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Social Security 101

Social Security 101. Kathleen Romig Social Security Administration. Today we are going to talk about Social Security’s . . . Origins Purpose Benefits Taxes Finances Impact. Overview. Social Security’s Origins. Social Security’s founders Major dates in social security history.

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Social Security 101

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  1. Social Security 101 Kathleen Romig Social Security Administration

  2. Today we are going to talk about Social Security’s . . . • Origins • Purpose • Benefits • Taxes • Finances • Impact Overview

  3. Social Security’s Origins Social Security’s founders Major dates in social security history

  4. Social Security’s Founders

  5. Major Dates in Social Security History

  6. Social Security’s Purpose What are its goals? Why social insurance?

  7. Goals of Social Security • Equity • What you get out is based on what you put in • Mandatory saving protects both the short-sighted people who won’t save and those who would be forced to bail them out • Adequacy • Insures against disability and premature death • Supplements incomes of those who wouldn’t otherwise have a decent standard of living

  8. Social Insurance vs. Welfare

  9. Social Security Benefits Beneficiaries Average Benefits Balancing equity & Adequacy

  10. Who Receives Social Security? • About 1 in 6 Americans (57 million people) Source: SSA, http://www.ssa.gov/oact/FACTS/index.html Note: As of December 2012

  11. How Much Do Average Beneficiaries Get? Source: Social Security Administration: http://www.ssa.gov/OACT/FACTS/ Note: As of June 2013

  12. Balancing Equity & Adequacy • Higher earners have greater monthly benefits than lower earners, since benefits are based on earnings Note: Hypothetical scaled earners who turn 65 and retire in 2012 Source: 2012 Social Security Trustees Report, intermediate assumptions

  13. Balancing Equity & Adequacy • Lower earners have higher replacement rates than higher earners, since the benefit formula is progressive Note: Hypothetical scaled earners who turn 65 and retire in 2012 Source: 2012 Social Security Trustees Report, intermediate assumptions

  14. Social Security Taxes Who Pays? How much?

  15. Who is Covered by Social Security? • About 19 in 20 workers (161 million people) Source: SSA, http://www.ssa.gov/oact/FACTS/index.html Note: As of December 2012

  16. How Much Do We Pay? • Payroll tax rate: • Employees = 6.2% of covered earnings • Employers = 6.2% of covered earnings • Total contribution = 12.4% of covered earnings • Payroll tax cap: • $113,700 in earnings for 2013

  17. Social Security’s Finances Income & outgo Trust funds Solvency outlook Options to restore solvency

  18. How Much Money Does Social Security Take In? • In 2012, Social Security took in $840 billion. Source:2013 Social Security Trustees Report, http://www.ssa.gov/oact/tr/2013/II_B_cyoper.html#94983

  19. How Much Money Does Social Security Spend? Source: 2013 Social Security Trustees Report, http://www.ssa.gov/oact/tr/2013/II_B_cyoper.html#94983 • In 2012, Social Security spent $786 billion.

  20. The Trust Funds

  21. Key Solvency Dates • 2010: Cash-flow deficits began • In other words, spending exceeds tax revenue (i.e., payroll taxes + taxation of benefits). • Accumulated trust fund bonds are redeemed from the Treasury. • 2033: Trust fund assets will be exhausted • At this point, about 77% of scheduled benefits will be payable with tax revenue. Source:2013 Social Security Trustees Report, intermediate assumptions

  22. Projected Trust Fund Exhaustion • The Treasury will gradually repay Social Security $2.7 trillion until its reserves are exhausted. Source: 2013 Social Security Trustees Report, Figure II.D7

  23. Why Does Social Security Have a Solvency Gap? • Demographics • Aging baby boomers • Declining fertility rates • Increasing life expectancies • Rising real benefits • Initial benefits are indexed to wages • Wages typically rise faster than prices • Thus, real benefits rise for each generation

  24. Fewer Workers Per Beneficiary Source:2013 Social Security Trustees Report, intermediate assumptions

  25. How to Restore Solvency? • More Money In • Raise the payroll tax immediately by 2.66 percentage points (raising the combined tax from 12.40% to 15.06%). • Less Money Out • Cut benefits immediately by 16.5%. • Larger changes are needed to maintain solvency beyond 75 years. Source: 2013 Social Security Trustees Report, intermediate assumptions.

  26. Advantages of Acting Sooner Rather than Later

  27. Social Security’s Impact Reduces elderly poverty Largest source of elderly income Modest by international standards

  28. Elderly Poverty Over Time

  29. The Largest Source of Elderly Income Source: SSA, Income of the Aged Chartbook, 2010

  30. Reliance Varies Widely by Income Level Source: SSA, Income of the Aged Chartbook, 2010

  31. Increasing Reliance on Accounts

  32. Replacement Rates Less than OECD Average Source: OECD, Pensions at a Glance, 2009, public pensions for median earner

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