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Today’s Lecture #24 Social Security

Today’s Lecture #24 Social Security. What Goes In and What Goes Out? Financing Historical Development Benefits What You Can Expect. The Cost of Current Social Security Benefits.

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Today’s Lecture #24 Social Security

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  1. Today’s Lecture #24Social Security What Goes In and What Goes Out? Financing Historical Development Benefits What You Can Expect

  2. The Cost of Current Social Security Benefits Current (2007) payroll tax is 7.65% of first $97,500 in earnings plus 1.45% of any additional earnings. The employer and the employee both pay this amount.

  3. Example You earn $30,000 this year. You pay $2295 in Social Security taxes (0.0765 x 30,000) and your employer pays the same amount. The total Social Security tax is $4590 (15.3% of your salary). Of this 15.3%, 12.4% is for OASDI and 2.9% is for HI (Medicare).

  4. Example 2 You earn $197,500 this year. Your Social Security taxes are $8908.75 (.0765 x 97,500 + .0145 x 100,000) and your employer pays the same amount. The total Social Security tax is $17,817.50.

  5. Historical Development • Social Security Established Benefits to Retired Workers of $10-85/month, starting in 1939 Tax = 1% of First $3000 of Earnings • Added Dependents and Survivors • Added Disabled • Retirement at 62 • Incorporated Medicare 1972 Indexed Benefits (Double Indexing Error)

  6. Historical Development • Corrected Double Indexing Error Raised Future Taxes “Financially sound through the end of the century” • Raised Taxes Expanded Coverage Taxed some benefits (up to 50%) Changed index Increased retirement age 1994 Taxed more benefits (up to 85%) 2003 Prescription drug coverage added to Medicare

  7. Coverage Universal with exceptions Major exceptions: Federal workers hired before 1984 Railroad workers State and local government workers if employer elected, prior to 1984, not to have Social Security

  8. Eligibility Earn one “Quarter” of coverage for each $x of annual earnings, subject to maximum of 4 quarters per year: 2005 x = 920 2006 x = 970 2007 x = 1000 Fully Insured Status 40 quarters of coverage less if born before 1929 Currently Insured Status Six quarters out of last 13 Applies to survivor benefits

  9. Types of Benefits Retirement Survivors’ Disability Medicare Part A – Hospital Benefits Part B – Medical Benefits Part C – Managed Care Options Part D – Prescription Drug Benefits

  10. Amount of Benefits(http://www.ssa.gov/OACT/COLA/piaformula.html) The Primary Insurance Amount (PIA) is a function of covered earnings. First, actual earnings are adjusted for inflation. Then average earnings during a selected period of time is calculated (Average Indexed Monthly Earnings, or AIME). For 2007, the PIA is based on the AIME: 90% of the first $680 32% of the AIME from $680-$4,100 15% of the AIME over $4,100.

  11. Average Benefits 2007 Monthly Annual All retired workers 1,044 12,528 Retired couple 1,713 20,556 Disabled worker, family 1,646 19,752 Cost-of-living-adjustment (COLA) for December 2007 2.3%

  12. Replacement RatesAt Normal Retirement Age Based on Intermediate Assumptions Wage Level Year Low Average Max 1996 58.2% 43.2% 24.5% 2007 56.0% 41.5% 28.5% • 55.3% 41.0% 27.3% Earnings Level Under Intermediate Assumptions 2005 2050 Low $12,000 $93,722 Average 36,600 208,271 Maximum 90,000 509,358

  13. Amount of Benefits Retired Worker at Normal Retirement Age – 65 (for those born in or before 1937) – increases monthly to age 67, the age for those born in 1960 and later Eligible for PIA each month Less is under 65 More if over 65 Spouse of Retired Worker If 65 or older 1/2 PIA Less if under 65 If spouse is eligible for own retirement benefit, receives only the larger benefit

  14. Example PIA is $800 65 year old retired worker 65 year old spouse who never worked Monthly benefit for couple is $1200 Retiree 800 Spouse 400 If spouse had worked and had a PIA of $500 Monthly benefit for couple would be $1300 Retiree 1 800 Retiree 2 500

  15. Future Cost of Social Security Cost of current OASDI benefits for 25, 50, & 75 year periods as % of taxable payroll Assumptions I II III 2007-2031 12.92 14.23 15.69 2007-2056 13.43 15.33 17.72 2007-2081 13.43 15.87 19.11

  16. What Will Happen to Social Security Three choices by the time you retire: Raise payroll taxes by 50-100% Lower benefits by 1/3 to 1/2 Reduce the number of beneficiaries Increase the Normal Retirement Age to around 75 Which would you choose?

  17. One Proposal to Save Social Security Reduce the annual Cost-of-Living Adjustments (COLAs) by 1% If this is done now, the Social Security system will remain solvent indefinitely Why don’t we do this?

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