Faculty in the News

How much financial damage has the Covid crisis done to Social Security? We may be about to find out. The 2021 annual report from the Social Security trust fund administration is expected to drop within weeks, possibly days, my sources say. This will be the first official status report on the fund’s finances since COVID-19 swept across America last year. This year’s report is already about four months late. The report will be critical. One of the country’s leading experts is warning that ‎the Social Security trust fund could run out of money as soon as 2029, five years ahead of official projections, because of the fallout from the Covid crisis. That’s the warning from Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School of Business and director of their Pension Research Council.

“It seems that the date of insolvency of SS has crept sooner — perhaps as early as 2029,” Mitchell says in a new Wharton podcast. She adds: “So that’s in eight years. And that’s partly a function of a lot of people having lost their jobs, so they’re not paying in [to] Social Security. Some people have retired early, so they’re claiming earlier and therefore drawing down.” The last official projection from the trustees said the system would be OK until 2034. But that prediction was made early last year. It is hopelessly out of date. ‎ “This year the trustees are very late,” says Mitchell. “They have not issued their report, and it’s August. They’re supposed to put it out in March or April. So nobody really knows what the numbers are going to be.”

The independent Congressional Budget Office has already brought forward its expected date of insolvency to 2032. Almost all of us will be relying on Social Security to varying degrees in our senior years. Some 180 million Americans are members of our national pension plan, which was set up by Franklin Roosevelt during the Depression and has been the mainstay of American retirement ever since.

Interview with Howard Kunreuther and Michael Useem on findings from their book, Mastering Catastrophic Risk: How Companies Are Coping with Disruption.

“We need to figure out ways where the State of California, insurers, utilities and residents can take steps to reduce these losses in the future.”

Howard Kunreuther: “There’s a tendency for all of us — not just firms, but individuals — to be myopic,” he says, “to want to get something back in the short term to justify an investment. It often takes a disaster to get people to pay attention.”

Interview with Howard Kunreuther.

Interview with Howard Kunreuther on the preliminary report by the commission set up by New York Governor Andrew Cuomo about how to deal with future extreme storms.

Critics of federal disaster aid contend that paying for building along the ocean provides an incentive for unsustainable behavior.  Marty Moss-Coane’s interview with Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes Center and Scott Gabriel Knowles, Drexel University associate professor of History & Politics.  (Audio: http://soundcloud.com/whyy-public-media/the-moral-hazard-sandy-relief).

Op-ed by Howard Kunreuther and Mark Pauly, co-authors of Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry.

From the World Economic Forum in Davos:  Jim Cantore interviews Howard Kunreuther, Wharton Professor of Operations and Information Management (video).

How long-term insurance can help homeowners in hurricane zones save money and protect themselves at the same time.

Howard Kunreuther was asked by the New York Times’ Freakonomics blogger, Stephen Dubner, to respond to the question,”What Is the State of U.S. Disaster-Preparedness?” A Freakonomics Quorum.

Howard Kunreuther is interviewed about his New York Times op-ed, “Who Will Pay for the Next Hurricane?”

Howard Kunreuther authored an op-ed on financing the costs of natural disasters.

The Risk Center’s Howard Kunreuther is interviewed by Thames Schoenvogel of SNL Financial about the history of the Risk Center and its current Natural Disaster Insurance Project.

The Wharton School’s Howard Kunreuther spent four decades studying ways to manage the risks of floods, hurricanes, earthquakes, chemical accidents, and other natural and technological disasters. Then came 9/11, “the ultimate low-probability event.”

It’s well-documented that Social Security faces a massive financing shortfall that threatens its solvency unless lawmakers swiftly enact corrections. However, this isn’t the only reason to reform Social Security. The program doesn’t treat work or workers fairly, and this needs to change.

By the time workers reach late middle age, each dollar of payroll taxes they contribute delivers on average only 2.5 cents in additional benefits. The reasons for this mistreatment are various, but are rooted in the fact that lawmakers have never adequately considered Social Security’s effects on work.

The 1935 Committee on Economic Security that advised President Franklin Roosevelt on Social Security’s design took it for granted, amid the Great Depression, that workers “past middle life” had “uncertain prospects of ever again returning to steady employment.” In the 1970s, lawmakers enacted automatic annual benefit increases that cannot be sustained unless workers’ tax burdens rise dramatically. Workers now beginning their careers are projected to be made poorer by Social Security, on average, by an amount exceeding 3 percent of their lifetime earnings.

The damage wrought by Social Security’s work disincentives is enormous. Healthy, productive workers are induced to drop out of the workforce, right at a moment in life when they are typically deciding whether to retire or continue working. Evidence shows that workers respond to these incentives by quitting work when their marginal Social Security tax rate is high.

Even before the pandemic, we faced an enormous labor participation challenge, with the baby boomer generation retiring in droves to spend more of their lives drawing government benefits than any previous generation. But especially now, when America lacks enough willing workers to fill employers’ needs, the last thing we need is for our largest domestic program to make the problem worse.

One problem is the archaic design of Social Security benefits. The benefit formula, reflecting bygone data limitations, is based on a worker’s average earnings in their highest 35 years (adjusted for national wage growth). The problem with this is obvious: As soon as a worker works for 35 years, he or she no longer accrues benefits at the same rate, because each subsequent year of earnings only counts toward benefits to the extent that it exceeds a previous year’s earnings.

Far better would be for workers to accrue Social Security benefits each year they work, just as workers in private pensions do. This requires changing the formula so that it operates separately on each year of earnings rather than on a career average. A side benefit of this reform is that it would actually save the system money, mostly by constraining benefit growth for sporadic high-income workers (to whom the current formula pays windfalls because it mistakes them for low-income workers).

We should also reform Social Security’s early retirement penalties and delayed retirement credits. The current system rightly adjusts monthly benefits for one’s age of claim — reducing benefits for those who claim early and draw for more years, while increasing benefits for those who delay retirement. The problem is that these adjustments are weak. Wharton economics professor Olivia Mitchell has found that offering the delayed retirement credit in a lump sum option (typically in the tens of thousands of dollars) could be a more powerful inducement to delay retirement than the current method of adjusting monthly benefits by a few percentage points. Current early/delayed retirement adjustments also don’t consider that those who keep working also continue to pay payroll taxes. To properly take workers’ taxes into account, early retirement penalties and delayed retirement credits need to be made larger than they now are.

Of course, there is no avoiding the most politically difficult issues, including Social Security’s outdated eligibility ages. There is only so much that other adjustments can accomplish, so long as eligibility ages remain badly out of sync with demographic realities.

The most common age of benefit claim today is 62. As long as healthy workers continue to claim benefits so early, program costs will be inflated, and workers’ tax burdens will be needlessly compounded. It bears noting that the current earliest eligibility age of 62 could be raised by three years, and still allow 21st-century workers to claim Social Security benefits at a younger age than those of the generation that fought the Spanish-American War of 1898. Then, too, initial benefit levels are currently indexed to grow faster than workers’ after-tax earnings. Until this cost growth is moderated, American workers’ standards of living will continue to fall behind.

While specific reforms should be thoroughly debated, we would all benefit from a general shift in Social Security’s posture toward work. To serve 21st-century needs, Social Security must be converted from a program that penalizes work to a program that rewards it.