Social Security: Where Are We? Where Are We Going?

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Social SecurityWhere Are We?Where Are We Going?

• Melanie Griffin

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Principal Features of Social Security

• Social Security refers to the federal Old-Age and
  Survivors Insurance (OASI) portion
• Social Security payroll tax is the second largest
  source of federal government revenue
• Revenue from the payroll tax is deposited in the
  OASI Trust Fund
• From that fund benefits and administrative costs
  are paid, and the remaining is invested in
  long-term U. S. Treasury bonds

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Key Terms

• Pay-as-you-go fund - fund with a balance that can
  cover future benefits and expenses for only a few
  years
• Fully-funded fund fund with a balance that can
  cover future benefits and expenses for many years
• Indexing factor ratio of average national wages
  in two different years used to index actual
  annual earnings

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More Key Terms

• Average Indexed Monthly Earnings actual average
  monthly earnings for the highest 35 years of
  earnings, adjusted by an indexing factor
• Primary Insurance Amount monthly social
  security benefits at the normal retirement age
• PIA .9(First 592 AIME) .32(592 lt AIME lt
  3567) .15(AIME over 3566)
• Early Retirement Penalty amount by which social
  security benefits are reduced for people who
  retire before the normal retirement age

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Social Security Benefits are Indexed for Inflation

• Inflation Indexing annual upward adjustment in
  social security benefits to cover the increase in
  the consumer price index
• Delayed Retirement Credit amount by which
  retirees benefits are increased for each year
  that retirement is delayed up to age 70

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Who Pays the Social Security Tax?

• OASI is financed primarily by 10.6 percent tax
  levied on taxable payroll
• Law requires employers to collect half tax
  through payroll deduction, remit twice the amount
  to federal government

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Effect Social Security Payroll Tax has on Hours
Worked
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Social Security and Early Retirement

• Factors of reduced labor force participation by
  older people include
• Rising income
• Growth in private pensions
• Increased availability of government
• Changing lifestyles
• SOCIAL SECURITY

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Social Security and Household Savings

• Wealth substitution effect an effect that
  induces workers to substitute Social Security
  wealth for other types of wealth
• Social Security wealth present value of Social
  Security benefits minus present value of Social
  Security taxes
• Induced retirement effect increase in household
  savings to offset early retirement induced by
  Social Security

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Individual Rates of Return

• Typical retiree pays 40-50 years of taxes over a
  working lifetime
• Then receives 15-20 years of retirement benefits

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Is That All There Is To It?

• Social Securitys old-age insurance reduces
  income and inflation risk which other individual
  investors would be exposed
• Risk reduction benefit value of lower risk of
  loss of Social Security benefits relative to risk
  of loss of income from private securities
• Inflation Protection value of inflation
  indexing of Social Security benefits

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The Long-Run Deficit

• Social Security analysts project
• Alternative I, II, III
• By 2041, the Trust Fund will be exhausted and
  insufficient to pay all promised benefits and
  expenses
• Alternative II relies on assumption about key
  economic and population variables
• Fertility rate average number of children born
  to women in their lifetime

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What Can Be Done About The Deficit?

• Benefit Reduction
• Start now, reducing benefits
• Starting after OASI Trust Fund assets are
  exhausted, reducing benefits
• Use more accurate measure of inflation to index
  benefits
• Change method used to index preretirement
  earnings of middle and upper income retirees
• Increase in normal retirement age

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What Can Be Done About The Deficit?

• Revenue Increases
• Increase in taxes, starting now
• Increase in taxes, starting after OASI Trust Fund
  assets are exhausted
• Increase in investment, financed by Social
  Security surplus
• Privatization of Social Security