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


PPT – Social Security and Reform: What it Does Now Will it be Around to Keep Doing It PowerPoint presentation | free to download - id: 18f8b-ZTAyY


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation

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


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

Number of Views:51
Avg rating:3.0/5.0
Slides: 35
Provided by: msgu4


Write a Comment
User Comments (0)
Transcript and Presenter's Notes

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

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
  • University of Wisconsin-Madison

Part of the Retirement Three Legged Stool
Employer provided plans
Social Security
Personal Savings
Social Securitythe longest leg
(No Transcript)
It isnt all about Retirement or about you
alone (New awards by type (2003))
Retired workers 44.5 are women
Disabled workers 45.5 Widow(er)s 92.3

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
  • Job transition(universal coverage)
  • Your benefits and your choices affect you and

(No Transcript)
  • Overview of program
  • What is this funding shortfall?
  • What are the major proposals?
  • Modifiers
  • Reformers-private accounts
  • Major challenges of each

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

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

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

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

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
(No Transcript)
Program basic 4 The importance of wage
Example of indexing past wages for subsequent
wage growth
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

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

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
  • 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

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

  • Benefits
  • Relationship to pensions
  • Reductions with age
  • What to expect during retirement
  • Retirement, remarriage, death, disability
  • Others

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?)

Trust Fund assets as a of annual expenditures
Actuarial Status of OASDI 2005-80 Alternative
cost projections (2005 Trustees Report)
1/. Fund is not estimated to be exhausted within
the projection period
Intermediate Projections In long-run 60-70
benefits paid
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
  • In long run benefit reductions to meet reduced
    (employer-only) FICA revenue

Reforms not simple because of social insurance
and defined benefit components of current
  • 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

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
  • 2005 earnings taxed up to 90,000
  • Percent of aggregate earnings taxed has fallen
  • to 86 of 2003 taxable earnings vs 92 in 1937

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

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
  • Some share of diverted FICA used to fund

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

Competing claims in Individual Accountswhose are
  • 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
  • What about childrens claims on accounts?

Retain Redistribution Component? Challenges of
Individualized Accounts
  • What annuity structure and rules protect
    surviving spouse, divorced surviving spouse,
    adult disabled children, surviving young
  • 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
  • Inheritance removes insurance pooling advantages.

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?

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
  • Social insurance features must be paid out of
    individual accounts, rather than being pooled.