SOCIAL SECURITY

Lindsay Nolan
Marcus Smith
Amy Huff
Soheil Zamanianpour
Erik Sordahl
History of Social Security
 Pre-Social Security
 1862 Civil War Pension program

 1896 New Jersey Teacher’s Pension Plan

– Oldest retirement plan

 1920 New York State and City retirement system for

employees
– Civil Services Retirement System set up for
Federal employees.
 Depression Causes Pension
Proposals
 Estimates state that in 1934 over ½ of the elderly in America lacked
sufficient funds to be self-supporting.

 1928 Everyman a King

– Huey Long Governor of Louisiana

 1930’s Ham & Eggs

– Robert Noble

 1933 End Poverty in California Plan

– Upton Sinclair
 Pension Proposals
 1933 Townsend Plan
 Francis E. Townsend from Long Beach, CA
 Government provide a pension of $200 per month to
every citizen age 60 and older.
 Pension funded by 2% of national sales tax.
 3 Requirements
– Person had to be retired
– “Their past life is free from habitual criminality”
– The money had to be spent within the US by the pensioner
within 30 days of receipt.
 Pension Proposals
 Social Insurance Movement
– Tradition began in Europe

– 1st Adopted by Germany

– Social Insurance emphasized government sponsored

efforts to provide for economic security of its citizens.
 Social Security Act
 1934 Committee on Economic Security
– Committee was instructed to study the entire problem
of economic insecurity and to make recommendations.

 1935 Social Security Act

– Included unemployment insurance, old-age assistance,
aid to dependent children and grants to the states to
provide various forms of medical care.
 Social Security Act
 Major provisions of the act
– Title I – Grants to states for old-age assistance
– Title II – Federal old-age benefits.

 Social Security Board

– Contains 3 members

 Social Security numbers

– John David Sweeny Jr. was the first social security number
account
 Social Security Act
 First payments
– Ernest Ackerman-lump
sum of 17 cents.

 1939 Amendments
– Added payments to
spouse and minor of
retired workers
Social Security Act
 Milton Friedman
– Claims Division of
SSA
– Started working in
November of 1939.
– Believes that Social
Security should
become privatized.
 Social Security Act
 1950 Amendments
– Increased benefits for existing beneficiaries
– COLA’s-cost of living allowances
– Disability-1954 President Eisenhower

 Medicare and other changes

– Amendments of 1961 lowered the age at which men are
first eligible for old-age insurance
– Medicare bill signed on July 30th, 1965 by President
Lyndon Johnson
 Social Security Act
 SSI-Social Security Income
– 1977 Amendment was to address the financing of the
program
 Disability in the 1980’s
– 1984 congress passed the Disability Benefits Reform
Act
 Social Security reform in the Bush Administration
– Reform of Social Security and Medicare.
Benefits and Administration
 Social Security Components
 Old Age retirement- a compulsory insurance
program designed for retirement benefits for
people who pay into the program.

 Survivors benefits- paid to the dependents of a

deceased worker who is fully insured.

 Disability Benefits- paid to disabled workers who

meet certain eligibility requirements.
 Qualifying For Old-Age Benefits
 Insured is eligible with  PIA Primary Insurance
40 credits paid in to Amount. The monthly
Social Security amount of benefits
received.
 Or earning 6 credits in
the last 13 calendar  AIME Average
quarters Indexed Monthly
Earnings.
 Determining Old-Age
Insured Eligibility
Normal
Year of birth retirement age
1937 and prior 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-54 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67
Note: Persons born on January 1 of any year should refer to age previous year.
 Qualifying For Old-Age Benefits
 Early retirement-
Up to 4 years before Full Retirement with penalty
– 3 years early 20% of benefits as opposed to 36%
– 4 years early a 5% penalty each month

 Full Retirement

 Delayed Retirement-
4 years after reaching Full Retirement receiving
up to 8% extra for delay
www.ssa.gov
 Disability Benefits
•Insured must be working to  Disability Compared to
qualify for disability benefits. Workers Comp. is much more
strict for qualifying

•With disability comes 100% of – You must meet SSA’s

primary insurance definition of disabled
21-24 Years Old At least 6
Credits – You have to go through a 5
month waiting period
24-30 Years Old 27 Credits in 3
of last 6 years
– The injury will either cause
31 or Older 20+ Credits disability for at least 1year
or result in cause of death
 Survivor Benefits
 Paid to dependents of deceased workers
– Surviving Spouses older than 60
– Disabled Children
– Unmarried Children 18 or younger
– Disabled Spouse 50+
– Dependent Parents 62 or older
– $255.00 death benefit to Beneficiary
– Maximum paid out benefits $2119.70 as of
2003
 Social Security and The Wheel
 Taxation
– 25,000-34,000 up to 50% benefits taxed
– 34,000+ up to 85% benefits taxed
– Working with IRS designed form to determine
the SSA amount of benefits taxed
 Inflation (AIME’s adjustment)
 Legal Requirements
Social Security Today
 Today’s Beneficiaries
 46 Million beneficiaries accounted for in 2003 OASDI Trustees Annual Report
 32 Million retired workers + their dependents
 7 Million survivors of deceased workers
 7 Million disabled workers + their dependents

 Average monthly benefits of $863.24

 $922.08 for Retired workers, $444.20 for their dependents
 $563.79 to $887.74 for Survivors
 $723.15 for Disabled persons
 $$411.87 to $567.04 for Children
(dependents of retired/deceased/disabled workers)
 Today’s Beneficiaries
Number of Beneficiaries by Fiscal Year (In Millions)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
OASI 37.2 37.5 37.6 37.8 37.9 38.0 38.7 38.9 39.2 39.4
DI 5.5 5.8 6.0 6.1 6.3 6.5 6.6 6.8 7.1 7.5
SSI/OASDI1 2.5 2.5 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.5
SSI only 3.7 4.0 4.2 4.2 4.2 4.2 4.2 4.3 4.4 4.4

1. Includes individuals receiving benefits from more than one program.

 Today’s Beneficiaries
Total annual benefits paid, by type of benefit and trust fund, 2003
(Amounts in millions)
CASH BENEFITS SERVICE (HOSPITAL) REHAB SERVICES
1994 $316,835 $161,900 $40
1995 332,580 181,340 39
1996 347,088 197,230 31
1997 361,970 210,519 53
1998 374,990 210,115 51
1999 385,768 209,490 68
2000 407,644 217,351 63
2001 431,947 240,846 60
2002 453,815 260,913 75
2003 470,798 275,909 47
 Today’s Beneficiaries
 Today’s beneficiaries treat Social Security as a
sort of Financial Safety Net

 Workers rely solely on these benefits for their

future financial needs

 Social Security treated as most important form of savings

and most valuable financial asset
Today’s Beneficiaries
Today’s Beneficiaries
 The Unified Budget
 The Unified Budget, or “Whole Budget”, is a combination of Trust
Funds and Federal Funds
 Trust Funds include taxes and revenues received for Social Security, Civil
Service/Military retirement, Medicare, etc.
 Federal Funds include all other revenues

 By combining the two, or unifying them, the “surpluses” received by

Social Security can be used to conceal part of the federal funds deficit.

 The Unified Budget has created the Pay-As-You-Go basis that

Social Security operates on
 The required annuity payments have not been made to the Trust Funds which
will later provide benefits for today’s workers
 Today’s struggling young workers are actually financing the retirement of
aging Baby Boomers’ high standard of living
 Strategic Plan of the
Social Security Administration

“Advance the economic security of the

nation’s people through compassionate and vigilant
leadership in shaping and managing
America’s social security programs.”
 Strategic Plan of the
Social Security Administration
 GOALS:
1) Deliver high-quality, citizen-centered service

2) Ensure superior stewardship of Social Security programs and

resources

3) Achieve sustainable solvency and ensure Social Security

programs meet the needs of current and future generations

4) Manage and align staff to support the Administration’s mission.

 Problems With
The Social Security System
 Retiring Baby Boomers
• 75 million baby-boomers will retire in coming years

• The number of retirees collecting benefits in 20 years is

expected to increase 60%

• The number of workers paying taxes to support those

benefits is projected to increase a mere 14%

• SSA Estimated contribution to Social Security will equal

only 3/4 of the current benefits given to retirees
 In the Future, Fewer Workers Will Support
More Retirees
As a matter of simple math, when the ratio of workers to retirees
falls, each worker must bear a greater financial burden.

1960: 5.1 to 1 Today: 3.4 to 1 2030: 2.1 to 1

 Fertility Rate (number of children per woman)

2
2.5
3
3.5
4

1.5
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
The Baby Boom

1990
The Baby Bust

1995
2000
2005
2010
2015
2020
2025
Levels
Birth Rates

2030
Continue at Low

2035
Low Birth Rates Mean Fewer New Workers

2040
 Increasing Life Expectancies Mean
More Retirees to Support
Total life expectancy for individual reaching age 65

88

Future retirees will live years longer

86 than today’s 65-year-olds, and collect
thousands more in benefits.

84

82

80
Male
Female
78

76
1985
1940
1945
1950
1955
1960
1965
1970
1975
1980

1990
1995

2010
2015
2005

2040
2000

2020
2025
2030
2035
 Government Spending Leads To
Social Security Deficits
• Since the 1980’s, American workers have been
contributing more into Social Security than retirees have
been taking out
• The average surplus amount has been $100 Billion
p/year
• By year 2021, the Trust Fund is projected to have
close to $4 Trillion
• Social Security Fund is used to pay for all current
Social Security claims
• Funds left over are spent by the government
• This is how part of the Social Security deficit is formed
 With each passing year, Social Security's long-term
deficits grow larger
$27
75-Year Balance (surpluses minus deficits)
Long-term Deficits (if short-term surpluses aren't saved) $25.03
$25
$23.87
$22.84
$23 $22.17
Trillions $2002

$21.74
$21.14
$21 $20.09

$18.71
$19

$17

$15
1999 2000 2001 2002
Year of Trustees' projections
 Social Security Prevents Savings
• Paying more on Social Security taxes reduces individual
disposable income, which in turn reduces the amount of
savings
• People are more reluctant to save money for retirement
on their own
– Social Security may reduce private saving
by as much as 50%
• Lowered Growth (GDP)
– Reduced savings results in decreased private
investing
– Decrease in capital stock ownership could easily
exceed $10 trillion, which is equivalent to 2% of GDP
per year
 Reduced Pension Plans
Not Covered

19% Defined Benefit

Only

17% 51% Defined

Contribution
13% Only
Both DC & DB
 High Social Security Taxes (cont.)
20
Income/Cost as percentage of taxable payroll

Cost
Income 2025: 16
2080: 20.1
17.5 percent
percent

Payroll tax
15 surpluses

12.5
Payroll tax
deficits
10
2002: 10.8
1970:
percent
8.1
7.5
1970
1975
1980
1985
1990
1995

2010
2015
2000
2005

2020
2025
2030
2035
2040
2045

2055
2060
2065
2070
2075
2050

2080
 Social Security Fraud
• Criminal activity
– False statements on claims
– Concealment of material facts or events affecting eligibility
– Misuse of benefits by a representative payee
– Buying or selling Social Security cards or SSA information
– SSN misuse involving people with links to terrorist groups or
activities
– Crimes involving SSA employees
– Identity theft

• Other violations
– Conflict of interest
– Fraud or misuse of grant or contracting funds
– Significant mismanagement and waste of funds
– Standards of conduct violations
Social Security Penalizes Education

Social Security Paym ents Over The Am ount Of

Benefits Received

$93,170.00
$100,000.00
$80,000.00 $63,363.00
$60,000.00 $32,667.00
$40,000.00
$20,000.00
$0.00
Male High Male College Male College
School Graduate Graduate
Graduate With a
Graduate
Degree
 Other Problems
• Workers have no legal right to Social
Security benefits

– Helvering v. Davis (1937)

– Flemming v. Nestor (1960)

• Loss of benefits in case of death

 Other Problems (cont.)
• Poor Rate of Return On Taxes Paid
– Workers born before World War II paid significantly less in taxes
than they will receive in benefits - and can expect a higher rate
of return than subsequent generations.
– Assuming that the program can pay full promised benefits,
Baby Boomers can expect a rate of return of less than 2%, and
Generation X’ers can expect less than 1%.
Children born today can expect a rate of return from Social
Security of almost ZERO

• Under the current system, benefits must be cut in order to

reduce the deficit. For Americans benefits would be cut
16% for today's 30yr-olds, 29% for today's 20yr-olds and
35% for today's newborns.

• The only other options under the current system is to raise

taxes or the retirement age even more
Social Security Reform

Why Pay into a Fund We May Never

See?
 Solution: Privatization

The ability to choose your investment

portfolio instead of putting money into Social
Security
 Positives about Privatization
 The ability to choose the combination of risk and return in which you
wish to take
 Allows worker to gain higher rate of return compared to the weak
return of Social Security
 Allows retirees to leave accumulated savings to someone if he or she
happens to die before retirement
 The ability to choose lump-sum distribution of retirement savings,
rather than being forced to receive a monthly annuity
 The ability to use accumulated funds for emergencies that might occur
prior to retirement
 The ability to retire and live on accumulated savings before the official
retirement age
 The Chilean Social Security System
1) The Chilean system links benefits to contributions

2) Workers are required to contribute a minimum of of 10% of their salary,

but may contribute up to 20%

3) The contributions are tax deductible

4) The investors cannot direct their own investments

5) At retirement, the worker converts his account into an annuity with an

insurance company

6) The annuities are taxed, but usually at a low rate

 The Chilean Social Security System
(cont’d)
7) If the annuities are not sufficient to bring the worker above the
minimum living income, the state makes up the difference from general
revenues

8) A Private Pension Fund Administration (AFP) invests the contributions

in mutual funds, stocks, corporate bonds, and government bonds

9) Workers that have contributed to the old government system and retirees
were given options to stay in the old system or move to the new system

10) The transition was financed without raising tax rates, generating
inflation, or pushing up interest rates
 Outperforming United States
Social Security Returns
 A single U.S. male with average earnings, born in 1937, has realized
only a 1.6% annual rate of return

 Between 1981, when private pension plans were implemented in

Chile, and 1998, Chilean workers have realized an 11% rate of return
on their private accounts

 The average retiree from Chile’s private system gets a pension that is
80% of his average income

 From 1986 to 1995, workers in the United Kingdom achieved an

annual average growth of 8.7% in their private pension plans.
 Singapore’s Privatizing Success

 Residents of Singapore are forced to save 40% of

their incomes

 Singapore has the highest savings rate in the world

 85% of Singapore’s population own their homes

 Negatives about Privatization

 Privatization Is Risky

 Privatization Hurts Women

 Privatization Reduces Disability and Survivors

Benefits

 Privatization Implementation is Costly

 President Bush’s Solution:
Private Accounts

Gives younger workers the option of putting part of

their payroll tax into personal retirement accounts,
in return for smaller Social Security benefits.
 Private Accounts
 Allows workers to divert part of their payroll taxes into
personal savings accounts

 Allows this portion of Social Security taxes to be invested in

stocks and bonds that typically yield higher returns than the
current government-managed system

 In the short-term, private accounts would worsen Social

Security’s financial condition

 Private accounts are a better alternative for younger workers

 Website Resources

 www.actuary.org/socialsecurity

 www.cato.org

 www.mysocialsecurity.org

 www.ssa.gov