal imbalance while promoting economic growth.Our plan re-establishes a balance between federal spending and revenue that achieves long-term fiscal stability and promotes economic growth. We cannot simply tax our way to a balanced budget without suffering the consequences of a sluggish economy and reduced prosperity. We also cannot simply cut spending without risking the loss of essential services for an aging population, undercutting our infrastructure on which economic growth builds, and reducing our ability to defend the country against its enemies.Our plan limits the national debt to 60 percent of annual GDP in 2035. Ambitious cuts in federal spending are required to achieve that goal while minimizing tax burdens on the American people and the drag that high marginal tax rates impose on long-run economic growth.

A NEW SOCIAL SECURITY 'NOTCH'? BAD NEWS FOR PEOPLE BORN IN 1947

American workers have demonstrated relatively low levels of knowledge of how Social Security works. Most claim benefits at age 62, far earlier than many experts believe is optimal. Early claiming has a particularly negative impact on women. A significant proportion of workers use professional financial advisors and most workers participate in a defined contribution plan. Through a survey and in-depth interviews information was collected on how advisors and plan providers counsel clients and participants on Social Security. The results indicate steps that could increase the effectiveness of these channels to provide effective education and advice on Social Security and claiming. Disciplines Economics Comments The published version of this Working Paper may be found in the 2013 publication: The Market for Retirement Financial Advice. This working paper is available at ScholarlyCommons: https://repository.upenn.edu/prc_papers/147 The Market for Retirement Financial Advice

The Life Cycle Model, Replacement Rates, and Retirement Income Adequacy

This year, Social Security benefits received no Cost-of-Living Adjustment (COLA) for the first time since automatic adjustments were adopted in 1975. While current beneficiaries perceive themselves to be harmed, they were compensated by receiving a higher-than-normal 5.8-percent COLA payment in 2009. However, a quirk in Social Security’s benefit formula will produce lower benefits for new retirees, presenting a stronger case for help. Social Security’s formula for granting COLAs, interacting with a spike in inflation during 2008, could reduce benefits for individuals born in 1947 by around 2.6 percent relative to the average benefits received by the 1930-1946 birth cohorts, costing a typical couple over

The Great Government Pay Debate

12,000 over the course of their retirement. Policymakers should consider adjusting benefits for these individuals and implementing longer-term reforms to reduce the likelihood of future “notches.” This brief proceeds as follows. The first section describes the Social Security notch of the 1970s. The second section explains how Social Security’s benefit formula works. The third section looks at how the experience of 2008 has created a new type of notch. The fourth section considers how replacement rates vary for different birth cohorts, and the fifth section offers potential solutions. The final section concludes that some adjustment for the 1947 cohort is both popular and sensible.

Exploring Alternate Ways to Present Estimated Future Retirement Benefits in the Social Security Statement

The key insight of the life cycle model in economics is that a household’s consumption at any given time is determined not so much by its current income as by the total income available to the household over its lifetime. A replacement rate can be a useful tool in approximating the life cycle model’s predictions for how households prepare for retirement. The Social Security Administration’s Office of the Chief Actuary (SSA OACT) publishes two different calculations of retirement income replacement rates, each of which finds that Social Security benefits replace about 40% of a typical retiree’s pre-retirement earnings. Some interpret these figures as indicating that Social Security benefits are insufficiently generous and that U.S. households’ total retirement saving is inadequate. But SSA OACT’s two methods for calculating replacement rates both violate the life cycle model in a meaningful way. SSA OACT’s career-average earnings replacement rates, in which lifetime earnings are first indexed upward by the rate of economywide wage growth, exaggerates by roughly one-fifth the real value of earnings available to a household for consumption over its lifetime. This overstatement lowers a household’s measured ability to replace their pre-retirement earnings. SSA OACT’s final-earnings replacement rates effectively compare Social Security retirement benefits to pre-retirement earnings only in the years in which the individual worked, ignoring the life cycle model’s prediction that household consumption is a function of long-term average earnings, including years in which a household member was not employed. A replacement-rate calculation more consistent with the life cycle model would compare retirement income to an average of real earnings calculated over a significant number of years. Such an approach would find substantially higher replacement rates for the typical retiree. It is important both for Social Security policy and the analysis of overall retirement savings adequacy that replacement-rate calculations build on the insights of the life cycle model that guides most economic analysis of retirement saving.

Alternate Measures of Replacement Rates for Social Security Benefits and Retirement Income

The three statements that follow were provided by individuals who have public positions that are likely to influence how government pay systems are planned and managed. Government pay and benefits have become political issues and the goal is to provide a forum prior to the election where three distinct positions can be stated, followed by comment and rebuttal. The first statement, by the two independent members of the Federal Salary Council, Stephen Condrey and Rex Facer II, joined by a colleague Jared Llorens, argues for a variation on the existing program model. As background, the Council makes annual recommendations to the U.S. Office of Personnel Management (OPM) and the President’s Pay Agent on needed adjustments to the federal white-collar salary system. The second was drafted by Andrew Biggs and Jason Richwine, prominent critics of government pay practices and occasional spokespersons on this subject for the American Enterprise Institute and the Heritage Foundation, respectively. Their comments are posted occasionally on the websites of their respective organizations. The third statement was provided by Michael Filler, who serves as a presidentially appointed member of the National Council on Federal Labor–Management Relations and Director of the Public Services Division, International Brotherhood of Teamsters. The Teamsters has over 260,000 public and professional employees across North America. Following each statement are comments by the two other “sides.” This article is intended to highlight the issues that are contentious as well as those where there is agreement. A key point is the general agreement that government pay should be aligned with market levels although there are differences in exactly what that means. 462333 CBRXXX10.1177/08863687124623 33Compensation & Benefits ReviewRisher 2012