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Chapter 32 Social Security

Chapter 32 Social Security. Chapter Outline. THE BASICS WHY DO WE NEED SOCIAL SECURITY SOCIAL SECURITY’S EFFECT ON THE ECONOMY WILL THE SYSTEM BE THERE FOR ME . Social Security’s Origin. The 1935 Social Security Act Part of the FDR “New Deal”

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Chapter 32 Social Security

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  1. Chapter 32Social Security

  2. Chapter Outline THE BASICS WHY DO WE NEED SOCIAL SECURITY SOCIAL SECURITY’S EFFECT ON THE ECONOMY WILL THE SYSTEM BE THERE FOR ME

  3. Social Security’s Origin • The 1935 Social Security Act • Part of the FDR “New Deal” • Intended to be a “third leg” of a retirement tripod • Social Security • Individual Savings • Company Pensions

  4. How to Fund Social Security • Every retirement system must be funded by using currently generated money to pay current retirees or use the balances of previously saved money to pay current retirees. • Pay-as-you-go : a system where current workers’ taxes are used to pay pensions to current retirees • Fully-Funded: system where for every benefit dollar it is required to pay in the future there is an off-setting amount currently invested that is sufficient to pay off that dollar

  5. The Current Funding System • Social Security was, until 1982, a pay-as-you-go system. • The baby-boom (1946-1964) created a problem for the system starting in 2010. • Recognizing this, Congress created the Social Security Trust Fund in 1982. • This makes Social Security a hybrid of a pay-as-you-go and fully funded system.

  6. The Basics: Taxes • Social Security is funded with a payroll tax (taxes owed on what workers earn from their work) • Employers and employees both pay an equal amount. • The amount for Social Security is 6.2%* of payroll up to the Maximum Taxable Earnings (the maximum of taxable earnings subject to the payroll tax). • *the tax is 7.65% minus the 1.45% Medicare tax

  7. Changes to Social Security • Tax Rate • 1935 1%; 2007 7.65% (6.2% excluding Medicare) • Maximum Taxable Earnings • 1935 $1000; 2007 $97,500 (at the 6.2% rate and unlimited at the 1.45% rate). • Retirement Age • 1935 65 years of age; 2007 (Depends on the year of birth) 1938->65+2 months; 1939->65+4 months; 1940->65+6 months; 1941->65+8 months; 1942->65+10 months; 1943-1954->66; 1955->66+2 months; 1956->66+4 months; 1957->66+ 6 months; 1958->66+8 months; 1959->66+10 months; 1960 on 67 • Coverage • 1935 Old age; 2007 Old age + Medicare + Disability + Survivor

  8. Why Social Security is Needed • Externalities • market, left unregulated, will create impacts on people other than the buyer or seller • Workers may make a decision to rely on welfare and not save. That decision affects taxpayers. • People cannot overcome a poor decision not to save. • Most decisions that adversely affect people can be changed. • The decision not to save cannot be reversed (because you cannot go back and live your life over again.)

  9. Social Security’s Impact on the Economy • Work (lower) • People retire earlier than they otherwise would have. • People work less that they otherwise would have. • Saving (in net lower) • Asset Substitution Effect: government is saving for you, you will save less for yourself • Induced Retirement Effect: because people need to save more if they are going to retire earlier than they would have without Social Security. • Bequest Effect: increases national savings because people save more so as to give larger gifts to their descendants

  10. Who is the Program Good For • People who retired before 1980 received, on average, more than they would have in private alternatives. • People who retired between 1980 and 2000 received ______ than they would have in private alternatives • More (if they were poor) • Less (if they were wealthy) • People who retire today will receive less than they would have in private alternatives.

  11. Why is Social Security in Trouble • The number of workers per retiree • Was above 40 in 1940 • Fell to around 5 in the 1980s and 1990s • Will eventually fall to under 3. • This demographic problem resulted from the baby-boom (1946-1964).

  12. Estimates of Social Security’s Bankruptcy • An organization is bankrupt if it has insufficient assets to pay off its obligations. • Estimates suggest that Social Security will be “bankrupt” in the 2040s. • “bankrupt” is not necessarily the correct term because the government could borrow to continue to pay benefits.

  13. Options of Saving Social Security • raising payroll taxes • Raise the tax rate • Eliminate the maximum taxable earnings • raising the retirement age further • cutting benefits with a Means Test • those with high incomes or great wealth would get less of their PIA than those who depend on the monthly check • reduce the adjustment for inflation to price inflation rather than wage inflation (perhaps only for upper income recipients) • investing the trust fund in corporate stocks and bonds • carving out some of the payroll tax for privatized individual accounts.

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