Social Security Benefits, Income, and Poverty: Evidence from Canada By Kevin Milligan and David A. Wise Discussion by: Geoffrey T. Sanzenbacher Research Economist Center for Retirement Research at Boston College 16th Annual Retirement Research Consortium Meeting Washington, DC August 8, 2014 Why is this paper interesting? In the future, many countries may reduce the size of public pension benefits, for example: o Canada plans to increase the eligibility age for its Old Age Security program to age 67. o In the U.S., increases in the full-retirement age can decrease benefits. Two key questions: 1. Will these reductions actually reduce the income and expenditures of recipients? 2. How will they affect poverty rates? In this paper, Milligan and Wise have built on earlier work by
Baker, Gruber, and Milligan (2009) to use changes in Canadas pension system to address these difficult questions. 2 Why are these questions difficult? As can be seen from the authors calculations, over the past several decades, poverty amongst older Canadians has declined while benefits have expanded o Why doesnt this answer the question? Various Measures of Elder Poverty by Year Simulated vs. Actual Canadian Public Pension Benefits at Age 70 Source: Kevin Milligan and David A. Wise. 2014. How Do Public Pensions Affect Retirement Income and Expenditures? Evidence from over Five Decades in Canada. Prepared for the 16th Annual Meeting of the Retirement Research Consortium. 3 Why are these questions difficult? Assessing the impact of public pension benefits on income,
expenditures, and poverty is difficult because economic trajectories differ across birth cohorts Obtaining more human capital and higher lifetime labor earnings, as has occurred in Canada (and the US), leads to higher public pension benefits But this may also be associated with higher income or less poverty later in life, for reasons unrelated to public pensions o Ignoring this issue may cause overstatement of the effect of public pensions on well-being 4 The solution: simulated benefits The authors need to obtain a measure of pension benefits that accomplishes two goals: 1. Is not affected by changes in human capital and earnings 2. Reflects the expansion of Canadas pension benefits Simulating benefits for a birth-cohort based on pension rules when they are older but holding other factors fixed can accomplish this goal. Based on 1920-1930 birth cohort estimate fixed:
Based on the pension rules in time t for age a individuals: Earnings history Old Age Security benefit Other retirement income Supplement/Allowance Retirement age Canada Pension Program Simulated pension benefits that: 1. Do not reflect any changes in lifetime income 2. Reflect changing rules 5
Using the simulated benefit With the simulated benefit in hand the authors use three measures to explore the link between public pension benefits and well-being: 1. total income; 2. total expenditures; and 3. poverty rates (measured relative to prime-age workers and the Canada Low Income Cut Off). Authors run regressions with simulated benefit on right hand side, measures of well-being on left (their reduced form analysis). o Each observation represents an age-year cell. o Result can be interpreted as the effect of a $1 statutory increase in total benefits on the various measures of wellbeing within each cell. 6 A summary of one set of results R e s p o n s e t o $ 1 ,0 0 0 b e n e f i t i n c r e a s e The reduced form analysis suggests that while the effect on income of poorer individuals is strong, low income individuals expenses are increased less income poverty is reduced more Income Regressions
$800 $716 After-tax income $567 $600 $427 $400 Percentage Percentage Point Point Reduction Reduction in in Relative Poverty Relative Poverty Income:
4.4*** Income: 4.4*** Expenditure: Expenditure: 2.0** 2.0** $412$437 $200 $71 $0 10th percentile Median 90th percentile Note: Striped bars indicate a lack of significance at any level. Poverty is measured as percent under LICO. Source: Kevin Milligan and David A. Wise. 2014. How Do Public Pensions Affect Retirement Income and Expenditures? Evidence from over Five Decades in Canada. Prepared for the 16th Annual Meeting of the Retirement Research Consortium.
7 The effect of changes in policy Some of the expansions in Canadas public pension system the authors note (and exploit to conduct their analysis): o 1960 1970: Introduction of Guaranteed Income Supplement and Canada Pension Plan o 1970 1980: Introduction of Allowance for widows and spouses aged 60-64 o 1980 1990: Early retirement provisions allowed in Canada Pension Plan o In 1971, 1979, 1980, 1984, and 2006 benefits were expanded for Guaranteed Income Supplement and the Allowance Holding the characteristics of the population fixed, the authors estimate that for individuals aged 70 to 79 these and other expansions reduced: o Income relative poverty by 88 percent between 1960 and 2010; and o Expenditure poverty by 56 percent 8 Conclusion As countries reduce public pension generosity, one hope is people will
respond by increasing income from other sources (e.g., save more, work longer, etc.) o This would occur if there is crowd out This paper adds to the literature that suggests crowd-out is limited: o Engelhardt and Gruber (2006) - Context of Social Security benefit increase o Baker, Gruber, and Milligan (2009) - Context of Canadian benefit increases Caveat/extension: The authors assume retirement ages are fixed at the 19201930 birth cohorts o Would be interesting to know how results change if this assumption is relaxed o Because many proposed benefit reductions are likely to impact retirement age (both in US and Canada) this may be an interesting sensitivity 9
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