PAM 10: 18 - Social Security is the largest and most...

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Social Security is the largest and most comprehensive income maintenance program Federally funded, federal/state administered program Characteristics of Social Security Redistributive policy – taking money from some individuals and giving it to others Intergenerational OASI(old age and survivors insurance) and SSI (supplemental security income: means- tested program) The Social Security Trust Fund “Ponzi” system: pay in while you are working and take out when you aren’t Taxes are regressive Benefits are progressive Amount of benefits you get with social security is almost based entirely on what you earned before. All of these benefits are indexed to the CPI. Inflation is very low right now o So, we do not have to adjust with the CPI. How does the trust fund work? o Pay-as-you-go system o No one can opt out o Income comes from taxes Taxes are regressive Benefits are progressive Replacement rate is much higher for those with lower income Because benefits you get later on are tied when you are in the labor market… the environment - say as wages have grown then benefits are increased The trust fund has no actual assets Any money that comes into the ss system that is greater then what is needed … then goes to the federal government for their spending The fed spends this The trust fund is full of IOUs from the government, and is empty otherwise In 2008 and 2009 the inflow was not greater than the outflow Entitlement program- you do not have to qualify for a program in any way, automatically eligible. The large number of people taking disability is what has really hurt this program. How to solve the problem- Additional taxes solution?
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What is causing the problem? Demographics? – Have very little to do with the problem. The problem may be that all are living longer… it is life expectancy. The big problem is the dependency ratio. So the real problem is, People are living longer People are still retiring at the same age Have not saved enough for their retirement Taxing, cutting costs, and borrowing… solutions when there is a deficit. Solutions to the Social Security Problem Principles on which this program was established Progressivity (vertical equity) To make a net underneath people, so we will not have incredibly poor people without food and shelter (redistribute) Fair Return on Contributions (individual equity) You shouldn’t be paying in huge amounts and only getting a small amount back Actuarial fair return Vertical and individual equity are at odds Individual equity, or fair returns on contributions, states that benefits should be related to contributions; contributions render a fair rate of return over time (you get back what you give) Equal Treatment of Equals (horizontal equity) Economic Efficiency Economic Efficiency: calls for efficiency of labor and capital markets (incentives to work, low taxes) and argues for society to get the most of out its resources and maximize utility. Want to keep labor and capital market efficiencies.
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PAM 10: 18 - Social Security is the largest and most...

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