PPt-17A Social Security Presentation exp

PPt-17A Social Security Presentation exp - Social Security...

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Unformatted text preview: Social Security Social Security What is it? What is the Objective? How does it Work? What is the Problem? Can it be Fixed? What is Social Security? What is Social Security? Basically it is Economic Security (i.e. Protection from economic hardship) What is its Objective? What is its Objective? To provide the certainty that food and shelter will be available for you and your family History History People always have faced uncertainties about their ability to provide food and shelter for the families in times of economic hardship caused by unemployment, illness, disability, death of family provider, old age infirmities Greeks sought security in Olive oil – nutritious, could be stored for long periods, thus valuable Medieval Europe (5­15th century): serfs sought security by working for feudal lords, lords sought security by having serfs to work land Genghis Khan: Mongols provided for families of fallen warriors Family members & relatives have felt some responsibility for one another If family had resources, family was often a source of econ security, esp. for old or infirm Land: another source, could be farmed, rented, or sold Post­Medieval Post­Medieval Societies grew, became more complex Cities developed Guilds (i.e. societies of merchants, craftsmen, etc.,) formed Often helped members/families in times of poverty, illness, &/or death Friendly societies (16th c. England). Fraternal orgs (for runners of trade unions{) Add to above with actuarially­based life insurance Early US fraternal orgs: Freemasons, Odd Fellows, Elks, Moose, Eagles England (17th c): Poor law of 1601; codifies idea that state has responsibility to provide for welfare of citizens Provided for Taxation to fund relief from poverty Distinguished between “deserving” & “undeserving” poor Idea/tradition comes to New World w­Pilgrims 1st colonial poor laws fashioned after English Poor Law 1601 – local taxation supported the destitute (“worthy” poor) No standardized criteria Managed at local level As colonial America became more complex, diverse, mobile – local system strained Result: creation of almhouses or poor houses Some ltd movement toward state funding Relief made as unpleasant as possible to “discourage” dependency Relief outside of alm/poorhouses viewed skeptically: Outside funds made it to easy to remain on relief But poorhouse costly to operate In some cases: could lose personal property, right to vote, might have to wear “P” on clothing Relatively easy to provide cash or in­kind support However, as late as 1915, at most only 24%of $spent on relief was from public funds Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system While need for Soc Sec affects all ages & classes of people, old age is a particularly acute aspect Retirement after long life of labor Thomas Paine in Agarian Justice (1795) was one of 1st to call for an econ sec system Those who inherited property would pay 10% inheritance tax to create special fund At 21 each citizen to get 15£ sterling to get them started on life 10£/year to everyone 50 or older to guard against poverty in old age Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system Military Pensions Civil War 1862 law provided for benefits for those disabled the consequent of the mil duties 1890 link to service connection disability broken: Widows & orphans of those mil killed in action received benefits = to those paid above Following war: CSA soldiers not included Any disabled vet could get benefits 1906: Old age sufficient for mil to qualify for benefits Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system Military Pensions By 1893: largest single Fed Govt expenditure = $165m spent on mil pensions By 1894 + 37% of Fed budget Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system Non­Military Pensions Company Pensions Before company pensions: some companies provided older workers w/token jobs Some companies paid a retirement stipend But there were no”rights” to any kind of retirement benefit 1st formal pension plan introduced in 1882 Alfred Dolge Co. (piano & organ maker): w­held 1% from each workers pay & put it in pension fund Company added 6% each year But by 1900 only 5 companies had plans By 1932 only 15% of labor force had any kind of employment related pension plan Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system Non­Military Pensions Enter – “Great Depression” of 1930s Not the 1st major depression but 3rd (1840s, 1890s) During 1890s: growing realization that in an industrialized society unemployment could strike anyone Oct 24­27, 1929 Stock Market began great decline W­in 3 months lost 40% of value $26 billion (roughly $365 B today) in wealth disappeared It took 25 yrs for stack market to recover to pre­crash level Unemployment exceeded 25% 10,000 banks failed GNP declined by nearly 50% ($105B­$55B) by 1932 Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system During 1930s poverty among elderly grew dramatically Circa 1930 Huey Long, Gov of Louisiana, inter alia, proposed: everyone over 60 receive old­age pension (life expectancy all races: Ave 59.7; men 58.1; women 61.6 v. today: ave 77.9; men 75.4; women 80.4) Francis Townsend, Long Beach doctor founding himself unemployed in 1933 w­no prospects, proposed: US govt provide pension to all citizens 60 or older Funded by 2% natl sales tax Requirements: Retired Free of past criminality $ spent in US by pensioner w­in 30 days W­in 2 years: 7,000 Townsend clubs in US Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system Best estimates: in 1934 >50% lacked $ to be self­supporting States responded 1st: By 1935 30 states had some form of old age pension program But programs generally inadequate/ineffective in meeting needs Only about 3% of elderly received benefits averaging 65 cents/day On entering office, Pres FDR proposed an econ sec idea based on social insurance 1st adopted in Germany by Otto von Bismarck 1889 By 1935 34 nations had some form of social insurance A program to insure against loss of income in old age Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system Enter the Soc Sec act of 1935 Workers 65 or older get continuing income after retirement Workers themselves were to contribute to fund for their future retirement 1st Fed Insurance Contributions Act (FICA) funds collected Jam 1937 Soc Sec Trust Fund created in 1937 $ received based Also provided unemployment ins Old­age assistance, add to dependent children Grants to states to provide various forms of medical care Act amended in 1939 to include Dependent benefits: paid to spouse & minor children of worker Survivor benefits: paid to family in event of premature death of worker Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system 1950 Amendments Since benefits were small: benefits increased Introduced Cost of Living Allowance (COLA) A person receiving $22.54 in 1940 would now receive $41.30 1954 & 56 Amendments: initiated disability ins, providing additional coverage against econ insecurity provided disabled workers 50­64 & disabled adult children w­benefits Further amended 1960: provides disability benefits at any age & to dependents By 1960, 559,000 people receiving disability benefits: ave $80/m By 1969, 1.7 m receiving disability payments Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system 1961: eligibility reduced to 62, w­reduced benefits 1965 Medicare became law (under Pres Johnson; Pres Truman rec’d 1st Medicare card) Soc Sec Admin created to administer program Extended health care coverage to Americans 65 or older 1983 Amendments, inter alia Nearly 20m people enrolled in 1st 3 years Taxed Soc Sec benefits Included Fed employees Increased retire age gradually to 67 by 2027 Increased deduction for early retirement 1972 COLAs became automatic Roots of Modern US Soc Sec system Roots of Modern US Soc Sec system 1996 amendments, included No disability pay if drug addiction or alcoholism a material factor in causing disability 2000 amendment: No longer need to be retired to receive SS payments Previously amended 1950: could receive SS payments if still working at 75 or older 1954: age restriction reduced to 72 1977: restriction reduced to 70 2009: One time payment $250 to those eligible for SS, RR Retirement, Vets disability, or Supplemental Security Income How does it Work How does it Work Today SS Provide a basic income to retirees And their families 1 in 7 Americans receive a SS benefit 52 M American retirees, including the disabled & dependent children receive an average monthly paycheck of about $1000 How Does It Work? How Does It Work? • Social Security's Old­Age, Survivors, and Disability Insurance (OASDI) program: • • • • • Workers and Employees pay into the Social Security Trust Fund (current rate –since 1990 ­ is 6.2% each or 12.4% total) Beneficiaries are paid out of the trust fund Excess money in SS Trust Fund is invested in interest bearing US Govt securities. Social Security Trust Fund thus has a govt IOU in form of govt Securities Current accumulated surplus (receipts over expenditures) > $2.6T MYTHS MYTHS #1: Social Security is going bankrupt! Reality: Even if nothing changes, the surpluses wouldn’t run out until 2036/7. Payroll taxes at current rates would then cover only about 77% of promised benefits. #2: You’d be better off if I kept my social security taxes in my own investment account. Reality: Maybe, under certain conditions only, e.g. You faithfully put your $ aside every yr of your working life in a mix of stocks & bonds The stock/bond markets don’t take a dive just before your planned retirement Remember: to have the ave. monthly payout of $2,170 for a couple w­ single breadwinner, you’d need to have about $580,000 invested at age 65. MYTHS MYTHS #3. You get out of Soc Sec the amount you put in. Reality: Not so. Your soc sec taxes today are paying for those who are on currently on soc sec. Future generations will pay for you. If you live long enough you are likely to receive more than you paid in. #4. Soc Sec helps old people, not younger people like you. Reality: No. Soc Sec also provides income for qualified widows & widowers with young children, as well as orphans It also saves young families from the cost of supporting older parents, who w­o SS might not have enough $ to support themselves MYTHS MYTHS #5. If young people switched their SS payroll taxes to private accounts, the government would not have to borrow to pay the SS bill in years when SS outlays exceed SS payroll receipts or when the SS surplus runs out. Reality: If current generations of employed stopped paying SS taxes & put money in private funds, the government would have to borrow $ to pay for current retires. The Problems The Problems #1. Actual money received by govt thru purchase of securities by SS Trust Fund is spent by the gov’t to cover current budget deficits (i.e the gov’t has borrowed the money to pay its bills) •So there is no $2.6T batch of money sitting around to cover SS costs when receipts are less than expenditures The Problems The Problems #2 In 1960 5.1 workers supported one retiree Today 3 workers support one retiree By 2040 there will be only 2 workers per retiree Thus with fewer workers contributing to the program less money is and will continue to be available to cover costs, unless changes are made Indeed in 2010: SS expenditures exceeded non­interest income (i.e. receipts) for 1st time since 1983 (by $49B); ($46B est 2011) while estimates vary expenditures are likely to continue to exceed receipts Thus the gov’t will go further in debt to cover the difference The Problems The Problems #3 By 2037 (best estimate), with outlays continuing to be greater than receipts, SS Trust Fund will be depleted. Result: SS will not be able to pay full benefits Possible Fixes Possible Fixes • Increase SS Tax • E.G. a raise in rates by about 1% each for employer & employee keeps system solvent until 2077 • • Current rate 6.2 each (4.2 for worker in 2011) Pop the Cap • SS Tax cap set by Cong is $106,800. Raising cap to $140,000 provides about 1/3 of needs for solvency for 75 years (for 2011 Possible Fixes ­ 2 Possible Fixes ­ 2 • Adjust Benefits • Increase retirement age • • • • Already it is now changing from 65 to 67 (by 2027) Modify COLA Introduce Means testing Calculate personal benefits based on price increases rather than wages Possible Fixes ­ 3 Possible Fixes ­ 3 • Bring State & Local employees into system • • • There are about 7M state & local employees not covered by SS but by employer operated retirement funds. Require new State & local employees to join SS would help. Pay SS benefits in excess of receipts out of general tax revenues Possible Fixes ­ 4 Possible Fixes ­ 4 • Establish Private Accounts • One proposal: Workers can chose to divert up to 4% of the 6.2% of their SS w/holding to private accounts Private Accounts Private Accounts • Advantages • • • Workers control a portion of their money If they earn money in the market it is theirs or their families to keep ­ even after the worker dies Over time SS Trust Fund will have to pay out less Private Accounts Private Accounts • Disadvantages • • • Investments are not always safe. E.G. Sen Bill Frist (R­T) had more than $750K in his re­election campaign fund after the 2000 election. He put it in a stock index fund & lost $460k in 2001 &2002 If current workers divert about 31% of the funding to private Accounts there will be a $1­$2 T deficit over 10 years the Govt would have to pay to cover current beneficiaries They don’t really improve SS system. With less money coming it simply provides proportionately less benefits. Other Interesting Info Other Interesting Info • Some say the amount in excess of SS outlays to retirees that is being spent by the govt to cover budget deficits is about equal to the tax cuts provided our wealthiest citizens Sources Sources Myths: Jane Bryant Quinn,“Getting the Story Right,” AARP Bulletin, November 2011, 21­22. ...
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This note was uploaded on 12/09/2011 for the course ACCT 2101 taught by Professor Turner during the Spring '08 term at Georgia Tech.

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