11a_social+security+problem

11a_social+security+problem - U.S. Social Security Crisis?...

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1 U.S. Social Security Crisis?
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2 Massive effort in 2005, including • State of the Union speech 2005 • 60-day, 60-city Presidential tour of US “As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers. And the best way to reach that goal is through voluntary personal retirement accounts… Here's why the personal accounts are a better deal. Your money will grow, over time, at a greater rate than anything the current system can deliver… In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children and -- or grandchildren. And best of all, the money in the account is yours, and the government can never take it away.” George W. Bush, State of the Union Address, February 2005 President Bush has strongly advocated reforming Social Security by introducing personal accounts
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3 Three misconceptions Returns on social security contributions so low because system is wasteful. Or else it is all the baby boomers’ fault. Can’t privatize today without hurting today’s retirees.
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4 Estimated Real Internal Rates of Return on Social Security Contributions Source: Geanakoplos, Mitchell, and Zeldes (1999) Data are from Leimer (1994) 1876 1886 1896 1906 1916 1926 1936 1946 1956 1966 1976 1986 1996 0 10 20 30 40 0 1 2 3 4 5 Birth Year Percent All birth years (use left scale) Birth years 1924-2002 (use right scale) Holdben Present Law Holdtax The projected return on Social Security is low
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5 2.7 % Long-Term Treasury Bonds 9.1 % Average Arithmetic Inflation-Adjusted Return 1926 - 2004 Asset Relative to the Historical Returns on Stocks and Bonds … Current real Treasury (TIPS) yields: 1.8 %
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6 U.S. Social Security Trust Fund Assets Intermediate Cost Assumptions 0 1,000 2,000 3,000 4,000 2000 2005 2010 2015 2020 2025 2030 2035 2040 year B illions of C onstant 2 006 Dollars 0 1,000 2,000 3,000 4,000 Source: US Social Security Trustees Report (2006) 2040: Trust Fund is exhausted But projected Social Security inflows will still cover about 70% of projected benefits
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7 Two Problems Low rates of return Current tax rates of 12.4% won’t be enough to cover projected benefit payments
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8 Results No action taken by Congress No current prospect for legislation Funding for individual accounts nevertheless included in President’s 2007 budget request
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9 Outline The Problems History Current system: mechanics and outlook What caused the problems? What Should we Do? Parametric reform options Bush Privatization Fundamental reform options
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10 History Social Security Act signed by FDR on August 15, 1935 • Old age pensions • Unemployment insurance
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11
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12 Intention Forced Savings Prefunded 40% replacement ratio Insurance
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13 Prefunding dropped Frances Perkins Pay as you Go
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14 Major Social Security Benefit Changes System expanded to cover more workers 1950s Earnings test eliminated
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This note was uploaded on 12/08/2009 for the course ECON 251 at Yale.

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11a_social+security+problem - U.S. Social Security Crisis?...

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