Question: What’s wrong with this story?

“In 1940, when Social Security first paid monthly retirement benefits and the number of private pension plans was just beginning to grow, individuals reaching age 65 lived, on average, for another 13 years. Furthermore, many workers entered the labor force at age 18, immediately after graduating from high school. These individuals could expect to work for 47 years before attaining “normal” retirement age…

Fast forward to 2006: the demographics of pension planning have changed significantly. Approximately two-thirds of eligible non-disabled workers claim Social Security retirement benefits at age 62 rather than 65, and they enter the labor force at a later age, often at age 21 or even older, rather than age 18. This leaves about 40 years of work before an expected retirement at age 62, at which point remaining life expectancy is approximately 20 years.”

Answer: It ignores women, except when including them makes the situation seem worse.

The hypothetical “individuals” in the first paragraph appear to be men, since few women born in 1875 spent 47 years in the paid workforce before retiring at 65 (it’s also doubtful whether their male counterparts worked that many years, but that’s another story). Likewise, the life expectancy of a 65-year-old man in 1940 was thirteen years. In the second paragraph, however, the life expectancy cited is for both sexes, which has the effect of exaggerating the increase in life expectancy in retirement since older women live roughly two years longer than men.

The quote is from an American Academy of Actuaries brief published in 2006. It’s still relevant, however, because the thrust of the argument—that we need to raise Social Security’s full retirement age because people are living longer but retiring at younger ages—has become the conventional wisdom in Washington.

You could argue that the statistics cited are appropriate since the workforce in 1940 was largely male, whereas in 2006 it was more evenly split between men and women. But it’s no accident that the influx of women into the paid workforce goes unmentioned, since acknowledging it would require the authors to paint a more complicated, and rosier, picture.

The rise of two-earner couples has been a boon for Social Security because it increased the number of workers contributing to the system while decreasing spousal benefits, which aren’t paid for by higher taxes on married workers. Meanwhile, it lowered the average age of retirement, since women have historically retired at younger ages than men (often at the same time as older husbands).

The resulting decline in the average retirement age was especially pronounced in the 1970s and 1980s, when the trend was toward earlier retirement for both sexes. But the last two decades have seen a reversal of this trend, and the labor force participation rate of older workers is now as high as it was half a century ago. In any case, whether people choose to retire early is irrelevant to discussions of Social Security’s finances because monthly benefits are reduced for early retirement in order to equalize the value of lifetime benefits.

A focus on the average retirement age misses the bigger story of how much more Americans are working and contributing to Social Security over the course of their lifetimes, thanks to women. It also ignores the fact that Social Security’s full retirement age is already increasing, so the ratio of working years to covered retirement years is roughly the same as it was in the early 1980s when the system was in balance. Last but not least, it ignores the fact that people are encouraged to continue working after claiming benefits. If you exclude people still working for pay as well as those who weren’t in the workforce to being with, such as full-time caregivers, the average retirement age is 65.5, not 62 as is often claimed.

Today’s interesting story on the front page of The Washington Post presents a nuanced view of the reaction of companies  to new environmental regulations, quoting, for instance, several utility industry representatives on the ways jobs are created during the compliance process. The main channel of job creation occurs through the construction and installation of pollution-abatement equipment, or less-polluting facilities.

The piece is a good overview of the impact of regulatory change on employment in general, but there is an important angle that it did not touch on: the positive job-impacts of regulatory changes are likely to be much more potent in today’s economic context of high unemployment and low rate of capacity utilization. In particular, the construction industry, where many jobs would be created, is in particularly dire shape, with its overall level still nearly a half million short of its level at the start of the recession.

As Josh has blogged previously, when there are large amounts of unused capital and unemployed workers, as there are today, government regulations can effectively move this capital into action in the form of investments to comply with important environmental rules. Partially because of this, Josh’s analysis of the air toxics rule found that it would be a net job producer; in essence, in 2014 the jobs generated by investments in less-polluting technologies would outweigh any jobs lost due to higher prices or plant closings by about 90,000 workers.

Plenty has been written on this by smarter people than me – but since the troubles of Greece (and now increasingly Italy) are routinely invoked by those arguing that the U.S. needs to move to rapid deficit-reduction, it can’t hurt to emphasize the salient points again.

The cautionary tale one should take from the Eurozone crisis is not the dangers of large deficits. Yes, Greece and Italy do have large public debts – but nowhere near as large as Japan. Yet nobody is talking about a yen crisis. And Spain – often fingered as a likely candidate for a run by the bond-market vigilantes – has a public debt about half as large as that of the UK. And nobody is talking about a pound crisis.

Instead, the cautionary tale one should take from the Eurozone is that the tools of macroeconomic stabilization – fiscal, monetary, and exchange rate policies – need to be taken much more seriously than they have been for decades. Since 1980 a consensus (obviously wrong in retrospect – and not adhered to in real-time by plenty of admirable skeptics) developed among macroeconomic policymakers that fiscal policy should simply aim for balanced budgets (or even surpluses) and should not be used discretionarily to fight recessions; that monetary policy should simply target very low rates of inflation; and that capital markets (including international capital markets) should be left to govern themselves and capital should flow freely across international borders. The underpinning of this consensus was the belief that capitalist economies could and would generally heal themselves quite quickly following recessions, so macroeconomic stabilization policy (the tools used to fight recessions) were mostly unnecessary and would often just impede, not aid, speedy recoveries.

This flawed consensus informed the adoption of the Euro – countries surrendered independent monetary and exchange rate policies because they were sure they weren’t really all that important.

By adopting the Euro and entering a monetary union, member countries lost the ability to print their own currency and to regulate capital flows. So, when borrowing on international markets, they were now borrowing in a currency that they no longer had the capacity to print themselves. This inability to run the printing presses to pay off debt means that they can be forced into default if financial markets players ever decide to stop lending them money on reasonable terms.

Further, the common currency means that important stabilizing forces that kick in when financial markets stop demanding a country’s assets – increased exports and reduced debt obligations driven by the now-weaker national currency – are not operating for individual members of the Euro zone. This exchange rate channel is hugely important for countries trying to recover from financial crises – as the experience of Argentina and Iceland have shown. Further, this abandonment of monetary and exchange-rate policies was not accompanied by a beefing-up of a continent-wide fiscal policy that could be used to buffer downturns.  Michigan or Nevada, for example, do not have their own monetary or exchange-rate policies, but they do get lots of federal transfers (like unemployment insurance) when their economies do more poorly than the national average.

To put this simply – the Eurozone was essentially a ship constructed for the fairest weather possible – a world without recessions. Now that the weather has turned foul, the consequences of not taking macroeconomics seriously is coming clear.

Worse, the too-limited scope that Eurozone countries have for macroeconomic policy stabilization resides solely in the actions of the European Central Bank (ECB) – which is barely even trying to mute the broader economic crisis. As John Quiggin notes, the ECB has actually raised rates within the past year – raising interest rates in the midst of the worst economic downturn in a generation! Recently, the new ECB head has cut these rates – but they remain a full percentage point higher than those in the United States or Japan.

So, what do we really have to learn from the Euro crisis? That the tools of macroeconomic management matter a lot – and they should not be given up casually. Failing to heed this lesson is already hurting the U.S. economy.

The Emergency Unemployment Compensation (EUC) program, part of the American Recovery and Reinvestment Act, is a federally-funded program that provides unemployment insurance (UI) benefits to the millions of Americans who lost their jobs in the Great Recession and who have exhausted or no longer qualify for unemployment benefits through existing state programs. With the anemic pace of job growth since the recession’s end, millions of unemployed Americans are still relying on these benefits to support themselves and their families. As the country is painfully aware, the job market is not recovering quickly enough to put these people back into jobs, and the EUC program is set to expire at the end of this year.

According to the Congressional Budget Office, extending UI benefits through 2012 would cost about $45 billion. But as EPI’s Larry Mishel and Heidi Shierholz explain, this $45 billion in federal spending would translate into an additional $72 billion in U.S. economic activity, or a 0.5 percent increase in GDP, due to standard economic “multiplier” effects and the fact that the long-term unemployed—often the most desperate for resources to meet their basic needs—are apt to immediately spend any benefits received.

From a jobs standpoint, this additional $72 billion in economic activity will save or create about 560,000 jobs across the country. How would your state be affected?  The table below estimates the share of these 560,000 jobs saved or created in each state based upon the size of the state’s economy and its share of previous federal EUC spending.  Not surprisingly, California has the most at stake – about 80,000 jobs.  New York, Texas, Florida, and Pennsylvania will each save over 27,000 jobs.

One other way to look at these jobs numbers is as a share of each state’s payroll employment to control for the differences in the size of each state’s workforce. As the highlighted cells show, New Jersey, Connecticut, Nevada, Colorado, and Massachusetts will see the largest job loss as a proportion of state payroll employment if the EUC program is not extended.

The deadline for the supercommittee is approaching, and so we welcome budget ideas from our friend and former board member, Andy Stern. But he and Reagan OMB Director David Stockman are advising the supercommittee to “go big” on deficit reduction, based on the false premise that “our debt crisis is so severe, so obvious,” in this CNN opinion piece. In Washington parlance, that means $4 trillion plus in deficit reduction, heavily weighted toward spending cuts.  The economic crisis we face today is not a debt crisis at all. We have a jobs crisis, and that is why we currently have large fiscal deficits. In today’s economic context, the most compelling case for long-term deficit reduction is to finance greater efforts to create jobs in the short term. Invoking a debt crisis that is not happening, however, can only lead to a rush for changes that need not be addressed in the short, nontransparent process of the supercommittee and are likely to do needless damage to our retirement and health programs, if not the economic recovery altogether.

To clarify:

Our “debt crisis”: 2.05% 10-year sovereign bond yields, independent central bank

Italy’s emerging debt crisis: 7.26% 10-year sovereign bond yields, no independent central bank

Greece’s very real debt crisis: 27.33% 10-year sovereign bond yields, no access to capital markets

We didn’t have a debt problem until conservatives in Congress concocted a debt ceiling crisis this summer, “ceiling” being the operative word. We’re struggling through a huge economic shock, and bigger budget deficits have ensued as a result. And it’s still the economy that Congress should be paying attention to: well over half of this year’s budget deficit can be chalked up to the weak economy and policies to boost employment.

Our economic crisis is so severe, so obvious, that it is visible in just about every U.S. data release. Unemployment has been stuck at or above 8.8% for over two and a half years. The economy and employment are growing too slowly to lower the unemployment rate. Poverty is rising, and real median incomes are falling. The economy is running $895 billion (-5.6%) below potential, which singlehandedly accounts for roughly a third of the budget deficit.

Yet Congress ignores these data in favor of the imaginary. There is no talk of a jobs program coming out of the supercommittee, even though fiscal policy is poised to shave one to two percentage points off of real GDP growth next year. The filibuster is repeatedly used to obstruct meaningful jobs legislation in the Senate.

We do face real long-term fiscal challenges that must be addressed. Along with Demos and The Century Foundation, EPI drafted a long-term budget for economic recovery and fiscal responsibility. We should address the health cost escalation but having just witnessed a yearlong process to achieve health care reform (at the time, the biggest piece of deficit-reduction legislation in over a decade), one wonders why this supercommittee should revise our health care system again—likely undermining reform—even before we see the results of reform. Social Security is not in any crisis and there is no need for its long-term fiscal challenge to be addressed in this process, either. We must restore revenue adequacy, but the prospects of the supercommittee doing so are zilch. Stern’s piece with Stockman does contribute to that effort by getting a prominent Republican on the record for substantial revenue increases (which is presumably what the point was, at least for Stern). But if long-term fiscal challenges misguidedly produce premature withdrawal of fiscal support and near-term spending cuts, as looks all too likely, both economic recovery and fiscal sustainability will remain elusive. Those genuinely concerned with long-term fiscal sustainability should pay attention to the economic crisis at hand, the jobs crisis, since we will never have a sustainable fiscal situation with the persistent high unemployment we are facing.

As Republicans in Congress intensify their attacks on EPA rules, largely on the grounds they disrupt the economy, it is important to keep in mind that in terms of the overall economy, these rules are essentially inconsequential.  Previously I’ve blogged on how the total compliance costs of all the major rules proposed or finalized by EPA so far during the Obama administration amount to only about one-tenth of one percent of the U.S. economy.  What I failed to quantify is how the 0.1 percent figure itself, as small as it is, significantly overstates the potential economic effect of the rules.

This can be demonstrated by looking at the economic benefits of just two of the rules finalized so far by EPA.  These are joint rules with the Department of Transportation that regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles for model years 2012-2016.  The economic benefits from these two rules are particularly sizable, as they produce large savings to drivers in the form of reduced expenditures on gasoline.

In 2010 dollars, a conservative estimate (see explanation below) of the economic benefits from these two rules amounts to $6 billion to $20.6 billion a year.  This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year.  Even if the four major proposed rules are also taken into account, the economic benefits from the fuel standard rules alone offset much of the combined costs of the final and proposed rules ($19.7 billion to $27 billion a year).

Stated simply, the economic benefits of just two of the major Obama EPA rules offset much of the economic compliance costs of all the rules.  It also bears noting that companies have several years or more to comply with the rules, diminishing immediate costs and facilitating transitions.  Further, an array of economic benefits is not considered here, including the economic benefits from the other nine final rules and the four proposed rules; these economic benefits range from workers spending more time at their jobs because they or their children are healthier to reduced expenditures on health care.  The modest employment gains from the largest rule, the air toxics rule, are also not considered; these gains reflect the fact that compliance expenditures generate jobs when the economy has substantial unused capacity.

So especially once offsetting economic benefits are considered, it is hard to conceive how the EPA rules advanced so far during the Obama administration could drag down the overall economy.

What is conceivable, and indisputable, is that the health benefits from these rules are large.  Every year, the cleaner air and other environmental benefits from the rules will save tens of thousands of lives, prevent tens of thousands of heart attacks, and mean hundreds of thousands fewer people will contract respiratory illnesses, thereby diminishing hospital stays.  When all benefits, including health benefits, are considered, the benefits from the rules dwarf any compliance costs.

Note:  Explanation of calculation.  For the two rules that raise fuel standards for, and reduce greenhouse gas emissions from, various-sized vehicles, this blog considers the following benefits as economic:  reductions in fuel expenditures, the value of time savings from needing to refuel less often, and the value of the decreased chance of economic disruption due to reduced dependence on foreign oil.  The costs of time lost due to increased congestion (due to more driving since fuel costs less) and the costs of increased crashes (also reflecting more driving) are considered economic losses.  The additional value drivers attach to driving more are not considered economic, nor are the costs assigned to increased traffic noise (reflecting more driving).  The method is conservative because due to technical obstacles, no economic benefits are attached to reducing carbon dioxide or other emissions.  Additionally, the health benefits from these rules, which EPA calculated for 2030 and did not annualize, are not included in the calculation.

From this week’s economic snapshot:

One of the arguments marshaled by the Occupy Wall Street movement is that corporate executives have seen pay increases far in excess of those enjoyed by typical workers.  To be clear, CEOs have always earned much higher salaries than the workers they manage, but the gap between CEO and worker pay has soared in recent decades.

The figure below shows the ratio of average CEO compensation to compensation of the average worker from 1965–2010. In 1978, compensation of CEOs was 35 times greater than compensation of average workers. Since then, this ratio has skyrocketed, peaking at 299-to-1 in 2000. During the Great Recession, CEO pay fell relative to pay of typical workers because much of CEO compensation is directly linked to the stock market, which fell sharply in 2008 and 2009. However, the ratio bounced back during the recovery and stood at 243-to-1 in 2010. At this rate, it likely will not take long for the gap to reach its prior peak.

Click to enlarge

—With research assistance from Hilary Wething and Natalie Sabadish

There was a lot of good news last night and some great headlines this morning. But here’s one of my favorites, via Fox News Latino, and not just because it references one of (immigrant former governor) Arnold Schwarzenegger’s best films:

Conservative voters in Arizona may have had enough of their immigrant-bashing elected officials, it seems. Arizonans confirmed that Arizona Senate President Russell Pearce had gone too far by sponsoring and pushing hard for the passage and implementation of SB 1070, an insanely draconian (and likely unconstitutional) anti-immigrant, anti-Latino law that facilitates racial profiling.

Arizona is also home to controversial, attention-loving Sheriff Joe Arpaio (pictured above on the right), an ardent supporter of Russell Pearce and vocal proponent of SB 1070. Arpaio has personified the extremist elements in the state that support SB 1070, and his questionable enforcement tactics have earned him criticism from Amnesty International for the harsh treatment of prisoners. His actions, which recently included forcing an immigrant detainee to give birth while handcuffed and shackled, are the subject of two federal investigations, one by the Department of Justice over civil rights violations and another by a federal grand jury for abuse of power.

The recall vote, the first ever recall of an Arizona state legislator, is being heralded as a rejection of the policies and tactics embodied in SB 1070.

Pearce lost the election last night in his conservative suburban Phoenix district to a political newcomer, fellow Republican Jerry Lewis. Pearce lost by a substantial margin of seven percent, despite having outspent Lewis by a 3-to-1 ratio, thanks to a flood of campaign funds donated by corporate lobbyists, 90 percent of which came from outside the district.

Legislators in other states – most notably Alabama, Georgia, South Carolina, and Indiana – who have targeted immigrant workers and their families for political gain or because of intense lobbying from corporate interests, including and especially from the private prison industry – are now officially on notice. If you strive to terrorize law-abiding immigrants and Latinos who simply wish to work to provide food and shelter for their families, responsible voters will not allow you to remain in power, no matter how much money you get from the special interests you champion.

This is the second part of a two-part blog prompted by an alarmist Washington Post article on Social Security, as well as the Post ombudsman’s muddleheaded response. Last Wednesday, we looked at links between the Social Security surplus (and future deficit) and the overall federal deficit and debt. Today, we’ll look at the impact of the Great Recession on Social Security and whether the fact that Social Security is now running a primary deficit will add to the nation’s budget problems, as Post reporter Lori Montgomery claims.

How have the Great Recession and weak recovery affected Social Security to date?

Compared to intermediate projections in the last prerecession (2007) trustees report, the number of workers covered by Social Security last year was down seven percent and the number of beneficiaries was up one percent in 2010, according to the latest report. The cumulative impact was that the Social Security trust fund held $2.6 trillion at the end of 2010 rather than the $2.9 trillion projected in the 2007 report.

How will the recession and weak recovery affect the future of the trust fund?

The Social Security actuaries project slower economic growth over the next decade, though long-run assumptions remain unchanged. As a result of lower projected employment growth, wage growth and other factors, the trust fund is expected to peak at around $3.7 trillion rather than the $6.0 trillion projected in 2007 and to be exhausted five years sooner—in 2036 rather than 2041.

How will the recession affect Social Security’s long-run outlook?

Because benefits are mostly paid out of current tax revenues as opposed to savings, Social Security’s long-run outlook isn’t as affected as one might think if focusing only on the trust fund.  The 2011 report projected a 75-year shortfall equal to 2.22 percent of taxable payroll, an increase from 1.95 percent in the 2007 report (some of this is due to the changing 75-year projection period and other factors besides the weak economy). This means that a relatively modest increase in the Social Security tax on employers and employees from 6.2 percent to around 7.3 percent of earnings would put the program in long-term balance, though more progressive revenue options, like lifting the cap on taxable earnings, would be preferable.

Why do some people say Social Security is already running a deficit?

Social Security had $781 billion in revenues in 2010. Of this, $637 billion was revenue from payroll taxes and $118 billion was interest on trust fund assets. Meanwhile, Social Security had $713 billion in expenditures, the bulk of which ($702 billion) was paid out in Social Security benefits. Since current tax revenues no longer cover current expenditures, Social Security is running what’s known as a primary deficit (sometimes referred to as a “cash-flow” deficit) even though it is still building up savings in the trust fund.

What’s the significance of this cash-flow deficit, if any?

By definition, Social Security will run a deficit when it taps into its savings to help pay for the Baby Boomer retirement. Running a primary deficit is a normal stage in the process of moving from saving to dissaving. The fact that this is happening sooner than expected is actually beneficial in the short run—since Social Security serves as an automatic stabilizer for the economy. Older workers tapping retirement benefits when they lose their jobs helps them and the sputtering economy—and does so at no cost to Social Security since benefits are adjusted for early retirement. Lower-than-anticipated payroll tax revenues do, however, add modestly to the system’s long-run challenges.

Does this “add to the nation’s budget problems?”

As explained last week, Social Security cannot contribute to the federal debt over time because it is prohibited from borrowing. This is analogous to a family with indebted parents and a thrifty child who is saving money from a newspaper route. When the child dips into her piggy bank to buy a bike, she’s contributing to her family’s “deficit” simply by tapping into her savings. She’s also adding to her family’s net indebtedness because there are now fewer savings in her piggy bank to offset her parents’ credit card debt. However, it would be absurd to hold the child responsible for her parents’ mounting debt.

On Monday, the Census Bureau released a report on the new Research Supplemental Poverty Measure (SPM), a metric designed to address longstanding criticisms of the official federal poverty threshold. The official “poverty line” is a set pre-tax income level, established in 1969 at essentially three times what was considered necessary to afford a “minimal, but adequate” amount of food. The measure has been adjusted for family size and inflation, but has otherwise remained unchanged for more than 50 years.

What’s different about the SPM?

The SPM attempts a more holistic appraisal of family expenses. It takes the average between the 30^th and 36^th percentiles of spending by a family of three on food, clothing, shelter, and utilities, and adjusts this amount to reflect other necessary expenses, such as child care, federal income taxes, FICA payroll taxes, out-of-pocket medical expenses, and work-related expenses such as commuting costs, uniforms, and tools. At the same time, the SPM also accounts for resources available to low-income families through government programs, like the EITC, SNAP (food stamps), housing subsidies, school lunch programs, heating assistance, and WIC (food assistance for women, infants, and children). Finally, unlike the existing official poverty rate, the SPM does adjust for regional differences in prices and costs.

How do poverty levels under the SPM compare to those under the official poverty threshold?

According to the SPM, more than 49 million Americans—or 16 percent of the population—are living in poverty as of 2010, compared to 46.6 million—or 15.2 percent—under the official poverty line.

Moreover, the figure below highlights changes in the distribution of people by the ratio of their income to the poverty line.  Note the enormous growth in the number of people with incomes 1.0 to 1.99 times the poverty threshold. This means that the number of Americans with incomes at or below 200 percent of the poverty line—a level often thought of as an adequate, but modest standard of living – rises from 34 percent under the official measure to 47.5 percent under the SPM. That’s nearly half of all Americans.

Why are so many more people closer to poverty under this new measure? 

One clear reason is that the official poverty line’s method of pegging the poverty threshold to three times a minimum food bundle assumes that the growth in all expenses other than food will remain proportionate to the growth in food costs. But we know this is not true: case in point, healthcare. In fact, the SPM report shows that when you factor in individuals’ out-of-pocket medical expenses, it increases the poverty rate by 3.3 percentage points – in other words, the poverty rate would be 12.7 percent instead of 16 percent if individuals faced no medical costs. This contrast is even starker for seniors. Without accounting for out-of-pocket medical expenses, the poverty rate for seniors would be 8.6 percent; once you factor in medical costs, the poverty rate among seniors jumps to 15.9 percent! (Let this be a big warning to policymakers advocating benefit cuts to seniors, under the illusion that the current indexing of benefits has been too generous.)

There’s another interesting point to be made when you look at the effect that the additional necessary expenses (childcare, payroll taxes, etc.) and government-provided resources (EITC, SNAP, etc.) has upon the estimated poverty rate. The sum of the effects of the additional government-provided resources is to lower the SPM rate by 5.2 percentage points. However, the sum of the effects of all the additional expenses is to increase the SPM rate by 6.7 percentage points. So on net, the additional expenses that families face are overshadowing the benefits that government programs provide at a level sufficient to raise the poverty rate by 1.5 percentage points. At a time when so much of the political discourse is on reducing and eliminating federal programs, this finding at least suggests that the question should not be which programs to cut, but whether the programs we currently have to combat poverty are actually doing enough.

The Census Bureau acknowledges that the new measure is a “work in progress” and there are certainly some glaring concerns about the SPM that other researchers have dutifully pointed out. On a more fundamental level, there will always be questions around measures that define poverty in quasi-absolute terms. Simply because a family is spending on healthcare (childcare, food, shelter) at a level commensurate with the 33^rd percentile of spending does not mean that they are receiving adequate healthcare. For these reasons, the SPM may be one step towards better ways of identifying poverty, but it cannot and should not be the end of the conversation.