Transcript Social Security - Central Web Server 2 - UITS

Social Security
Contemporary
Problems in Economics
S. Cunningham
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Origins
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1935: Great Depression, FDR
Social Security Act
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Created a “system of federal old-age benefits” (defined
benefits program)
1956, added disability benefits
Two parts:
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“Old age and survivors’ program”
“Disability program”
“Supplemental security income program” for the aged,
blind, and disabled (without regard to prior workforce
participation, or “pay-in”)—Administered by SSA, but
not funded by SS taxes.
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FICA and Medicare
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FICA: Federal Insurance Contributions Act
Medicare: Medical Benefits for the Elderly
SS
Medicare
FICA
(Total)
Employee Tax
6.2%
1.45%
7.65%
Employer Tax
6.2%
1.45%
7.65%
Total
12.4%
2.9%
15.3%
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FICA and Medicare (2)
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Threshold: Any income earned above the
threshold is not taxed
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SS Act of 1935, the tax rate was 2%
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2005 -- $90,000
2000 -- $75,200
1935 -- $3,000
1950
1960
1970
1980
1990
2000
–
–
–
–
–
–
3%
6%
8.4%
10.2%
12.4%
12.4%
SS Taxes have been raised 20 times since 1937.
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Entitlement?
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Daniel Shapiro, Making Sense of Social
Security Reform.
Perceived intergenerational character of
SS.
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Each generation supports the generation
before
• Feel entitled
• Operates like a large family
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But FICA collects a surplus now, and later will
run a deficit.
• Is this a simple intergenerational transfer?
• This is not really pay-as-you-go
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Redistribution
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If some receive more than they pay, then there
is a distributional effect—you may gain or lose.
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Incentives change
Is this forced saving?
Can the government save?
Saving is forgoing current consumption in order
to finance future consumption.
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Is there actually saving in this system, a deferral of
consumption?
There may be individual saving, but is there net saving?
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Incentive effects
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SS transfers wealth from some workers to
others—it is redistributional
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It is a net wage tax to those who lose from it.
It is a net wage subsidy to those who gain
from it.
It affects work decisions
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The SS tax reduces the immediate return to
work
Affects spouse’s decision
Depends mostly on perceptions—has saving
fallen because of SS?
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Social Insurance?
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Insurance depends on statistical
analysis of risk
Individual outcomes are unpredictable,
but large numbers of people will have
outcomes that are statistically
predictable.
 Pooling to protect against
nonsystematic risk
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Private Insurance
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Problems to privately provided insurance:
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Insured losses must be measurable and
verifiable.
People must enter into the insurance contract
before the insured event occurs.
Must mitigate against adverse selection.
Must mitigate against moral hazard.
The cost of insurance must not be higher than
people are willing to pay.
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Public Insurance
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The rationale for gov’t provision of insurance must be that
it can resolve some of these problems that private firms
cannot.
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More complete pools. (Avoids adverse selection)
Better information.
Gov’t can force people to prepare for their retirement when
they won’t do it for themselves. (Issue of price.)
Gov’t can prevent risk:
•
•
•
•
•
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Auto safety
Drinking and driving
Outlaw smoking
Laws against fatty foods? (Food and drug policy)
Gov’t can force risk-reducing behavior.
Each participant pays a premium that need not be equal to
the expected value of the benefits.
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Risk?
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Perhaps SS is not insurance because
there is no risk to insure against.
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Is it simple redistribution?
Is it insurance against income loss?
Age is important factor:
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Old are more risk-averse
Less able to make up for losses
Use age instead of health because it is more
objective and less open to question
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Plan Types
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Defined Contribution Plans
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Defined Benefit Plans
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Specifies what the payer must
contribute
Worker’s ultimate retirement benefit is
specified in advance.
SS tries to be both, but is clearly the
second—benefits are considered
guaranteed.
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Guarantees?
According to a 1960 Supreme Court
ruling, Americans have no ownership
rights to the money they pay into
Social Security.
 The federal government has no
contractual obligation of any kind.
 The benefits you receive may be
changed at any time by Congress.
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Guarantees?
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According to the Social Security
Administration’s website,
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“There has been a temptation throughout the
program’s history for some people to suppose
that their FICA payroll taxes entitle them to a
benefit in a legal, contractual sense…
Congress clearly had no such limitation in
mind when crafting the law.”
“Benefits which are granted at one time can
be withdrawn…”
Money that people pay in Social Security
taxes is not saved for them and is not their
property.
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Pay As You Go?
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Workers currently pay more in SS taxes than is
being paid out.
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The surplus is used to finance the federal debt.
By 2017, by some estimates, the system will run
a deficit.
Problem:
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in 1950, there were 16 workers/payers for every retiree
on SS.
Today there are 3.4 for each retiree.
In 2030, there will be 2.1 for each retiree. (This will
require a tax rate of 18%+.
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Is the Trust Fund a Fraud?
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What happens when the SS draws on its
Trust Fund?
Surpluses have been held in treasury
debt. How will the funds be “retrieved”
when needed?
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Pay back SS from taxes? (raise taxes?)
Sell more debt to pay off earlier debt? (rollover, possibly raising interest rates)
Is this just a hoax perpetrated on the
U.S. public?
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Nature of the Trust Fund
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According to the FY2000 Budget prepared
by the Clinton Administration:
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“These Trust Fund balances … do not consist
of real economic assets than can be drawn
down in the future to fund benefits. Instead,
they are claims on the Treasury that, when
redeemed, will have to be financed by raising
taxes, borrowing from the public, or reducing
benefits or other expenditures. The existence
of Trust Fund balances, therefore, does not by
itself have any impact on the government’s
ability to pay benefits.”
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Social Security as a Tax
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In 1936: “… beginning in 1949… you and your
employer will each pay 3 cents on each dollar
you earn, up to $3000 a year. That is the most
you will ever pay.”
After adjusting for inflation, this would be $1620
today. The actual maximum collected is more
than 5 times this amount!
In 2000, SS taxes accounted for 25% of all
federal tax collections.
The average worker pays an amount equal to 6
weeks worth of their salary in SS taxes each
year.
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Benefits
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To qualify for old age benefits, a person
must work 40 quarters (10 years),
earning at least $3,120 a year.
The actual benefits are based upon a
formula that takes into account the taxes
paid by the worker.
The formula penalizes workers for making
more money or worker more years.
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Benefits (2)
Average Annual Income
Avg Annual Taxes
Old Age Benefit
$20,440
$2,535
$9,200
$40,880
$5,069
$14,800
$74,197
$9,200
$17,424
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Benefits are increased once a year based on
cost of living.
Receive full benefits at “full retirement age”,
which is 65-67 depending on your year of
birth.
Can opt to retire with less at 62, or more later.
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Benefits (3)
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If a married worker dies, their spouse receives
50-67% of the couples’ combined benefits.
Additional benefits to families with minor or
disabled.
Note that about 1/3 of Americans have no
savings, and about 1/3 have less than $2,500 in
savings.
To qualify for disability benefits, a person must
work for 5 years, and have been disabled for 5
months.
Disability benefits are higher than retirement
benefits.
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Distribution of Benefits
Retired Workers & Their Families
Survivors of Deceased Workers
Disabled Workers & Their Families
67.4%
19.8%
12.8%
Data is from 1999.
As of June 2000, 45.2 million people were
receiving Social Security benefits.
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Causes of the problem
Increase in life expectancy without
comparable increase in retirement
age.
 Higher birth rate of baby boom
generation compared with later
generations.
 Increasing number of people
receiving disability benefits.
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Life Expectancy
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When SS started paying benefits in
1940, the average 65 year old male
had a life expectancy of 11.9 years.
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As of 2000, the average 65 year old
male has a life expectancy of 15.9%-an increase of 34%.
Women at 65 lived 13,4 more years,
now 19.2 more years—an increase
of 43%.
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Birth Rates
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In the late 1940s until the early 1960s, the
average birth rate per woman was 3.7.
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Around 2010, the baby boom generation will
begin to retire.
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By 1976, the average birth rate had fallen to 1.7.
In 2000, it was 2.1.
Between 2010-2030, the number of people eligible for
old age benefits will increase by about 80%.
The number paying SS taxes will increase by 2%.
1960-2000, U.S. population grew by 56%.
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Number receiving disability benefits grew by 876%.
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Disability Benefits
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Year
Population
Number on
Disability
Benefits
1960
180,000,000
687,000
2000
281,000,000
6,709,000
Between 1960 and 2000, the population
grew by 56%. The number of people
receiving disability benefits grew by
876%.
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Trust Fund
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By law, SS surpluses must be invested in federal
securities. That is, the only thing the SS program can do
with its surplus money is to loan it to the federal
government to be spent elsewhere.
The federal gov’t is required to pay this money back to SS
as necessary, with interest.
Between 2015 and 2017, the annual shortfalls of SS will
require the federal government to begin paying back the
money.
By 2037 (some estimates), the money and interest the
federal gov’t owes to SS will be paid in full.
Between 2037 and 2075, SS will run annual deficits
totaling $30 trillion.
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SS and Federal Debt
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Two kinds of debt:
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Intragovernmental holdings or nonmarketable
debt—owed to federal entities.
Debt held by the Public or Marketable Debt—
owed to non-federal entities. This is “net
debt”.
Owed to Federal Entities
$2.7 trillion
Owed to Non-Federal Entities
$3.0 trillion
Total Debt
$5.7 trillion
December 31, 2000
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SS & Debt (2)
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If Congress uses SS surpluses to pay off debt it owes to
non-federal entities, this is called “Putting Social Security
into a lockbox.”
If Congress uses money from SS surplus to fund
government programs, this is called “Raiding the Social
Security Trust Fund.”
When the gov’t does either, the finances of the Social
Security program are not affected.
There have been bills proposed to outlaw “raiding the
fund.” None have passed.
During the Clinton Administration, when many reported
that the budget was “balanced,” it did not account for the
interest owed on the debt to federal entities. The national
debt has risen every year since 1960.
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Privatization
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George W. Bush has proposed to give individuals the
option to place 16% of their Social Security taxes into a
private account, turning it into a “forced saving
program.”
People who do this could put their money into bank
accounts or lower-risk investments.
This proposal would have a negative effect on the shortterm finances of the SS system because its receipts
would fall.
Longer term, it would have a positive effect on the
system because the SS would pay less in benefits.
People could pass on their SS savings to their heirs.
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SS Trustees Report
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To cover Social Security’s total cash shortfalls in perpetuity
would demand a lump-sum payment today of $11.9 trillion.
To achieve permanent solvency under traditional SS financing
would demand an immediate tax increase equal to 4.47% of
payroll. This amounts to raising the SS part of FICA from
12.4% to 16.87%. Including revenue derived from income
taxes on benefits, this becomes 18.93%. (Add Medicare tax to
this: 18.93% + 2.9% = 21.83%)
By contrast, a number of personal account plans certified by
SS actuaries achieve sustained solvency without large tax
increases.
The 2003 report includes a “stochastic analysis” that accounts
for the infinite variability of the economic and demographic
factors affecting SS finances.
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