Macro Roundup

“…Also in 2006 a young senator declared: “When I see Mexican flags waved at pro-immigration demonstrations, I sometimes feel a flush of patriotic resentment. When I’m forced to use a translator to communicate with the guy fixing my car, I feel a certain frustration.” That was Barack Obama….”

William Galston, "Our Walled Off Immigration Debate,"Wall Street Journal, July 4, 2017, https://www.wsj.com/articles/our-walled-off-immigration-debate-1499188885

Our Walled-Off Immigration Debate

Democratic analysts have begun a long-overdue review of their party’s weakness among white working-class voters. Because postelection research has shown that immigration is important to these Americans, the review has brought to the surface a long-suppressed debate among Democrats about this contentious issue.

More than politics is at stake. The basic architecture of today’s immigration policy was enacted more than half a century ago. Immigrants’ share of the U.S. population has since tripled while economic opportunities for low-skilled workers have diminished. It is not unreasonable to ask whether a 1965 law is suitable for today’s economy and society.

Among the Democrats weighing in is Stanley Greenberg, a veteran pollster who came to prominence in the mid-1980s for his study of “Reagan Democrats” in Macomb County, Mich. A month into the Trump presidency, Mr. Greenberg returned to Macomb County and interviewed white working-class Trump supporters who had previously voted for Barack Obama. “It was clear,” he reports, “how central concerns about immigration, borders, foreignness, and Islam were to their receptivity to his call to take back America. Many thought Clinton, on the other hand, wanted ‘open borders.’” As they saw it, “Democrats have moved from seeking to manage and champion the nation’s growing diversity to seeming to champion immigrant rights over American citizens’.”

During a public event convened by the liberal magazine American Prospect, Mr. Greenberg was blunt about the political implications of his findings. “You can only succeed if people believe you want to manage immigration,” he declared. Every center-left party in the West is struggling with this issue, he warned. “Sometimes it’s fatal.”

A week later, Peter Beinart of the Atlantic entered the fray. As recently as a decade ago, he pointed out, progressives were willing to entertain tough questions about immigration. In 2006 Paul Krugmanwrote that “immigration reduces the wages of domestic workers who compete with immigrants” and that “the fiscal burden of low-wage immigrants is also pretty clear.” His conclusion: “We’ll need to reduce the inflow of low-skill immigrants.” As recently as 2014, Mr. Krugman said that “if you don’t feel conflicted about these issues, there’s something wrong with you.”

Also in 2006 a young senator declared: “When I see Mexican flags waved at pro-immigration demonstrations, I sometimes feel a flush of patriotic resentment. When I’m forced to use a translator to communicate with the guy fixing my car, I feel a certain frustration.” That was Barack Obama.

By 2015 these economic and cultural doubts were out of bounds for Democrats with political aspirations. Early in his campaign Sen. Bernie Sanders was pilloried for suggesting that low-skilled immigrants would depress wages for American workers. He quickly retreated, even though the facts were mainly on his side. If he had been feeling brave, he might have cited a National Academies of Sciences report that found today’s immigrant-headed families with children are disproportionately likely to rely on food stamps and Medicaid—and slower than their predecessors to learn English.

The constriction of Democratic debate is part of a larger problem facing today’s upscale liberals, who are fixated on cultural issues. In October 2016, progressive stalwart Robert Kuttnerwrote in the American Prospect that it is hard to tell white working-class voters to check their privilege when they are so much worse off than their parents. “The charge of political correctness, used so deftly by Trump, resonates with white workaday voters in part because liberals seem to give priority to every other downtrodden group, from illegal aliens (sic) to transgender people to brown pelicans.” The “sic” was Mr. Kuttner’s.

In a recent issue of Foreign Affairs, two staunch liberal internationalists point to the politics of immigration as the principal obstacle to a sustainable balance between openness and national solidarity. “It is not bigotry,” write Jeff Colgan and Robert Keohane, “to calibrate immigration levels to the ability of immigrants to assimilate and to society’s ability to adjust.”

A new immigration policy need not mean surrendering to nativism. A recent study by the Public Religion Research Institute found majorities of Republicans as well as Democrats who favor a path to citizenship for illegal immigrants, provided that they meet certain conditions. By contrast, support for identifying and deporting them is low in every sector of the population.

Humane treatment for those already here is compatible with a fundamental shift from an immigration policy focused on family reunification to one that prizes education and skills and emphasizes the rapid attainment of English fluency. If both parties are willing to set aside obsolete preconceptions, this new bargain is within reach.

Andrew G. Biggs, "How the Poor May be Saving More for Retirement than the Rich," American Enterprise Institute, July 7, 2017, https://www.aei.org/articles/how-the-poor-may-be-saving-more-for-retirement-than-the-rich/

How the Poor May be Saving More for Retirement than the Rich

Who’s better prepared for retirement: a $12,000 worker who saves nothing on top of Social Security, or a $100,000 worker who maxes out his 401(k)? The answer may surprise you.

Americans of all income levels are worried about saving enough for retirement, but our biggest concerns are often about the poor. Many low-income workers aren’t even offered a 401(k) plan at work, and when they are offered a plan many choose not to participate. And when low earners do participate in a 401(k), most save a smaller percentage of their earnings than do higher-income employees. Put simply, most low earners don’t save much for retirement.

Or do they? In fact, thanks to Social Security, low-income Americans may effectively be putting aside a bigger share of their incomes for retirement than middle and high-income workers, even those who max out their 401(k) contributions. You can’t know how well Americans are preparing for retirement simply by looking at whether they participate in a 401(k) or how much they contribute.

Nearly every worker is required to pay into Social Security, contributing 6.2% of their earnings matched by a 6.2% contributing from their employer. So, in a sense, we’re all saving 12.4% of our salaries for retirement even before we think about signing up for a 401(k). As a foundation on which to build your retirement income, that’s not bad.

But for low-earning workers, their effective saving rate is even higher than 12.4%. The reason is that - unlike a 401(k) or a traditional corporate pension - Social Security is progressive, with a benefit formula that’s tilted toward low-income workers. While we all pay the same payroll tax rate into Social Security, low earners receive higher benefits relative to their taxes than do middle- or high-income workers. Based on their benefits, it’s as if low earners were putting aside even more than 12.4% of their earnings for retirement.

How much more? The Social Security Administration’s actuaries provide a statistic that can answer that question. This figure, often called a “money’s worth ratio,” is the ratio of the Social Security benefits a person receives over their lifetime relative to the taxes they pay into Social Security. If your ratio of taxes to benefits is one, that basically means that you’ve saved 12.4% of your earnings through Social Security and (due to the way the SSA actuaries do their calculations) that on those contributions you can expect to earn a return equal to the yield on safe government bonds.1

But for low-income Americans, it’s even better than that. For instance, let’s focus on what the SSA actuaries call “very low” earners. These workers earn about one-quarter of the national average wage — a bit less than $12,000 per year - and make up about 19% of the retiree population. On average, workers in this group receive Social Security benefits equal to 1.7 times the Social Security taxes they pay.2 This means that, while these very low earners may be contributing only 12.4% of their earnings to Social Security, they receive benefits as if they were saving 22% of their pay, invested in safe government bonds.

It’s not obvious how much these low-salary workers should be saving for retirement on top of Social Security. Maybe 22% is enough, maybe it isn’t. But ask yourself: if you were earning $12,000 and already were effectively saving 22% of your income, would you save more? The realistic answer is: probably not. At those income levels, keeping the lights on and food on the table are likely to be much higher priorities.

But, of course, progressivity giveth and progressivity taketh away. While the poor receive much more out of Social Security than their taxes alone would buy, the rich receive less. The table below shows effective Social Security savings rates for workers earning from $12,000 per year up to $112,000 per year, the highest wage (at the time the figures were produced) that was subject to Social Security taxes. While the “very low” earner received benefits equal to 1.7 times his taxes, and thus had an effective saving rate of 22%, the “maximum” wage worker earning $112,000 receives lifetime benefits equal to only 0.5 times his lifetime taxes. Thus, his effective saving rate through Social Security is 0.5 times the 12.4% payroll tax, or just 7%. (Note that these numbers are rounded.)

What does all this mean in practice? First, that we shouldn’t be surprised to see very largedifferences in private retirement savings by Americans of different income levels, simply because Social Security plays a much bigger role in providing retirement income for low earners than it does for the rich. For instance, a 2016 Federal Reserve study found that the bottom half of the population had private retirement savings equal to only 17% of their annual incomes, versus 147% for the richest 5%. But when you add Social Security, total retirement savings rose to 530% of annual incomes for the poorest half versus 230% for the richest 5%. The top 5% are still a lot richer in dollar terms but in terms of being able to maintain their pre-retirement standard of living — a relative measure — poorer Americans aren’t obviously worse off.

And second, just because many low earners aren’t saving much or anything on top of Social Security doesn’t mean they’re irrational today or that they’ll regret their actions tomorrow. Recent research using IRS tax data shows that, despite low saving rates, even poorer retirees are likely to be able to maintain their pre-retirement standard of living. The typical poor retiree, in fact, has a higher income in retirement than they had when before they retired.

Finally, these results show that, as a country, we don’t know as much about retirement saving as we think we do. There’s a rush among some lawmakers to expand Social Security, despite the system’s $10 trillion-plus existing deficit, or to set up new state-run retirement plans for low-income workers. Maybe these are good ideas, maybe not. But I’m confident those decisions often are being made without a full (or even fullish) understanding of what’s going on in the world of retirement saving.

Some technical notes for the wonk set.

Specifically, SSA’s actuaries calculate the present values of lifetime taxes and lifetime benefits, where taxes and benefits are discounted using the yield on the government bonds in the Social Security trust funds. So if the present value of a worker’s taxes is equal to the present value of their benefits, that’s equivalent to the person earning the government bond yield on their Social Security contributions.

In these figures I’ve calculated a unisex figure based on the weighted averages of the male- and female-specific money’s worth ratios calculated by SSA’s actuaries. At any given earnings level women tend to have higher money’s worth ratios due to their longer lifespans over which to collect benefits. The specific figures used are for individuals retiring at age 65 in the year 2020.

This kind of comparison assumes that people of different earnings levels should be saving the same percentages of their earnings for retirement, which may not be true. But it may not be completely untrue either. Yes, most financial advisors recommend that low earners aim for a higher “replacement rate” - that is, a higher retirement income relative to their pre-retirement earnings - than high earners. For instance, the late Robert Myers, a former chief actuary for Social Security, recommended that a low earner aim for a replacement rate of 85 to 90% of their pre-retirement earnings, while high earners could live comfortably on just 55 to 60%. By itself, that implies that - before Social Security is counted - the poor should save roughly 50% more than the rich, as percentage of their incomes. On the other hand, the rich live longer past retirement than the poor and so must save more to cover those extra years. According to a 2014 Congressional Budget Office analysis, someone in the top fifth of the earnings distribution can expect to live over 6 years longer in retirement than a person in the bottom fifth. All else equal, this implies about a 40% higher need to save for retirement while working. So while the comparisons of implicit saving rates may not be precise, they’re in the same ballpark.