Social Security (ch 13) Over the next 75 years, Social Security has promised _________trillion more in benefits than it plans

to collect from worker taxes. Reforming Social Security is difficult because it is the largest source of income for the elderly. ______% of beneficiaries derive more than half their income from it ______% of beneficiaries derive 90% of their income from it A. How Social Security Works It began in _________ , motivated in part by the fact that the Great Depression had wiped out the savings of many elderly. 1. Program Details a. Who Pays In? The Federal Insurance Contributions Act (FICA) tax is paid by most workers on the first $102,000 of earnings. Individuals pay ______% of earnings. Employers (or self-employed people) pay an additional ______% of the workers earnings. b. Who is Eligible? To be eligible to collect benefits, a person must - be age ______ - have worked and paid this tax for ______ quarters over their lifetime c. How are the benefits paid? Social Security is an ____________ payment, which means it is received until the recipient¶s death. - The amount of the payment is a function of average lifetime earnings. - Indexed for inflation. - 35 year average Benefits are calculated as a redistributive function of ___________________________________. - low earnings are translated into: Ex: Workers with an AIME of less than $711 per month get _____ in benefits for every dollar of AIME. Workers with an AIME up to $4,288 per month get ______in benefits for every dollar of AIME. Above $4,288, benefits are _______ for every dollar of AIME. Workers who earn more get ___________ benefits. Benefits do not rise ___________________ earnings. The replacement rate is the ratio of benefits received to _________________________ prior to the entitling event. For the average person, Social Security has a replacement rate of _____% For the low income workers, the rate is more like ____%. For the high income workers, the rate is more like ____%. Starting at age 65, individuals can receive their full retirement benefits. Full retirement benefits are also known as Primary Insurance Amount (PIA). Age 65 is also called the Full Benefits Age (FBA).

The FBA is slated to rise to age ______ for those who were born in ______ or later. Age 62 is the Early Entitlement Age (EEA). There is an _________________reduction in benefits of 6.67% per year. Those who receive benefits at age 62 get ____% less in benefits than those who claim at 65.

d. Work and Social Security For those age 62-64 who are receiving benefits, an _______________ test is applied. - benefits are reduced by ______ for each dollar they earn above $13,560. For those 65 and older, they can work as much as they want and still get full benefits.

e. Benefits for Family Members Spouses of claimants receive benefits equal to the higher of their own benefit or _______ of the benefit of the spouse. Children of deceased workers are also entitled to a share, but the total family benefit cannot exceed _____% of the workers benefit amount. Spouses of deceased workers receive the higher of their own benefit or the deceased.

2. How Does Social Security Work Over Time Private pension plans are _________________ plans, which means:

Social Security is an __________________ plan, which means:

a. Social Security Redistributes Income

b. Lessons Learned The rate of return provided by an unfunded Social Security to ³middle generations´ depends on the rates of __________________________ and ______________________ growth. An unfunded Social Security carries a legacy debt which means:

c. Practical Aspects of Redistribution Measure redistribution by computing the Social Security Wealth (SSW) that accrues to different generations. SSW = expected PDV of lifetime future SS benefits ± expected PDV of lifetime payroll taxes Step1: Step 2: Step 3: Step 4: Step 5:

B. Consumption-Smoothing Benefits of Social Security 1. Rationale for Social Security a. market failures in the annuity market

b. paternalism

2. Consumption Smoothing and SS

3. Private Savings and SS

4. Living Standards of the Elderly The poverty rate is: The poverty level is:

C. Social Security and Retirement 1. Theory There are 2 effects of Social Security on retirement decisions: - implicit taxation

- redistribution

2. Evidence Three types of evidence suggest that Social Security is a powerful determinant of retirement decisions. a. time series evidence

b. age pattern of retirement

c. international comparisons

D. Social Security Reform In 1950, there were ______ people over the age of 65 for every _____ people of working age. By 2050, it is estimated that ______ people will be over 65 for every 100 people of working age. Factors contributing to the current fiscal imbalance in Social Security: 1. Reform Round 1: The Greenspan Commission In 1983, the Social Security trust fund was set to run out in July. The Greenspan Commission was set up to make recommendations. Recommendations made:

2. Incremental Reforms a. Raise taxes

b. extend the base of taxable wages

c. raise the retirement age

d. lower benefits

e. reduce benefits for high income groups

3. Fundamental Reforms a. invest the fund in stocks

Two serious concerns: In theory, both could be addressed by appropriate design of investment strategy.

b. privatization Advantages: Problems and comments on each: c. Tradoffs between fundamental reforms

A middle ground might be:

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