SOCIAL SECURITY
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SOCIAL SECURITY Chapter 11
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SOCIAL SECURITY. Chapter 11. Social Security Expenditures (1939-2011). Source: Social Security Trustees [2012]. Why Have Social Security?. Consumption Smoothing and the Annuity Market How Social Security works Annuity Consumption smoothing Adverse Selection and the Annuity Market - PowerPoint PPT Presentation
Transcript of SOCIAL SECURITY
SOCIAL SECURITY Chapter 11
Social Security Expenditures(1939-2011)
Source: Social Security Trustees [2012].
11-2
Why Have Social Security?
• Consumption Smoothing and the Annuity Market– How Social Security works– Annuity– Consumption smoothing
• Adverse Selection and the Annuity Market– Asymmetric information– Adverse selection
11-3
Other Justifications
• Lack of foresight and paternalism• Moral hazard• Economize on decision-making and
administrative costs• Income Redistribution• Improve the Economic Status of the Aged
11-4
Fully Funded Plan
Period 1 Period 2 Period 3 Period 4
contribute benefits
contribute benefits
contribute benefits
The GreatestGeneration
The Baby BoomGeneration
Generation X
Work Retire Dead
Unborn
Work
Work
Retire
StillDead
DeadChildhood
Childhood Retire
11-5
Each generation’s benefits based on deposits it made
during working life plus accumulated
interest
Period 1 Period 2 Period 3 Period 4
The GreatestGeneration
The Baby BoomGeneration
Generation X
Work Retire Dead
Unborn
Work
Work
Retire
StillDead
DeadChildhood
Childhood Retire
contribute
benefits
contribute
benefits
contribute
benefits
benefits
Pay As You Go (or Unfunded) System
11-6
Each generation’s
benefits come from tax
payments made by current
workers
Period 1 Period 2 Period 3 Period 4
The GreatestGeneration
The Baby BoomGeneration
Generation X
Work Retire Dead
Unborn
Work
Work
Retire
StillDead
DeadChildhood
Childhood Retire
contribute
benefits
contribute
benefits
contribute
benefits
benefits
Today’s Partially Funded System
Baby Boomers and Gen X are also
contributing to their own retirement
11-7
Explicit Transfers
• Benefits for dependents and survivors (1939)• Supplemental Security Income
11-8
Benefits
• How to calculate benefits– AIME (Average Indexed Monthly Earnings) –
average monthly earnings in 35 highest paid years• Wages indexed for inflation• Ceiling on AIME – up to tax ceiling
11-9
Benefit Structure
If AIME < $711 PIA = .90*AIMEIf $711< AIME <$4288 PIA = .90*$711 + .32*(AIME - $711)If AIME > $4288 PIA = .90*$711 + .32*($4288-$711) + .15*(AIME - $4288)
11-10
Adjustments• Family Status
– +50% for spouse or dependent child– If covered worker dies spouse receives 100% of worker’s benefit
or spouse’s own benefit (whichever is higher)– Divorced spouse married at least 10 years gets spouse benefit if
not remarried while covered worker alive• Earnings test and taxing benefits
– Benefits reduced $1 for every $2 earned above $14,160– Individuals losing benefits may have later benefits increased– Up to 85% of benefits taxed for recipients with income above a
base amount ($25,000 for single and $32,000 for married taxpayers)
11-11
Financing• FICA (Federal Insurance Contribution Act)• 2008 Social Security Tax rates
– Employee– 6.2% (OASI - 5.6%, DI - .6%) of first $102,000 of earnings on both
employee and employer– Self-employed
• 12.4%• 2008 Medicare Tax rates
– 1.45% on both employer and employee with no earnings ceiling• Why not fund Social Security through general tax revenues?
11-12
Distributional Issues
• Actuarially fair return• Intergenerational redistribution
– Total benefits = Nb * B
– Total taxes = t * Nw * w
– If total benefits = total taxes:Nb * B = t * Nw * w orB = t * (Nw/Nb) * w
• Ida Mae Fuller
11-13
Ida Mae Fuller
11-14
Social Security Wealth:
Representative Individuals
-1000
-800
-600
-400
-200
0
200
400
Tho
usan
ds o
f 20
06 D
olla
rs
Year Cohort Turns 65
Single Male
Low
Average
High
Max
Single Female
-1000
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65
Low
Average
High
Max
One-earner Couple
-1000
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65
Tho
usan
ds o
f 200
6 D
olla
rs
Low
Average
High
Max
Two-earner Couple
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65T
hous
ands
of 2
006
Dol
lars
Low
Average
High
Max
Source: Updated tables, furnished by C. Eugene Steuerle and Adam Carasso, 2006.
See C. Eugene Stueuerle and Jon M. Bakija [1994] for original tables and methodology.
All values expressed in 2006 dollars.
11-15
Other Distributional Issues
• Redistribution within a generation– Differences by earnings– Differences by lifespan– Differences by living arrangements– Differences by number of earners in the family
• Normative evaluation
11-16
The Social Security Trust Fund
• Social Security and National Saving• Budget Treatment of Social Security
– Off budget– Unified budget
11-17
Social Security and Savings Behavior
• Life-cycle theory of savings• Wealth Substitution Effect• Retirement Effect• Bequest Effect
11-18
Budget Constraint for Present and Future Consumption
Present consumption (c0)
Futu
re c
onsu
mpti
on (c
1)
N
MI0
I1
D
I0 - S
I1 + (1+r) S
S
(1+r)S
I1 - (1+r) BF
B
(1+r)B
At endowment point (A)
consumer neither saves nor borrows
11-19
A
Utility-maximizing Choice of Present and Future Consumption
Present consumption (c0)
Futu
re c
onsu
mpti
on (c
1)
N
MI0
I1
E1c1*
A
c0*
Saving
11-20
Crowding out of private saving due to Social Security
Present consumption (c0)
Futu
re c
onsu
mpti
on (c
1)
N
M
I0
I1
E1c1*
A
c0*
R
T
I0T
(1+r)T
Saving before Social Security
Saving after Social
Security
11-21
Empirical Evidence: Does Social Security Reduce Saving?
• Time-series evidence– Martin Feldstein (1974, 1996) v. Leimer and
Lesnoy (1982)
• Cross-section evidence• Evidence from other countries
– Attanasio and Brugiavini (2003) and Italy
11-22
Other ways Social Security Affects Saving
• Retirement effect• Bequest effect• Empirical evidence
11-23
Distribution of Wealth
• Bequeathable vs. Annuitized Wealth• Effect of Social Security on Bequeathable
Wealth• Effect on Wealth Mobility
11-24
Retirement Decisions
• Social Security wealth and the retirement decision
• Empirical evidence– Diamond and Gruber [1999]– Gruber and Wise [2004]
11-25
Long-Term Stresses on Social Security
Source: Social Security Trustees [2012]
Projected revenues and projected costs of Social Security as share of Gross Domestic Product
11-26
Long-Term Stresses on Social Security
Since: B = t * (Nw/Nb) * w
Rearrange: t = (Nw/Nb) * (B/w)
Dependency RatioReplacement Ratio
11-27
Social Security Reform
• Time horizon for solvency– Sustainable solvency
11-28
Maintain the Current System
• Raise the payroll tax• Raise the Maximum Taxable Earnings Level• Raise the Retirement Age• Reducing the Cost-of-Living Adjustment• Change the Benefit Formula• Comparing the Options
11-29
Privatize the System
• Personal Accounts• Pros and cons of personal accounts
– Effect on Solvency– Effect on Saving
• Carve-out accounts• Add-on accounts
– Risk– Administration– Distribution
11-30
