D.C. Pension Geeks
Andrew Biggs - Lies and Statistics—What the 401(k) Data Actually Says
Former high-ranking Social Security Administration official and retirement policy gadfly Andrew Biggs joins American Retirement Association CEO Brian Graff for a frank discussion about the data fueling the 401(k) debate. Biggs, a frequent financial media critic of ‘retirement crisis’ sensationalism, explains the retirement readiness disconnect—and why we get it so wrong.
Former high-ranking Social Security Administration official and retirement policy gadfly Andrew Biggs joins American Retirement Association CEO Brian Graff for a frank discussion about the data fueling the 401(k) debate. Biggs, a frequent financial media critic of ‘retirement crisis’ sensationalism, explains the retirement readiness disconnect—and why we get it so wrong.
And so you know, recently I said I'd kind of take the gloves off a little bit and say, look, you can't cite these data anymore. No responsible researcher will cite them. It is irresponsible to do it.
Intro:DC Pension Geeks brings you exclusive conversations with top retirement policymakers and regulators in and around Washington DC, hosted by Brian Graff, an attorney, accountant, former Capitol Hill staffer and CEO of the American Retirement Association. If you're looking for an insider's view of all the twists and turns that Washington takes on the road to ensuring a secure retirement for millions of Americans, you're in the right place. Welcome to DC Pension Geeks.
Brian Graff:Hey everybody, welcome to another episode of DC Pension Geeks. I'm very fortunate to have with me today a very well-known, renowned economic expert on retirement policy, andrew Biggs. He's with the American Enterprise Institute currently. I guess You've got so many gigs, andy, maybe it's probably best to have you introduce yourself. But also, what we like to do here is give people an opportunity to talk about how they ended up becoming a pension geek, because, you know, not everyone just you know as they're going through their formative years, as a child, dreams of working on retirement policy. So how'd you get stuck working on it?
Andrew Biggs:It's great to be here with you today. I really appreciate it. As I was saying before we went on air, I'm always happy to talk about retirement. For me, it's not just my job, it's something I find endlessly fascinating, and you and what that says about me.
Andrew Biggs:I don't leave it to the listeners to decide, but it's a fascinating topic to work on. My main gig is I'm a senior fellow at the American Enterprise Institute, which is a large think tank in Washington DC, and I've been at AEI since 2009. Prior to that, I spent about five years in the Social Security Administration. I ran the Office of Policy there, which does the policy research. I eventually got kicked up to be the number two of the agency, which is sort of the Peter principle at work, in the sense of I'm a researcher, but managing 60,000 federal employees is a little bit beyond my skill set. In addition to my work at AEI, during that time at SSA, I spent a year at the National Economic Council in the White House when George W Bush was doing social security reform, so I did a lot of work on that. In addition, I'm a member of what's called the financial oversight management board for puerto rico. Uh, puerto rico declared bankruptcy in 2016, and one of the reasons for that was the public sector pensions had all gone bankrupt, and so my expertise from my background on state and local donor pensions grew me to that.
Andrew Biggs:I'm a policy fellow at the Stanford Institute for Economic Policy Research. I do some retirement-related stuff there. There may be various other things, but that's the main stuff. In terms of how I got into it, it was a sort of interesting story. I got out of grad school I'm from New York I did most of my education in the UK. I graduated undergrad from Queens University of Belfast, then went to Cambridge for my master's and London School of Economics for my PhD. After that I wanted to sort of just get involved in public policy, so I moved to Washington DC, worked on Capitol Hill for a few years, but after that I wanted to get back into the research side, so I started working at think tanks.
Andrew Biggs:I remember when I first started, my then boss was like well, do you want to? We're thinking, maybe a project on social security or a project on tax policy. And so at that point I was like, all right, let's just choose one or the other. Social security seemed more interesting to me at the time because there's so many people working on tax policy and there still are and that just one thing led to the next that it just it was social security itself. I still do quite a bit of work on that.
Andrew Biggs:At the Social Security Administration we did a lot of work on modeling, not just Social Security, but you know they have a very sophisticated model at SSA for projecting people's future retirement incomes, and that was, you know, interesting for a whole variety of reasons.
Andrew Biggs:But what probably set me on the path I am in terms of kind of my current research narrative was back in this is probably 2006 or so when these first studies came out saying all Americans facing retirement crisis you know 60% or 50% won't be able to maintain their standard of living.
Andrew Biggs:You know the people, the career employees at Social Security who ran this model, are like you know, that's not what we're getting. And so then I said, okay, I've got a really interesting sort of research agenda here, in the sense that you've got this very dominant narrative of things are not going well, but then you also have sort of credible projections that things are going to be okay, and so that, just as a researcher, that gets you interested and then you know, 10 years later you're still working on it, but it's just really. It's interesting stuff as a researcher. But it's also important to people from the governmental standpoint. You know social security is the biggest federal program. It's important to people from a household, personal perspective, because they depend on Social Security. They depend on other sources of income and retirement. So for somebody in my perspective, it's just a great issue to be working on.
Brian Graff:One of the things that I've been frustrated with is this disconnect between what you know several, you know a lot, frankly the predominant perspective from academia versus others who are relying on what I would describe as real data Versus the academic reliance on survey data. And you know what seems. You know because you've got these incredibly disparate perspectives. You know you've got what you're saying based on Social Security data. What you're saying based on Social Security data ICI's got a version of this based on IRS data from the statistics on income of retirement readiness versus. You know, teresa Garaducci, alicia Minnell, others that are many others, including the media in general, who are parroting this narrative that basically, the system is a complete failure and no one's going to have any retirement savings. So what's going on here?
Andrew Biggs:Well, yeah.
Andrew Biggs:I mean this is? I mean it's one question among sort of several in thinking about retirement readiness. But let me put it to you this way Imagine if I were saying well, there's one thing we could do to increase the typical or median retirees income by 29%. People would say that's unbelievable. How do you do that? The answer is you use accurate data to measure retirees' incomes, and I'll back up a little bit. Most studies or citations of retirees' incomes come from what are called household surveys. These are done by the Census Bureau or by others, and it's in fact a survey. They call people up or go to their homes. They ask them a whole series of questions.
Brian Graff:And Michigan's got one that a lot of them tend to rely on Sure.
Andrew Biggs:But the key thing is when you're measuring people's incomes. In some areas, these household surveys are very, very accurate. If you ask people what their Social Security benefits are and then you match it up to what you call administrative data from the Social Security Administration, from the IRS, saying what those same people's Social Security benefits are, the household surveys are actually very accurate. Compared to what you get from these data sources that you know are correct, the issue comes from when they ask people about the incomes they get from what we'll call private retirement plans.
Brian Graff:Or how much they have in retirement.
Andrew Biggs:Yes, but let me just talk about the income stuff first, because that's a key in the sense of they say, okay, how much are you getting from private retirement plans? That can be pensions, that can be 401k, ira, 403b withdrawals, so they're all kind of lumped together. But 2012,. I wrote a piece in the Wall Street Journal with Sylvester Schieber and Syl is one of the sort of longstanding experts in retirement policy and what we pointed out is, if you compare the total amounts of retirement plan income in these household surveys from the Census Bureau, like the current population survey, which is a very, very commonly used data set, if you compare that to what the IRS reports, they're dramatically different. For things like earnings, things like Social Security benefits, are very, very similar. For things like retirement plan benefits, the Household Survey has reported something like half as much total income, total benefits, as what you get from the IRS.
Andrew Biggs:And so the question is why is that? And the answer comes down to the way the Census Bureau surveys define what is income. Put my quotey fingers around income. They define income as regular payments. So if you get a regular paycheck, regular Social Security benefit, regular pension defined by the pension check, that's income. But what if you just withdraw from your retirement account as needed, and that's, in fact, what most people do. They pull money out when they need it. It doesn't count, it's part of their definition.
Andrew Biggs:It's not that people are making mistakes. They're answering the question that is given to them, which is what is the regular income you get, and so what happens is, when you have those data, it turns out they're excluding the vast majority of the income people get from retirement accounts. It's a little hard to say precisely, but you can look at IRAs where that's? The IRS breaks it out separately, breaks it out separately from pensions and 401ks, and I looked at data a while ago and these household surveys were catching something like 5% of the income people got from individual retirement accounts. They're just essentially omitting it. But when people rely on this household survey data, they'll say say, look, people aren't getting very much income from 401ks or IRAs. Clearly these things don't work. Therefore, the whole retirement system there doesn't work. Therefore, you expand social security. That's like that. All makes sense so long as you are relying on a data source that literally ignores the income you get from retirement accounts.
Brian Graff:So it's so how are they getting away with this I?
Andrew Biggs:mean they're well it's not really a.
Brian Graff:So it's how are they getting away with this? I mean, they're Well, it's not really a plot, it's.
Andrew Biggs:One thing that happens with government is, once they start doing something, they never change the way they're doing it.
Brian Graff:So I think, but how do these economists get away with then, knowing that this disconnect is there, making these, you know, I I would argue very spurious statements, because it's not just and it's not just about the income side, it's also about the savings pot too. There's surveys where they're asking people to um, to reveal how much they have in retirement saving, and they get it wrong all the time yeah it's.
Andrew Biggs:I mean, okay, that's probably just an error where people if there is, people get things wrong. I mean, when I was at social security, uh, one of our economists did a research paper where they looked at survey data where people asked you know, are you offered a retirement plan of work, do you participate in your retirement plan? And then you get the usual responses you know, are you offered a retirement plan of work, do you participate in your retirement plan? And then you get the usual responses you know, say 50% of people are participating, something like that. But then they matched those household surveys up to tax data. So for those same people you could see are they in fact participating in a retirement plan? And you had some people who were not participating but said they were. You had a much bigger number who were in fact participating. We could see it on the tax data.
Brian Graff:And they said they don't.
Andrew Biggs:So the actual participation rate was reported in the survey data as 50% and the actual rate was like 62% or something like that.
Brian Graff:So when the surveys also ask for what people's you know accumulate current account balances are, or whatever, if they don't even know if they're participating in the plan, they're obviously, or at least they're not answering it that way. The likelihood is they don't know what's in their account balance. The point is that we're making these blanket statements about the failure of the system, based on data that is as reliable as presidential polling.
Andrew Biggs:Or less probably. Yeah, I just finished a couple months ago, a draft of what will be my first and maybe only book. The book is about this idea of the retirement crisis, but I have a chapter in it called the Crisis in Retirement Data. We may not have a retirement crisis. We do have a crisis in the data, in that these data sources that people rely on are really wrong in a whole bunch of ways.
Brian Graff:But again. So back to my frustration. We actually have data. They just refuse to use the actual, real data. So if we have Social Security data, if we have IRS data, it is indisputably accurate. How do you get away, as an economist, relying on data that you know isn't as accurate as the actual government data?
Andrew Biggs:no-transcript. Really good at PR, very good at PR, and she you know it's and you know more power to her. But she continues to cite current population survey data. I mean, I wrote a piece recently. I'm just saying, look, you can't do this anymore. We've known I mean it's not just since I wrote this piece in in 2012. There's a piece that social security administration published 2006 and at that time they were saying that 20 percent, based on these household surveys, current population survey, they said 20 percent of seniors get 100 percent of their income from social security benefits, and part of that because they're not counting retirement accounts. When they matched that survey data to IRS data, they said the true answer is like four and a half percent or something. This stuff has been known with certainty for close on 20 years with certainty. And so you know, recently I said I've kind of take the gloves off a little bit and say, look, you can't cite these data anymore. No responsible researcher will cite them. It is irresponsible to do it. You're saying, well, okay, why do people do it? And one answer is those data are very amenable to this retirement crisis narrative Because the current population survey doesn't just show sort of low or stagnating incomes for retirees because ignored retirement accounts. It also shows low and declining participation in retirement plans. You know 401ks pensions we know that's false. And it shows high dependence on social security. We know that's false, but it's very amenable to that narrative.
Andrew Biggs:The second reason they keep doing it is because the media don't call them on it. It is. I mean this can sound a little bit harsh, but you know, a couple of years ago I did a like a debate with Teresa, sponsored by the Wall Street Journal, and you know it's good, I'm happy to do it and and all that. But you but I think listeners to it came to the conclusion I came out on the better end of that debate and the reason for that isn't that I'm smarter or more articulate, say, than she is. I'm not. I mean she's a very smart, very articulate person.
Andrew Biggs:But if you're coming from my perspective, you're always being challenged by the media. If I go and I tell a reporter, look, the retirement system is actually working pretty well, they'll say, well, what do you mean? And they'll come at me with the whole slew of statistics challenging me. So I've learned I have to be able to defend myself. If you're somebody who's coming to this narrative the retirement system doesn't work, people can't save the blah, blah, blah, blah, blah. Therefore, you know we need to do something that most, to be honest, washington Post or New York Times reporters agree with we need to expand Social Security. We need to nationalize retirement savings.
Andrew Biggs:You don't get much pushback, you don't get much fact checking, and so it's. I've been sort of toughened up a little bit by the fact that most people and most reporters don't agree with what I'm saying, and so that makes me better at what I do. But if you're spewing or I don't want to say spewing if you're speaking the dominant narrative of the US retirement system, that doesn't work, you're not getting much challenge from people and, seriously, I could show you some of the stuff. It's just laudatory. Nobody's asking any tough questions, but that's not good for you as a researcher. Being asked tough questions is what makes you better.
Brian Graff:So the Census Bureau does the CPS right?
Andrew Biggs:Yes, Census and Bureau of Labor Statistics, but the Census Bureau it's-.
Brian Graff:Is it really something for the Census Bureau to do between the 10 years that they do the census?
Andrew Biggs:Yeah, I'm going to stop. I mean because you want to say okay, where does the unemployment rate come from? Current population survey.
Brian Graff:I guess part of it makes me wonder whether we should you know we should go to this. You know, try to get the Census Bureau to do something differently.
Andrew Biggs:Well, they have tried to improve things a bit. Ideally, you would simply use administrative data for all of us, and they can. They can match. They've been doing more of this. Take the survey data and match it to administrative data. Use the more accurate data where it's available. It's just not as timely. It takes a long time to do that. Getting irs data makes you jump through a lot of hoops because there's all these privacy concerns.
Intro:So it's not an easy thing.
Andrew Biggs:But I think this definition of money income, that's, the regular payments probably came during a time when people didn't have retirement accounts. They want to exclude lottery winnings or whatever.
Brian Graff:I understand the genesis, but again it leads to this false narrative. Does your book kind of, will it, I wonder? Would it be helpful to sort of show the CPS data and then kind of fact by fact juxtapose it against the actual admin data? Is that what you're doing in your book?
Andrew Biggs:Yeah, no, and that's an important part of it, because part of when I think about you know how well is the retirement system doing? I mean, there's very sophisticated ways of thinking about this, but you're trying to talk to normal people. My starting point is how well are current retirees doing? Do we have a retirement crisis today? Are retirees suffering To tell that? You want to know.
Andrew Biggs:Accurate data survey. The poverty rate for seniors is somewhere nine and a half percent, something like that. If you look using IRS data, where they capture their full incomes, the poverty rate is about six and a half percent and the poverty rate has. If you look in the CPS, the poverty rate for seniors has remained roughly stagnant for 30 years. If you look using more accurate data, the share of seniors in poverty has dropped by a third since 1990. It's been a dramatic reduction in the risk of poverty in old age, and so you really want to know how well people are doing. And so, yeah, a whole chapter is devoted simply to the data part and getting an accurate picture of what retirees have.
Brian Graff:Well, let me encourage you to make like a chart that maybe you know a little bit more, you know digestible version. That would sort of say, hey, here's some good examples of why you know the reliance on this survey data is so flawed and skews the policy discussion in a way that's not productive.
Andrew Biggs:No, you're absolutely correct.
Brian Graff:So that then turns me to my next question related to this somewhat, in that you wrote a paper that was very controversial. It did get a lot of press that suggested that, given the importance of Social Security, one way to fund the current gap that we're going to be cascading into in roughly 10 years would be to pull that from the tax incentives for 401k bonds.
Andrew Biggs:Sure, so I'm going to give you an opportunity to state your case and then, yeah, that was a paper I wrote a few months ago with alicia minnell, who's an economist at boston college, and it's interesting. Alicia and I are on different sides of a lot of policy but she thinks we face retirement crisis. I clearly don't. She is more to the left on social security, I'm more to the right, but you know, we just didn't. But we have written various papers together on sort of technical topics and what came about was we both had this sort of agreement that we don't think the federal tax incentives or retirement savings do very much to increase retirement savings. I'm pulling numbers out of my head.
Brian Graff:I think the the cost of the tax incentive for retirement savings and sort of net well, the stated cost, because it's not scored correctly, because they ignore the, the fact that the money coming out um returns to the treasury.
Andrew Biggs:If you look at, say, congressional budget office will do a net present value, meaning they'll look at the outflow today, the lost revenues for, say, 401k or pension contribution but the cbo score is not what they use.
Brian Graff:The jct numbers and the jct numbers um are 1.5 trillion over five years yeah, no, no and that's too high.
Andrew Biggs:But if you look at CBO because that's the figure we work from, because we're trying to use we're not trying to use some artificially inflated number, we're trying to say what is the real cost of this. So what CBO does they say? What is the lost revenue today? Because when people put money into a 401k it's not taxed. But then we subtract from that loss the future revenues they'll be collecting when people retire and they collect their benefits. So that comes to about $185 billion a year. So that's a smaller number. And so the question is what are you getting for that $185 billion? And this is one of those things where people say you know we have this incentive. Clearly you know it must be helping increase retirement savings. But if you actually look at the research on it, both in the US but also in other countries where they have similar incentives, it basically it doesn't say zero, although some of it says zero.
Brian Graff:But it says, really not a large effect. Well, I know, I mean, I know that Denmark this is Denmark study that a lot of economists rely on in this regard, that I, you know, don't. I do think is more apples and oranges. But you know, most of the countries around the world do provide some type of tax benefit for savings and, you know, one would think there's some logical rationale for this, both when I was on the Hill and since off the Hill, is that when you're looking at the tax incidence of savings for the employees' own deferrals, granted, that you are providing a much bigger incentive for higher-income people than lower income people because it's a progressive tax rate structure. But what that ignores is the fact that, particularly in the small business environment, that tax incentive is the major driver for the employer, small business owner to choose to have the plan in the first place.
Andrew Biggs:Okay, so we've got two different things going on. One is contingent on 401ks or other retirement plans being offered. Does the tax incentive increase the amount that?
Andrew Biggs:people contribute to their 401k. Or the same would apply to IRAs, logistic 401ks, if your employer offers it. What effect does the tax incentive have? The answer to that in most of the research. I know we didn't rely particularly heavily on the Denmark study. There's been stuff done in the US and in other countries and the conclusion is it really doesn't do very much. The conclusion is it really doesn't do very much and they'll look at it in a variety of ways.
Andrew Biggs:Say, when people sign up for a retirement plan, as a tax incentive they'll use data that looks at not just how much they contributed to the plan but what is going on in the rest of their household's finances. And what appears to happen is that a large amount of what's going into tax preferred plans is money that otherwise would have gone into a taxable investment account, you know, just an ordinary Fidelity account. You also get some effect because the tax incentive is raising your after-tax income and that produces a little more money you can put in. But on net it doesn't appear to do very much. You know I can explain the economic theory of why it wouldn't do much.
Brian Graff:No, I mean, I understand the substitution, it appears not to do very much. You're making the argument around the substitution effect and you know certainly I'm not disputing the fact that among higher income individuals right that there is certainly a fair argument to be made that they would be saving somewhere else. The degree to which the incentive, along with the matching contribution, are the drivers for savings.
Andrew Biggs:Okay, and it is possible you're getting different effects in different parts of the income distribution. But if the net effect is very low, let's just assume for argument the net effect is zero.
Brian Graff:I will allow you to do that.
Andrew Biggs:Okay, just assume it is. Or the net effect, just assume it is. Whatever it is. It would mean that if you're getting some increase in some part of the income distribution, it would mean the effects are even smaller elsewhere. And I don't think we really know very much either way on it. The more salient point you raise is does the tax incentive encourage employers to offer retirement plans, you know, so that their high-income employees can reap the benefits of the tax incentive? I mean, most of this money is going to the top.
Brian Graff:Well, the business owners particularly, you know, people who work in this environment will say repeatedly that the selling point for the business owner is the tax subsidy helps to pay for the contributions that they have to make to satisfy the non-discrimination rules.
Andrew Biggs:Okay, if that's the case, then effectively you're not increasing retirement savings, you're not increasing net national savings because essentially, the federal money is substituting for employers. But let me just what you're doing was.
Intro:If I'm going to lay out the argument in full.
Andrew Biggs:Yeah, it's not going to make sense if I give it to you in pieces, but I guess and there's two parts. One is you can say okay, for some reason this incentive to tax preference for retirement savings encourages employers to offer retirement plans. It could be so they can gain a subsidy for their own contributions. It could be because it's attractive that their high-income employees can get the subsidy. It doesn't matter, let's just say that it does. The question is, how do we know that? And there really hasn't been very much research on it.
Andrew Biggs:As part of this paper, I tried to do something which I'll admit was crude for the characteristics of the workforce and also controlling for differences in the highest income tax rate in each state. And the reason I looked at that is the state income. You get a deduction in general for your state income taxes. That mirrors that for federal income taxes, because the states often piggyback on the federal tax code. What that means is, if you're in a very high income tax state let's say you live in New York City, you're living in California, I live in Oregon, where I pay 10% income taxes a retirement plan should be more attractive than if I live in Florida or Texas, where there isn't. So you should see higher retirement plan coverage, controlling for other workforce differences in high income tax states. You don't, so there's that.
Andrew Biggs:But then there's just this policy argument that Alicia and I make that even if you're getting some benefit of coverage from this preference, it's an incredibly expensive way to get there because the benefit probably isn't that big. And then we looked at it and the cost is high. It's almost enough to affect social security. But then we looked at what happened in the UK with they call it NEST is the acronym for the Savings Trust and that's essentially a supplemental retirement account offered to employees who are not offered retirement plan at work and above some minimal income level you're automatically enrolled in it. Over the course of 10 years in the UK they went from, I think, 42% private sector retirement plan participation to 86% yeah, and it costs. It costs a fraction, a small fraction, of what we're paying for retirement tax preference. So our point is, even if the tax preference gives you a little bit of encouragement to offer a retirement plan for employers, just do what the UK did at a fraction of the cost and get-.
Brian Graff:Mandate. Everybody have to have a plan. You don't-.
Andrew Biggs:What happens in the UK is you're not mandating the employers have the plan. The plan is run by the government, by a trust. If the employer doesn't offer a plan, then the employees are automatically signed up for it. They're not mandated, they're defaulted in. But the point is, over the course of 10 years they doubled their retirement plan coverage in the private sector at a very low cost. So what we argued is get rid of the tax preference, use that money to fix Social Security and then set up some UK-style supplementary.
Brian Graff:Basically have the government take over the entire system.
Andrew Biggs:Well, no, yes, well, it's no, yes. Well, has that happened in the UK? No, it hasn't, and because it's a system.
Brian Graff:But the UK has a tax incentive for retirement savings.
Andrew Biggs:Yeah, they do, but my point is the Offering.
Brian Graff:Because if you're saying, get rid of the tax incentive, you're not.
Andrew Biggs:Again, it's not an apples to apples comparison, no, it's if they're, uh say, the uk was around 42 percent, you had the supplemental plan, make up 86 percent.
Brian Graff:Now, okay, if you took away the tax preference in the uk you know again using your assumption okay, my assumption would be less private sector plans. It would be the government taking over the system.
Andrew Biggs:Your assumption is less private sector plans. I don't know how much less, but let's say you'd have less, but you'd still your retirement savings problem is solved and it's, aren't you ignoring?
Brian Graff:but aren't you ignore, aren't you see? I disagree, because what you're failing to take into account is the employer contributions that are being made by the private sector in these plans, which are substantial part of the equation for most working americans and you. If the private sector plans go away, then you won't have those employer contributions and the government's going to be picking up that tab. I mean one of the objections. You know. You've got this proposal, the Retirement Savings for America Act, which essentially is sort of like NEST in a way that requires people without a plan to be automatically enrolled into a retirement 401k style plan run by the Treasury Department, and the government pays for the match.
Brian Graff:Yes, we've argued, is well, if the government's going to pay for a 5% contribution on behalf of these employees. Employers will eventually say why am I paying for something the government's going to pay for? And they'll just drop their plans and maybe divert some of the benefits that they were paying for the match to health care or emergency savings or something else. And so the government, all of a sudden, is now not only having to pay for Social Security, they have to pay for this.
Andrew Biggs:Yeah, I understand that. I don't know the legislation that well. I'm not sure how well it would substitute for a high-income person. I don't think the matches go up that high.
Brian Graff:No, it's actually up to about 150,000. It would cover about 70, 75% of the working population, which is not your current tax preference is heavily weighted towards the high end.
Andrew Biggs:I understand.
Brian Graff:It is, except it is, andrew, except the non-discrimination rules do create a drive down effect. Rules do create a drive down effect and you know we have some research that shows that when you add the employer contributions in, the benefit shifts dramatically in the reverse direction and primarily benefits lower income people because they're getting for their dollar a much more powerful tax incentive through the deferral of the match and employer contributions that are given directly to those employees than someone at higher income levels because of the limits on on contributions.
Andrew Biggs:Oh, because of the.
Brian Graff:The 401k.
Andrew Biggs:The percentage of the total income. All right, I mean it's you know.
Brian Graff:And what troubles us is that.
Andrew Biggs:I'm just not sure that's sufficient to.
Brian Graff:Oh, I'm happy to share that data with you.
Andrew Biggs:No, I'm interested, I'm just saying I'm not sure that's sufficient to defeat the entire argument, because it's just a backtrack about why I would propose something like this. Because it's you know, my general view is that the US Social Security program should gradually evolve to be something closer to UK or Australia or New Zealand. It's much more focused on poverty prevention, much less focused on income replacement for middle and high income people. So the question is why would I want to have all this extra money going into Social Security when you know under my druthers you don't really need it? And the answer is that the entire political spectrum on Social Security has shifted to the left since the time I was, you know, started working on this late 1990s time.
Andrew Biggs:I worked in the Bush administration, if you look around, say 2000,. You had a number of prominent Democrats in the Senate who would support pretty significant long term social security benefit reductions, retirement age, cost, living adjustments. You had Republicans like President Bush who would fix the entire program deficit if they could through benefit reductions. Now you have essentially I mean, there is a bill in the House that was co-sponsored by 90 percent of House Democrats which not only would have maintained current benefits but expanded them. President Trump has said he doesn't want to cut benefits at all. President Biden says he doesn't want to cut benefits at all. President Biden says he doesn't want to cut benefits at all.
Andrew Biggs:The whole spectrum has shifted to the left, and the cost of doing that, though, is the largest tax, largest peacetime tax increase in US history. It's a huge amount of money. If you do it through the payroll tax rate, you're looking at another's three, four percentage points. Yep you. The preferred uh approach through most uh congressional democrats is to eliminate the cap. Uh, currently, social security taxes go up to 168 000. They want to eliminate that cap. That's a 12 percentage point increase in your top marginal tax rate. That's a very, very big deal from the point of view of economic policy, and so the point of view I have on this was that if that's our alternative and increasingly it's looking like that is our alternative then I want to find a way to-.
Brian Graff:You're actually just talking about maintaining status quo in terms of benefit structure.
Andrew Biggs:Yes, you know, maintain the currently promised benefits, which increase with time. I mean, that's part of the problem with social security is not just more retirees living longer, it's ever increasing benefits. But the point is here that it is not simply a choice between, you know, getting rid of the retirement tax preference and doing nothing. It's a choice between getting rid of the retirement tax preference and having a massive increase in taxes on labor, which are clearly damaging.
Brian Graff:So I think the concern that I have, that we have is that we do think that there would be a significant amount of plans, particularly smaller plans, which are the majority of plans, that would go away without an incentive.
Intro:Let's assume I'm right about it.
Andrew Biggs:There's very little research, one way or the other.
Brian Graff:You asked me to assume some things, so I'm going to assume some. I'm going to ask you to do the same. So, assuming that's the case, even with a mandate of payroll deduction just for deferrals, without the structure driving the business owners to have the incentive to put the plan in place to provide the matching contributions and profit sharing contributions, to provide the matching contributions and profit-sharing contributions, you're going to diminish the opportunity for people to save in the workplace, and we know, when they don't have a plan at work they don't save. And really it's the middle income.
Brian Graff:I'm talking about the second let's quartiles here. I'm talking about the second quartile, some of the third quartile, primarily where they're relying in order to get to replacement incomes that we think are adequate. They're relying, if you you know, if you look at some, you know data that ici's put out that looks at both of these in tandem. The, the addition of private savings on top of Social Security is the critical component to achieving adequate replacement income, whereas the lowest income quartile, generally speaking, does okay with Social Security alone. And so it's that I'm not worried about the upper income, I'm not worried about the top of the third quartile, I'm worried about the second and most of the third quartile that are so critically reliant on private savings to get at in terms of seeing a combination of, in our view, private-public partnership, as opposed to having the government primarily the provider.
Andrew Biggs:I mean, I'm philosophically in agreement with that. I get it, get it. I think when you look at the paper that Alicia and I did, it's just important to remember we didn't simply say get rid of the tax preference, put the money in social security and do nothing else. We coupled that with something like the UK's nest plan, which is going to increase the opportunity for people to save. So on net, I think that's going to increase saving. Now you raise a valid point of what can you do about matching contributions and there's no reason you could not allow employer matching contributions into these supplementary accounts. Now maybe they say, oh, we wouldn't contribute as much if we didn't get the tax preference. All right, you know there's some losses on this, but in return we're fixing Social Security essentially without any tax increases. Some losses on this, but in return we're fixing Social Security essentially without any tax increases.
Brian Graff:I guess what I would say is why gut a system that, as we started this conversation, that, if you look at actual, real data as opposed to surveys is actually working? Why gut a system that is actually working, as opposed to trying to figure out a way to pay for Social Security on its own?
Andrew Biggs:Well, I guess two thoughts on that. First is that I mean, I agree the 401k system is broadly working. That's where I would differ from the Teresa Gillard duchies of the world. By and large it is working. The question, and so some people say well, you want to get rid of this entire system of workplace retirement plans or whatever, and that's not the case.
Andrew Biggs:The question is, how much effect does the retirement tax preference have? And I'll admit, what we did looks at one part of the question, and if you read our paper, we're very clear about this. I mean, we looked at a part of the question of contingent on being an offer to plan what is the effect of the retirement tax preference, and the effect appears to be very small. There's a separate question which we made only a cursory attempt at answering, which is what is the effect of the tax preference on retirement plans being offered in the workplace. Now, that's an important question and a lot would depend on how you answer it. There really is very little research on that and so it's just it's kind of hard to say. Again, my preliminary look at it, which may not be perfect, but didn't indicate that the tax preference played a big role- by looking at different states.
Brian Graff:I don't know if the incidence and differentials between New York versus All I can tell you is that everyone who works in this business, who does that for a living, will tell you those plans are sold, they're not bought, okay, and the way they're sold is through, primarily to the business owner, through the tax preference and and um okay but let's park that because we're going to agree to disagree, yeah, no, but I think we know the, the avenue which reassured should go.
Andrew Biggs:It's not on. We kind of know what happens. The effect of tax preference contingent on being offered a plan. I think the path forward for research is what effect does it have on offering and so and there really is very, very little research on that. So I just as a researcher, I say that's something people should look at.
Brian Graff:Sure, no-transcript. I think you know. Let's assume we're not going to get rid of the 401k to pay for Social Security.
Brian Graff:Sure, we still have to fix Social Security, yeah, and so let's spend, you know, a little bit of time left here. To me, the problem is the lack of a process, because everyone has their right, as you pointed out. Democrats have bills, republicans have ideas, you know there's. There's the medallion idea, there's which yeah, you made a face, and understandably so. Um, I mean there's all sorts of, but what we don't have is a process, and what I mean by that is our concern is Social Security is foundational for the retirement system in this country.
Brian Graff:It has to be there, otherwise we are going to have a major whether we can argue about what percentage of the seniors rely solely on Social Security, but it's a material amount and it would dramatically. Social Security, the program in its entirety, has probably brought more people out of poverty than any other federal program in existence bar none, and so it is critically important. The only way we're going to get to a solution, at least in my view, is if there's an agreed-upon process for legislating a solution that allows for both parties to put down their swords during this debate and come up with a compromise, because right now, anytime someone proposes anything on this, they get attacked. It's just why both of these candidates won't touch it. There's no percentage in trying to do so.
Andrew Biggs:I spoke at a event at Stanford last year and it was sort of celebrating or whatever the word would be, you know the 40th anniversary of the 1983 social security reforms. And the interesting thing about it, I thought, was that, you know, by 1984, the Social Security trustees were again projecting a long term deficit for Social Security. By 1990, they were calling on Congress to act on this and really by the early 90s we knew pretty much everything we need to know, everything we know today about Social Security.
Andrew Biggs:By the early 90s we knew pretty much everything we need to know, you know everything we know today about social. By the early 1990s they were projecting insolvency in the 2030s. That's kind of where we are. So it's it. It is not the 1983 social security crisis really just snuck up on people. It was. It was really response, the economic conditions of the time. It happened very fast.
Brian Graff:The Social Security Well, primarily due to the ridiculously high inflation that we had.
Andrew Biggs:Sure, yeah, but it was an economic thing. What we're looking for in Social Security going forward is a demographic problem. And if you, the Social Security Retirement Fund is projected to go insolvent in 2033. The Disability Fund is projected to go and solve in 2033. The disability fund is projected to stay solvent. But if what we're looking at 1983, if we had let social security go and solve, and it would have been about two and a half 3% cut to benefits, that would have lasted like seven years and then the system would have come back into solvency again. If you go forward to 2033, you're looking at something like a 20% cut of benefits that lasts forever and gets bigger forever. So it's a very different situation.
Andrew Biggs:But the problem is we've known about it for 40 years and yet we've done nothing. And this isn't I'm not a great political scientist, but I think a key thing to think about is, during that same period, other countries have reformed their pension system the UK, australia, you know. All these countries do this stuff. We haven't. And so the question is why and sometimes people make it like kind of morality play we just need to elect better people. You know, like you know, good luck with that, but it's that's not really the problem.
Andrew Biggs:I think we do have a structural problem that prevents the US from doing any real major reforms of any kind, and that's because if you're in the UK or something, you need a simple majority in parliament, one house of parliament, boom, you're done, and then you can do essentially what you want. And if it doesn't work, you lose the next election, it gets reversed or whatever. In the US you have to pass the House with a majority, you have to pass the Senate with a supermajority usually 60. You have to have it signed by the president and you know, inevitably somehow it'll go through the Supreme Court. It's just too high a hurdle and it's so easy to stop things from happening. So people are members of Congress are kind of unwilling to get on board and threaten their political careers with reforms that are very unlikely to pass.
Brian Graff:And that's why in the US Particularly, on a topic that is so much, what is?
Andrew Biggs:the point. But in the US you always bipartisan commissions and they're trying. You know, and I worked for one in 2001 for bush from the really early 90s onward you have these things. Those are admissions that are policy making processes incapable of handling things like social security, medicare. We just can't do it. That's a pretty sad dam admission that because these are not minor programs, these are the Social Security, medicare, medicaid, that's what the government does. You know. All the other stuff is kind of ancillary. You know, department of Education or whatever, these entitlements, that's the majority of what the government spends money on.
Andrew Biggs:The fact that we have to turn to these bipartisan commissions or outside usual process is an admission. We that our government cannot manage the major programs that it administers and it's it really is. So it's not just a social security thing, it is a larger policy making. You know handicap that we face in the uS. So you know I focus more on Social Security. So what do we do for that? Let's try another bipartisan commission. People, you know, make fun of these things, but it's no. I.
Andrew Biggs:If it works once you're good.
Brian Graff:Actually, I think we might need even to up the ante and do a select committee. And do a select committee that's bicameral, that would involve, you know, specific members of the relevant committees of jurisdiction with expedited legislative authority. Sure, because the problem with the commission is it just, you know, it's off the hill, they just hand it over to the hill. Off the hill, they just handed over to the hill. And the reason it got done in 83 was it was imminent and it was painful, but not, it wasn't that painful, it wasn't that painful. Yeah, and so that's going to be the great challenge for us.
Andrew Biggs:Yeah, if I could make another point of the political incentives and this is goes not towards Congress but towards individuals. And let's say we've known for 40 years that the system faces long term funding. Yeah, we could have fixed it 40 years ago. What that means is for the last 40 years, americans would have either paid higher taxes and or accrued lower Social Security benefits, and we didn't do that. And so come 2033 or whenever, we're going to have to make up some funding gap.
Andrew Biggs:Americans sort of played a game of chicken with the political process. They refused to accept the reforms that would have been needed to make Social Security permanently solvent. You know you never had a ton of support for raising taxes, cutting benefits, retirement age, whatever. They just didn't really support it. And then they're saying you know, we kind of dare you to cut our benefits when the trust fund runs out. And you know we've been entirely justified in a way doing it. We've been warning since Bill Clinton. You know, if we don't fix this system, the trust fund runs out, we're going to cut benefits. It's not like nobody's been warned on that, but they're playing a game of chicken. We're not going to cut their benefits. Joe Biden's not going to cut their benefits, donald Trump's not going to cut their benefits. So they played a game of chicken and they won it. You know they're so far they've won.
Brian Graff:Yeah, but it's my. My best guess is that in fact, they will win it. The likelihood that we come to 2033 and there's the potential 20, 21 percent, 22 percent haircut actually goes into effect is, I would say, virtually zero effect is, I would say, virtually zero.
Andrew Biggs:Now I calculated, if you're sort of a medium wage worker and I said, okay, let's say we raise taxes. You know, begin 1984, as needed to keep the system solvent for 75 years what would be the accumulated cost Over your career? You would have paid. You know, including interest on past taxes, you would have paid over $100,000 in additional taxes. If you were somebody earning maximum taxable wage currently $168,000, you would have paid something like $300,000 in additional taxes over your career. They didn't pay those taxes but they're still very likely to get the benefits. So it's, you know, if, from the point of view of an individual person you know, assuming you care only about yourself, not about your kids and grandkids delaying reform was an entirely rational thing because the likelihood they're going to get hit with that 20% cut was always pretty small and they didn't want to have to pay for it.
Brian Graff:They want to pay for it.
Andrew Biggs:So this is there is this sort of it is the technical challenges of Social Security are not that hard. I mean it's you know no it's a pension plan.
Andrew Biggs:No, but you want to think you know it's. I mean there are bigger disagreements than you would think, but I think they can be resolved using data and all that. But these incentives, both at the individual level, they don't want to accept the reforms. At the congressional level, why take the risk when there's such a low probability of passing anything? It just conspires so that nothing happens. But then of course the problem gets bigger and all that. So it's a sign of a dysfunctional system.
Andrew Biggs:I think if Social Security had been set up I mean, the state and local pensions are a big problem for various reasons. But one aspect they have is that every year they do an actuarial evaluation and you have to change your contribution rate or change your benefit formula to keep yourself either solvent or move towards solvency. We don't have any of that with social security. We have a tax formula and a benefit formula that are mathematically incompatible. They just won't meet each other. But we have nothing that mandates you have to make them compatible. So we just keep on promising benefits that are trillions of dollars in excess of the taxes we're going to collect. It's just a screw-up, basically, at a whole variety of levels.
Andrew Biggs:I wrote a piece, maybe about six months ago, with a guy named john cogan who's an economist at stanford, and we pointed out that, you know, from 1935 up until the mid-1970s the system was imperfect but it wasn't going to go and solve it and the reason for that was that benefits were increased on an ad hoc basis. When you have inflation 808 benefits or if revenues are higher, we felt we could afford more benefits. We'd increase them. In 1977, they put in place an automatic formula for always increasing benefits. That was the moment when sort of our fate was sealed, because you kept promising more and more and more to people without having the revenues to pay for them. If we had not done that, social security would probably be solvent today. We would just increase benefits a slightly lower rate and it would be fine. We screwed up and you know it's. It's just interesting, you can.
Intro:So let me suggest.
Brian Graff:So let me suggest to you, as you, as you, as you, continue to write about this and talk about this because, truthfully, this is, as I said, foundational to our system. We're having this kerfuffle about 401ks. The reality is politically unlikely for 401ks to go anywhere. It'll be more if they do any trimming, it'll be around the edges, but ultimately, what we will have to do is address social security. And let me encourage you to focus on the process more than the substance of how to fix it, because ultimately, to your point, this isn't nuclear physics. Figuring out the process is going to be more important than figuring out the fixes.
Andrew Biggs:I agree. And I disagree in the sense that I agree the process is the thing holding us back. And you know you talked about a select committee. I think that would make sense. I think it would make sense to include not just, say, ways and means of Senate finance, but also people from, say, health, education, labor and pensions, because for an ordinary person, they're not just thinking about Social Security in isolation, they're thinking about retirement and if you can do things to improve stuff on a private side. But here's something which I think is interesting. It's like if you think about how you fix Social Security, people just rattle off this menu of options I'll raise the retirement age, reduce cost of living adjustments, blah, blah, blah.
Andrew Biggs:The interesting thing, I think, is that when I compare the US retirement or US Social Security system to other countries that are like us meaning I'm not comparing it to France, I'm comparing it to Canada, to UK, australia, new Zealand, which are, you know, they're not identical, but they're by and large similar to us in the way we think about the role of government, the role of private sector, the role of individual choice. Their social security programs look very, very different from ours and they are much more focused on poverty prevention, much less focused on paying high benefits to rich people. For instance, if you look at a high income couple retiring this year, you know both are earning the taxable maximum $168,000. They retire this year. Together. They're going to get something like $96,000 in benefits this year. Together they're going to get something like $96,000 in benefits.
Andrew Biggs:If that same couple were living in Canada, they would get something like 31,000 dollars in benefits. Now you don't see rich Canadian seniors, seniors roaming the tundra, homeless. It's they. They have adjusted to the fact. Okay, I'm going to save more on my own.
Andrew Biggs:No, I think everything you're saying, my point is that if you don't talk about things like that, we simply pick off this menu of options that are constructed by the social security actuaries that never, ever think outside the box. Those menus of options are entirely about keeping this system going. They're not about how do we serve the needs of seniors, have an effective, cost-effective social insurance program. So I do think it's important.
Brian Graff:Understood and I do think we need to rethink the mission of this is really what you're getting to, but I also think you can't, again, you can't get to any of this without some process for allowing that debate to happen.
Andrew Biggs:No, you've got to acknowledge our political process has failed on this. That it is not that social security reform is too technically tricky, the political process has failed for four decades. Not a Republican problem or Democratic problem, it's the structure we have just makes it it doesn't make sense to reform social security.
Brian Graff:And so you're, you're precise, and there you have it, we have to do something that, um, there really is no way current, under the current regime politically, uh, for anyone to want to really do it.
Andrew Biggs:Exactly, and you know we're seeing that in the presidential election.
Brian Graff:Now it's you know, it's a null set.
Andrew Biggs:Yeah, it doesn't get any real. You know I'm not favoring one person over the other, but you know President Biden had at least a partial plan in 2020. And during that election he wanted to raise the tax max or whatever. Literally nothing got mentioned of it since then never entered into any of his budgets. It was just dropped. And if social security is as important as people say it is, if it's a sacred trust, if it's an earned benefit, so on and so forth, don't you owe it to americans to get serious about social security?
Brian Graff:because you can't really do it without raising taxes on people making less than $400,000.
Andrew Biggs:That's it. That's it. You can't do what they want to do. You can have a very effective social security program, which is why they dropped it. Yeah, you can't have a program that pays every penny of future benefits that are being promised without taxing the middle class. And there were a lot of congressional Democrats who realized that and they proposed, you know, eliminating the tax max, the payroll tax, but also raising the payroll tax rate, and you can make the system balanced that way. But it's just not taxes people want to pay.
Brian Graff:And so Certainly not, and it's not something that's very attractive politically.
Andrew Biggs:So no, it's not attractive at all politically, which is you know? Which is why president biden said I'm not going to tax anybody making less than four hundred thousand dollars. He has got it. The average member of congress comes from a very gerrymandered district where they get 90 of the vote or whatever. They're not thinking about the median voter. If you're a presidential candidate, says I gotta win pennsylvania or something. You're thinking very hard about.
Andrew Biggs:The media, it's all about the middle, and the median voter doesn't want to pay higher taxes. That's the difference between us and europe, even among sort of lefty americans, is europeans are happy to pay the higher taxes. Even left-leaning Americans are not. You know, you're Bernie Sanders Like let's get the billionaires to pay for it. That's not how Sweden does it. They say no, let's have, you know, joe Sixpack, pay for it. And we're not there. And so we need a little bit more maturity from our presidential candidates to think well, what is it in fact Americans want and to a certain degree they want false promises, but ultimately they want a social security program that works for them.
Brian Graff:I think what you're asking for is maturity that matches chronology. Yes, and we haven't had that quite yet. On that note, andy, thank you so much. Appreciate your time, great, great conversation, and obviously I think you started by saying retirement policy isn't boring, and I think we've proved that point.
Andrew Biggs:Well, thank you. I really appreciate the chance to be with you.