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Social Security and Reform: What it Does Now Will it be Around to Keep Doing It

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Social Security the longest leg. It isn't all about Retirement. or about you alone ... Social Security is about different risks. Retirement (62 ) Disability ( 65) ... – PowerPoint PPT presentation

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Title: Social Security and Reform: What it Does Now Will it be Around to Keep Doing It


1
Social Security and Reform What it Does Now
Will it be Around to Keep Doing It?
  • Karen Holden, Ph.D.
  • Professor of Consumer Science and Public Affairs
  • Co-Interim Director Center for Financial Security
  • Associate Director, La Follette School of Public
    Affairs
  • University of Wisconsin-Madison
  • holden_at_lafollette.wisc.edu

2
Part of the Retirement Three Legged Stool
Earnings
Employer provided plans
Social Security
Personal Savings
3
Social Securitythe longest leg
4
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5
It isnt all about Retirement or about you
alone (New awards by type (2003))
MAJORITY OF AWARDEES ARE WOMEN57.2
Retired workers 44.5 are women
Disabled workers 45.5 Widow(er)s 92.3

6
Important to Understand
  • Social Security is about different risks
  • Retirement (62)
  • Disability (
  • Death of a spouse (any age)
  • Death of a parent (child
  • Disability of a child (disability benefits)
  • Low average wagesdue to low wages or interrupted
    work lives
  • Effect of divorce of homemaker on retirement
    security
  • Job transition(universal coverage)
  • Your benefits and your choices affect you and
    survivors

7
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8
Topics
  • Overview of program
  • What is this funding shortfall?
  • What are the major proposals?
  • Modifiers
  • Reformers-private accounts
  • Major challenges of each

9
Program Benefit Basics and contrast to
Employer Provided Pensions
  • 1. Pay-as-you-go financing
  • 2. Pays a mandatory annuity (benefit for
    remaining life)
  • 3. Annuity is fully inflation-adjusted
  • 4. Benefit based on average covered wage
    adjusted earnings over highest 35 years
    (including zero years)
  • 5. Progressive benefit formula provides higher
    replacement to life-long low earnings
  • 6. Survivor benefits financed by system rather
    than worker no reduction in workers benefit

10
Program Basic I pay-as-you-go
  • Current FICA pays for current beneficiaries
  • Early program always has high ratio of
  • payers / beneficiaries
  • As the program matures, ratio must fall
  • With a stable population it is
  • Productivity growth, labor force and retirement
    timing increasingly matters

11
Total Fertility Rates U.S. is a relatively
young country
  • U.S. 2.1 Germany 1.3
  • Sweden 1.8 Italy 1.2
  • Ireland 1.8 Japan 1.5
  • Canada 1.7 China 1.8
  • Britain 1.7 S. Korea 1.8
  • France 1.6 Thailand 1.8
  • Netherlands 1.5 Russia 1.3

12
PAYGOwhat is paid?
  • FICA (as percent of taxable payroll)
  • Employer Total employee, each
  • Old Age Survivor 5.30 10.60
  • Disability 0.90 1.80
  • Medicare (Part A) 1.45 2.90
  • Total 7.65 15.30

13
Program basics 2 3 Annuity guards against
uncertainty about length of life inflation
  • At age 65 males females
  • Expectations of life 16.6yrs 19.5yrs
  • Percent alive at 85 36 50
  • Percent alive at 90 18 29

U.S. 2002 Life table
14
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15
Program basic 4 The importance of wage
adjustments
Example of indexing past wages for subsequent
wage growth
16
Program Basic 5
  • Average Indexed Monthly Wage Indexed wages
    averaged over 35 years
  • Primary Insurance Amount (PIA)
  • .90 of first 627 AIME
  • .32 of 628 - 3779 of AIME
  • .15 of Average Indexed Monthly earnings
    above 3,779

17
100 PIA at Full Retirement age
  • Turning 62 Full Retirement Age
  • 2005 - 2016 66
  • 2017 66 and 2 months
  • 2018 66 and 4 months
  • 2022 and later 67
  • Reduction 5/9 of 1 each month for first 36
    earlier than FRA
  • 5/12 of 1 each additional month to 62

18
Program Basics 6 Survivor Benefit
  • Up to 100 of amount primary beneficiary would
    have received as retired/disabled worker
  • Divorced survivor eligible if married 10 years
  • Survivor receive higher of own or survivor
    benefit
  • but can begin survivor earlier and not have
    retired-worker benefit reduced
  • Reduced for earnings if per month)
  • Ineligible if remarried before age 60
  • If widowed again will receive the higher benefit
    from either spouse

19
Redistribution higher rates of return for
lower wage workers, females, one-earner couples
  • Estimated internal rates of return Person born
    2004, retiring 2069

20
QUESTIONS ON SOCIAL SECURITY AND YOU??
  • Benefits
  • Relationship to pensions
  • Reductions with age
  • What to expect during retirement
  • Retirement, remarriage, death, disability
  • Others

21
How do we know what the next 75 years looks like?
  • Actuaries review the past and project
  • birth rates, death rates, immigration,
    employment, wages, inflation, productivity,
    interest rates
  • Make assumptions for the next 75 years
  • Three scenarios Low cost High cost
    Intermediate (best estimate?)

22
Trust Fund assets as a of annual expenditures
23
Actuarial Status of OASDI 2005-80 Alternative
cost projections (2005 Trustees Report)
1/. Fund is not estimated to be exhausted within
the projection period
24
Intermediate Projections In long-run 60-70
benefits paid
25
Challenge all proposals must bring any pay as
you go component into balance
  • Modifiers do it with combination
  • Increased revenues and reductions in benefits
  • Reformers
  • Private accounts divert 4-6 FICA to IA
  • System out of balance by 1.92 diversion .
  • In short run funds must come from somewhere to
    finance this now larger shortfall (transition
    costs)
  • In long run benefit reductions to meet reduced
    (employer-only) FICA revenue

26
Reforms not simple because of social insurance
and defined benefit components of current
system.
  • Insurance protection against income risks and for
    all family members
  • Predictable and inflation adjusted benefits
  • Benefits not subject to market risks
  • private pensions increasingly shifting market,
    inflation, survival risks onto workers

27
Modifiers proposals Increase limit on covered
earnings that are taxed
  • Proposal Raise cap to historic 90 of earnings
    and use current benefit formula resolves 40 of
    deficit.
  • 2005 earnings taxed up to 90,000
  • Percent of aggregate earnings taxed has fallen
  • to 86 of 2003 taxable earnings vs 92 in 1937

28
Modifiers Deficit reduced by other tax and
benefit changes
  • Cover currently uncovered state and local 10
  • Speed rise in Full retirement age
  • to 67 and raise gradually to 68 28
  • to 67 and raise gradually to 70 36
  • Change COLA post-benefit adjustments
  • COLA 1 percentage point 79
  • 40 percent of Trust Funds into equities with
  • 6.5 real return 48

29
Reformersdiversion of FICA to private accounts
  • Divert 4-6 of employee FICA
  • Individual chooses among limited number of funds
    approved by some central authority
  • Retirement annuity based on account accumulation
  • Reduced when split with spouse or at divorce
  • Retiree must purchase inflation adjusted joint
    survivor annuity survivor benefits reduce worker
    annuity
  • Some share of diverted FICA used to fund
    disability

30
Reformers Who pays the cost of diversion to
private accounts?
  • In long run system must be brought into balance
    by reductions in SS benefits such that can be
    funded by payroll tax less contributions diverted
    to Individual Accounts
  • In short run General Fund transfer required to
    cover SS benefits until all individual account
    system is mature.
  • At annuitization, some offset of traditional SS
    benefits by annuitized amount.
  • Long-run cost higher if SS account has minimum
    guarantee to reduce market risk

31
Competing claims in Individual Accountswhose are
they?
  • Who has property rights to accounts?
  • Are accounts individual or marital property?
  • What happens to accounts upon divorce?
  • Is a joint survivor annuity mandated in all
    cases?
  • What about childrens claims on accounts?

32
Retain Redistribution Component? Challenges of
Individualized Accounts
  • What annuity structure and rules protect
    surviving spouse, divorced surviving spouse,
    adult disabled children, surviving young
    children?
  • If inflation-adjusted annuity required, what
    market instruments are available to allow this?
  • If accounts inherited, does that reduce
    traditional SS further for those who inherit
    accounts?
  • Inheritance removes insurance pooling advantages.

33
Overview There is a financing problem
  • Total shortfall estimated 4.0 trillion, though
    predicted with uncertainty.
  • In long-term tax and benefits must be sufficient
    to balance system
  • Diversion of FICA in Individual Accounts MUST
    increase shortfall in short run and must lead to
    smaller traditional benefits than currently
    payable because no pooling of risk.
  • Question for all reforms and modifications
  • How important is the social insurance nature of
    Social Security?

34
Reform is not simple and Individualized Accounts
are not a simple modification
  • Accounts introduce the market risks inherent in
    any defined contribution pension plan.
  • Individuals will gain if individual accounts earn
    more than Treasury Bills. Will lose if accounts
    earn less.
  • Accounts will require federal property law and
    probably more federal insurance company
    oversight.
  • Social insurance features must be paid out of
    individual accounts, rather than being pooled.
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