Social Security
What are the two most successful aspects of the social security program (broadly speaking)
1) Social Security has addressed and solved a number of market failures, including: Moral hazard associated with relying on family/community for retiree needs Adverse selection in pensions, annuities, and disability insurance Myopia, leading to undersavings 2) Social Security lifts millions out of poverty, and provides tens of millions more with an adequate and certain income in case they earned too little during their working years
what rate is the social security payroll tax? on what type of income is it applied? to what level?
12.4% (6.2% from employer, 6.2% from individual) (but economists believe employee pays entire cost) On wage income, not investment income up to $125,000. This wage cap is indexed to average wage growth.
When did social security turn cash negative?
2010
When will SSDI become insolvent?
2023
When does CBO say social security (on a combined basis) will become insolvent?
2029
When do the Trustees say that social security will become insolvent?
2034
When is the OASDI trust fund projected to be exhausted?
2034. On its own, the DI trust fund is expected to be exhausted sooner (before 2030)
What are the twin goals of social security?
Adequacy - providing benefits based on need Equity - providing benefits based on contributions (thought of another way, Social Security insures both against under-savings and against low income)
Describe the details of the argument that social security benefits are too small
Average Social Security benefits are only $14,000 per year Most seniors rely on Social Security for the majority of their income Social Security benefits will be less generous in the future, since the retirement age will be higher and Medicare costs will grow Despite the existence of Social Security, many seniors still live at or near poverty
How does social security correct for undesired resource allocation?
Before Social Security 75 percent of the elderly lived in poverty, compared to 10 percent today More than a quarter of disabled individuals live in poverty, and would be substantially more without Social Security There may be a stronger social welfare case for redistribution to the elderly and disabled since they are least physically able work and earn income
How does social security correct for moral hazard?
Before Social Security, those who lived beyond when they could work were taken care of by their family In many cases, there was no need to save for retirement because the financial burden of retirement would fall to others
How to address aging
Change demographics (mortality vs. fertility) Make retirees less dependent on Social Security benefits Make workers wealthier **Encourage Longer Working Lives Increase National (and Personal) Savings => Improve Economic Growth
What is the normal retirement age? How about the earliest and latest claiming eligibility?
Earliest Eligibility Age = 62 Normal Retirement Age = 66 (rising to 67) Additional bonuses for delaying until 70
What market solutions are there to poverty and economic insecurity?
Employment Charities Savings/investment Family/friends/community support Insurance
Specifically, what are 5 ways social security redistributes income?
From the Rich to the Poor From the Young to the Old From Healthy to Disabled Workers From Later Generations to Earlier Ones From Single-Earners and Two-Earner Couples to One-Earner Couples
What are ways to fix social security?
Increase Social Security Taxes (Increase Tax Rate) (Increase Income Subject to Tax) Reduce (or slow growth of) Initial Benefits Reduce Benefits After Collected (COLAs) Increase Retirement Ages Make Other Changes
Is there a keyesian macroeconomic case for social security?
Increases C
What policies would encourage delayed retirement or more savings?
Increasing the Normal Retirement Age (CBO: 3 yr increase = 8 mo's of ave. additional work) Increasing the Earliest Eligibility Age (CBO: 2 yr increase = 8 mo's of ave. additional work) Increase early/late retirement penalties/bonuses Establish "add-on" retirement savings accounts or create incentives/nudges to encourage savings Reduce future benefits and/or current taxes Better link taxes and benefits (stronger/clearer connection between the two) Establish new tax/spending incentives for later retirement
How are benefits calculated? (three steps)
Initial benefits are calculated in two steps: Finding a workers average wage-indexed lifetime wages Apply a progressive formula to this average Benefits are then adjusted upward or downward depending on age of collection Upon collect, benefits are indexed to inflation ("COLAs") Benefits are progressive (lower income=more of your income is replaced by benefits in retirement), but still wage based (higher income=higher level of benefits overall)
Is there a classical macroeconomic case for social security?
Lowers K and L (not really)
What are the two main types of transfer programs?
Means-tested programs Social insurance programs
How does social security correct for myopia?
Myopia literally means "nearsightedness" Sociology and behavioral economics finds that individuals tend to be "myopic," meaning that they irrationally favor the present over the future If individuals are myopic, they will under-save for retirement Social Security can serve sort of as "forced savings"
Examples of social insurance programs?
Old Age & Survivors Insurance (Social Security) Social Security Disability Insurance Unemployment Insurance
What was included in the original social security act?
Old Age Insurance (Social Security) Old Age Assistance (old version of SSI) Unemployment Insurance Death Benefits (Survivors Insurance) Aid to Families with Dependent Children (Welfare) Child Welfare Services Public Health Services Aid for the Blind
What are the two main parts of social security? What are it's two main aspects?
Old Age and Survivors Insurance (OASI) Disability Insurance (SSDI) A "payroll tax" on wages of almost all workers A cash payment to disabled and elderly beneficiaries
Define poverty and income inequality
Poverty = Inadequate income to meet needs Economic Insecurity = Risk of falling into poverty
How does social security exacerbate the consequences of aging?
Reduces L by encouraging people to retire Reduces L by taxing labor (payroll tax) Reduces K by encouraging less savings Reduces K by running deficits
How does government help with poverty and economic insecurity?
Regulations (ex: minimum wage) Direct government purchases In-Kind transfers (goods or services for free or at a reduced rate) Near-cash transfers Tax breaks Cash Transfers
Who gets social security benefits?
Retirees or older Americans (the largest category by far, but the other beneficiary categories are substantial) Widow(er)s (and other survivors) Spouses and other dependents Disabled workers
What are three main consequences of many people aging?
Slower Economic Growth (Fewer Workers) (Fewer Investors) Greater Risk of Poverty in Old-Age (More years in retirement) (Higher chance of outliving savings) High Deficits and Debt (More Entitlement Costs) (Less Revenue)
What are some of the distributional concerns associated with the Social Security program?
Social Security benefits are too small Social Security benefits are too generous Social Security is too progressive (or is "hidden welfare") Social Security is not progressive enough (or is upper-middle class welfare) Social Security is not well-targeted, given its progressivity goals Social Security unfairly rewards certain family structures
describe the details of the argument that social security benefits are not progressive enough
Social Security does not provide adequate protection to many seniors with low life-time wages, particularly those with intermittent work histories Despite the existence of Social Security, more than 10% of seniors are still in poverty Meanwhile, Social Security offers benefits to Bill Gates By 2050, a single-earner high-income couple could collect $60,000 per year at age 65. A two-earner high-income couple could collect $80,000. (numbers are adjusted for inflation)
How big is the shortfall for social security?
Social Security in the Short Term: $27 billion deficits in 2017 $1.4 trillion deficits from 2018 through 2027 Social Security in the Long-Term: 75-year shortfall of 2.8% of payroll (1% of GDP) Shortfall of 3.7% of payroll (1.3% of GDP) in 2040 Shortfall of 4.5% of payroll (1.5% of GDP) in 2091
describe the details of the argument that social security benefits are too progressive
Social Security is sold as a "contributory" system which people believe their benefits are based on their contributions However, the system subtly redistributes income in a way that many participants are unaware of This redistribution is unfair, since it rewards those who don't work or contribute as much This redistribution also provides a disincentive to work and a "tax" on those who do
describe the details of the argument that social security benefits are too large
Social Security is supposed to be one part of a "three legged stool" which includes pensions and private savings Social Security benefits grow with wages, and so becomes more generous over time (Lifetime benefits also grow as life expectancy does) The elderly are already comparatively financially well-off Social Security costs have grown as a share of the economy from 4 percent to 5 percent and will grow to 6 percent
How does social security correct adverse selection?
Social Security provides insurance against those who become disabled or outlive their retirement savings The market for disability insurance can be dominated by those more likely to become disabled, creating a "lemon"-type effect Those who do not believe they will live for as long may not want to contribute to pensions or purchase retirement annuities
define solvency
Solvency is achieved when the combination of revenue and trust fund assets is sufficient to pay benefits for 75 years
What was driving economic insecurity at the turn of the century?
Some experience with public insurance and welfare (Civil War and WWI pensions Poor Houses) New Economic Insecurity in the last 1800s: The Industrial Revolution The Urbanization of America The Disappearance of Extended Family Increasing Longevity The Great Depression
define sustainable solvency
Sustainable Solvency is achieved when the program is solvent for 75 years and annual revenues are at least as large as annual costs in the 75th year
Examples of means-tested programs?
Temporary Aid for Needy Families (TANF/Welfare) Supplemental Nutrition Assistance Program (SNAP/Food Stamps) Supplemental Security Income (SSI)
With what did most cash transfer programs originate?
The Social Security Act of 1935
Is there a market failure case for social security?
Yes—See flashcards on: Adverse selection Moral hazard Myopia Undesired Resource allocation
What happens when social security runs out of money?
benefits will only be able to be paid partially on time
What does it mean for social security to be funded on a "pay-as-you-go" basis?
current benefits (to retirees) are paid with current revenues (from workers) By contrast, if Social Security were "funded," as pension systems are, current benefits would be paid by selling assets bought with past revenues
What is one of social security's biggest issues? (why people are pressing for reform)
it is in danger of becoming insolvent
describe the details of the argument that social security unfairly rewards certain family structures
see slide 76 of the class 9 powerpoint for specific example One earner families get higher "return" than others Spousal benefits often accrue to the highest earners
For which group do social security benefits make up the highest percentage of senior income?
the bottom fifth of the income distribution
How is social security funded?
the social security payroll tax
Why is the trust fund running out?
there are less people contributing to social security per beneficiary now. in 1950, there were 16 workers per beneficiary. In 2011, it was 3 workers per beneficiary
