Social Security by AARP Illinois - June 2011

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Social Security: An Overview AARP Illinois June 2011

description

Social Security facts and figures. Where AARP stands in the debate over solvency in the coming years and more.

Transcript of Social Security by AARP Illinois - June 2011

Page 1: Social Security by AARP Illinois - June 2011

Social Security: An OverviewAARP IllinoisJune 2011

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Agenda

• Basics• Eligibility• Funding

Social Security:Social Security:Social Security:Social Security:

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• Funding• Benefits• Trust Funds• Solvency

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Social Security Defined

Social Security established in 1935, motivated because of the

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1935, motivated because of the Great Depression. Social Security provides guaranteed retirement, disability and survivor benefits to eligible workers.

Social Security was established in 1935, motivated largely because of the Great Depression, which saw many Americans out of work and the nation's retired elderly often left in poverty. Social Security provides guaranteed retirement, disability, and survivor benefits to eligible workers. Social Security provides benefits to 54 million Americans (December 2010). And nearly 14% of people 65 and older rely on Social Security for 100 percent of their family income.
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Benefits Received

• Retired – 67.2%Disabled – 17.7%

By Beneficiary Type

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• Disabled – 17.7%• Survivors – 15.1%

4Social Security Administration 2010

Although Social Security is primarily a retirement benefit, it also provides benefits to disabled workers and their family members and survivors of deceased workers. In 2010 there were a total of $701.6 billion benefits paid out. Retired workers and their family received 67.2% of recipients, disabled workers received 17.7%, and survivors of deceased workers received 15.1% of total benefits paid. [NOTE: 89% of persons 65+ receive Social Security benefits; About 11 million under age 62 received Social Security benefits.] NOTE: Additional Info if needed 54 million people received Social Security benefits in 2010 – the break down 64% retired workers 15% disabled workers 8% children 5% spouses 8% widows, widowers, and parents 1.9 million children of deceased workers received benefits (December 2010)
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Earned Benefit

Social Security is an earned benefit. A worker must pay into the system for 40 quarters.

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into the system for 40 quarters. Requirements for disability and survivor benefits depend on age of disability and death.

Social Security is an earned benefit. In order to collect a retirement benefit, a worker must pay into the system for 40 quarters or the equivalent of at least 10 yrs (4 quarters in one year). Requirements for disability and survivor benefits depend on age of disability and death. A worker with earnings less than the amount needed to earn 4 quarters of coverage in a year may need to work more than 10 years to be eligible for retirement benefits. [NOTE: earnings of $4,480 or greater during any part of the year will get you four quarters of coverage] Only legal residents can collect Social Security benefits. [NOTE: a worker with earning less than the amount needed to earn 4 quarters of coverage in a year may need to work more than 10 yrs to be eligible for retirement benefits]
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Full Retirement Age is Increasing

Age for Full/Normal Retirement BenefitsIf you were born

in:Retirement age

Year Months

1937 or earlier193819391940

65656565

0246

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194019411942

1943�5419551956195719581959

1960 or later

65656566666666666667

681002468100

Source: Social Security Administration, Social Security Handbook (13th ed.), 1997.Prepared by AARP Public Policy Institute.

Retirement age Full retirement age (also called "normal retirement age") had been 65 for many years. However, beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born 1960 and after. [ NOTE: The earliest age at which reduced benefits are payable is 62. ]
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Near Universal Coverage

• 94% of workers are covered under Social Security

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• In IL, some state and local govt. workers and teachers participate in alternative retirement system

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About 94% of workers in paid employment and self employment are covered under Social Security. The majority of workers not covered by Social Security are: State and local government workers participating in an alternative retirement system (Most of these are teachers, firefighters, and police officers. Certain states like Massachusetts and Ohio affected more than others.) Covering newly hired state and local workers under Social Security has been suggested as a way of moving toward universal participation. Universal participation is desirable because it would ensure that all workers and their families receive the program’s protections. For example, many state and local government workers who are in alternative retirement systems do not receive death and disability benefits, but would if they participated in Social Security. [NOTE: The President, Vice President, and all members of Congress are required to participate in the Social Security system.] [NOTE: can state that other workers like Federal gov’t employees hired before 1983 are not covered by Social Security, only if you think it will not cause debate in audience]
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Social Security Funding

Interest earned on Trust Fund

assets

Taxes on benefits

3%

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Payroll Taxes82%

assets15%

Social Security Administration 2010

Social Security is funded through dedicated payroll taxes or FICA, which are paid by employees and their employers and by the self employed – this makes up 82% of the funding. Employers and Employees each pay 6.2% of wages up to the taxable maximum. [NOTE: The maximum earning taxable for 2010 and 2011 is $106,800. About 6% of all eligible workers had earnings greater than the maximum.] The remainder of Social Security revenue comes from taxation of Social Security benefits – this makes up 3% of the funding and interest earning on the Social Security Trust Funds, which makes up 15% of the funding. The Trust Funds are the interest earned on the employee and employer payroll taxes. Social Security operates under a pay-as-you go system, which means that today’s workers pay for current retirees and other beneficiaries.
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2010 Average Monthly Social Security Benefit

•Retired worker - $1,175•Disabled worker - $1,068

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•Disabled worker - $1,068•Survivors - $994

Social Security Administration 2010

In 2010 the average monthly Social Security Benefit was $1,175 for a retired worker; $1,068 for a disabled worker; and $994 for survivors of a deceased worker. Benefits are based on the amount of money you earned during your lifetime – with an emphasis on the 35 years in which you earned the most. Plus, lower paid workers get a bigger percentage of their preretirement income than higher paid workers.
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Social Security Cost of Living Adjustment (COLA)

• COLA’s based on consumer price index (CPI-W)

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index (CPI-W)• No COLA in 2010 and 2011

Once benefits are claimed, Social Security benefits are increased annually to account for inflation. This is called the Cost of Living Adjustment or COLA. It is not a benefit increase but rather helps beneficiaries keep up with inflation over time. COLA’s are based on changes in the consumer price index for wage earners and clerical workers (CPI-W = consumer price index for urban wage earners and clerical workers). Changes in the consumer price index are a measure of inflation. The price level as measured by this index declined during the recession (that is, we had a brief period of deflation), therefore there was no COLA in 2010 and 2011. The Social Security COLA will not return until the price level as measured by the CPI-W reaches the high point set in 2008. AARP is concerned, because the CPI-W does not adequately reflect the buying habits of seniors, particularly the disproportionate effect of health care costs growth.
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Older Americans Depend on Social Security

AARP 11AARP Public Policy Institute tabulation of the 2010 U.S. Bureau of Census Current Population

Older Americans depend on Social Security for a substantial share of family income and the reliance on Social Security increases with age. For 49% of Older Americans Social Security makes up less than 50% of their family income For 27% of Older Americans Social Security makes up 50-89% of their family income For 23% of Older Americans Social Security makes up 90% or more of their family income 17% of those 65-69 rely on Social Security for 90% of their income; this doubles to 30% for those 80+
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Social Security Helps Keep Older Americans out of Poverty

54.9 55.7 47.3 51.663.2

60%70%80%90%

100%

Above poverty

Above poverty

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8.9 6.618.9 18.3 16

36.2 37.733.8 30.1

20.8

0%10%20%30%40%50%60% Above poverty

because of Social SecurityBelow poverty

AARP Public Policy Institute tabulation of the March 2010 U.S. Bureau of Census Current Population

Almost half of older Americans would be poor without Social Security and for African Americans and Hispanics it is greater.
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Social Security is Important for All Incomes

Low Income Middle Income Upper Income

5%3%

6% 7%3%

37%26%

3%

AARP 13Center for Retirement Research; US Bureau of Labor 2009

Social Security Pensions Assets Other

87% 70%

20%

37%

34%

26%

Social Security is important for low, middle, and upper income earners, making up a substantial portion of their retirement income. Social Security accounted for 87% of total income of low Income households over the age of 65. For middle Income households over the age of 65 Social Security accounted for 70% of their income and Upper Income households over the age of 65 Social Security accounted for 37% of their income. Other sources of income for households include pensions, assets, and other.
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Worker to Beneficiary Ratio

AARP 142010 Annual Report of Social Security Trustees

The composition of the population has changed substantially over time. While in 1950’s there were more than 8 workers for every retiree, but that ratio has decreased substantially since people are having fewer children than they used to, they’re living longer, and the large Baby Boomer cohort is leaving the workforce and retiring. The ratio is 2.9 workers to 1 retiree today and is projected to fall to about 2 workers per retiree within 40 years. With so few workers per retiree there will not be enough payroll tax revenue to pay for benefits at the current tax rate. The economic downturn which caused high unemployment rates, resulting in fewer people paying into the system as well as more people applying for Social Security as a result of unemployment, has also contributed to the decrease in the ratio of worker to beneficiary.
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Social Security Trust FundsWho are the Trustees?

• Sec’y of Treasury• Sec’y Labor• Sec’y of Health and Human Services• Commissioner of Social Security

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• Commissioner of Social Security• Presidential Appointees (2)

What are the Trust Funds?• Accounts in the U. S Treasury to which FICA and SECA tax dollars are credited and benefit payments are debited.

Social Security taxes are paid into the Social Security Trust Funds maintained by the U.S Treasury. Some key questions are who are the Trustees and what are the Trust Funds? The Social Security Act created a Board of Trustees to oversee the Social Security Trust Funds. Each year the Trustees issue a report on the financial status of the Trust Funds. The report is a projected snapshot of the health of the funds in the short range (10 years) and in the long range (75 years). READ SLIDE. There is a surplus that has been built up since 1983. It currently holds about $2.6 trillion. [NOTE: SECA (self employment contributions act)]
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Social Security Trust Funds

• Old Age and Survivors Insurance Trust Fund (OASI)

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Insurance Trust Fund (OASI)

• Disability Insurance Trust Fund (DI)

There are two separate trust funds for Social Security. The Old Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits. The Disability Insurance (DI) Trust Fund pays disability benefits. The combined Trust Funds are described as OASDI.
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Social Security Trust Funds

• Trust Funds track Social Security’s income and outflow of benefits

• Trust Funds credited with tax revenue and interest

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revenue and interest

• Trust Funds debited for benefit payments and administrative costs

• Trust Funds assets grow when credits exceed debits.

This is how the Social Security Trust Funds work The Social Security Trust Funds track the income coming in and outflow of benefits. The Trust Funds are credited with tax revenue and interest and debited for benefit payments and administrative costs of the program. The Trust Funds assets grow when credits exceed debits.
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Trust Funds Assets

Trust Funds assets must be invested in interest bearing special issue Treasury bonds.

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special issue Treasury bonds.

By law, the assets of the Social Security program must be invested in interest-bearing special issue Treasury bonds that pay interest to the Trust Funds currently at a rate of 4.642%.  [NOTE: The Trust Funds hold a mix of short-term and long-term government securities.]
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Trust Funds Assets

• As of 2010, about $2.6 trillion of assets in Trust Funds

• Trust Funds assets are part of gross/total debt

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gross/total debt

• As Trust Funds redeemed to pay benefits they become publically held debt

READ SLIDE Gross or total U.S. debt (in the form of treasury bonds) is made up of debt held by the public and debt held by the Social Security Trust Funds. When Social Security takes in more money than it distributes in benefits the Social Security trust fund grows; the amounts not needed to pay current benefits are invested in Treasury bonds and the Treasury uses the proceeds to help pay for other government operations.  This was the case since 1984 and up until very recently (2010). As a result, the Treasury owes money to the Social Security trust fund that will be repaid when and if Social Security needs it to pay future benefits.  So the SS trust fund assets represent a real liability for the Federal Government. These amounts must be repaid if and when needed to pay benefits. What happens when the trust fund assets are redeemed to pay benefits? Social Security makes a claim on the Federal Government – i.e., they redeem a bond in the trust fund. The Federal Government must oblige, but to do so they need to collect money from somewhere else to pay for the bond redemption. The Federal Government does this by borrowing from the public to repay Social Security: debt held by the public goes up by the same amount as the bond redeemed by the Social Security trust funds
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Trust Funds Assets

• Positive Social Security Cash FlowØMore Trust Funds debt; Less publically held debt

ØSocial Security historically had positive cash

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ØSocial Security historically had positive cash flow

• Negative Social Security Cash FlowØLess Trust Funds debt; more publically held debt

• Costs can ONLY be covered if Trust Funds has assets

Consider the case where Social Security has a positive cash flow; that means, Social Security was taking in more money in the form of payroll taxes than benefits paid out. As mentioned earlier, this was the case since 1984 up until recently. The excess revenue was credited to the SS trust funds through the issuing of Treasury bonds and then the revenue was used to pay other operating expenses of the government. Hence more debt held by the Trust Funds. But, it also means less money needed to be borrowed from the public to pay other operating expenses of the government – less publicly held debt. Consider the case now, when Social Security has a negative cash flow; that means, Social Security is taking in less money in the form of payroll taxes than benefits paid out. Social Security can rely on its trust fund assets by redeeming bonds to make up the difference. The Federal Government has to borrow from the public to make up the shortfall. Hence more publicly held debt, but less debt held by the Social Security trust funds. Once the trust fund assets are exhausted, Social Security can only pay benefits to the extent of its revenue base (primarily payroll taxes). According to the Social Security actuaries, the trust funds will be exhausted in 2037 and which point Social Security will only be able to pay about 75 % of promised benefits using payroll tax revenue and revenue generated by taxing Social Security benefits.
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Social Security's Solvency

• Social Security is NOT in Crisis.

FACTvs.

MYTH

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• Trust Funds invested in Treasuries and backed by the full faith and credit of the U.S. Government.

Social Security is NOT in crisis. Today, Social Security is financially strong and is in no immediate danger of “going broke” as some alarmist would have us believe. As of 2010, there are about $2.6 trillion of assets in the Trust Funds. Assets in the Trust Funds are invested in Treasury bonds at current market yield and they are backed by the full faith and credit of the U.S. Government. The Trust Funds is a subject of considerable dispute regarding its investments. However, the safest investment is the U.S. Treasury bond, The United States has NEVER defaulted.
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Social Security's Solvency2010 Trustees’ Report

2015 Benefits exceed income revenue excluding interest

2025 Benefits exceed income revenue including interest

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revenue including interest

2036 Trust Funds assets are exhausted – Social Security must rely solely on tax revenue

After 2036

Continued reduced benefits paid

These are key dates in long-range financing based on the Social Security Trustee’s 2010 projections. By 2015, the benefits paid exceed income excluding interest. [NOTE: in fact, more recent estimates by the Congressional Budget Office show that this has already occurred in 2010 and is expected to continue] By 2025, benefits paid will exceed income including interest. And by 2037, the Trust Funds assets are exhausted – Social Security must rely solely on tax revenue. After 2036, it will be able to pay about three quarters of promised benefits. Social Security is not in Crisis, but it does need to be strengthened for future retirees, disabled workers, and spouses and children of deceased workers.
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Key Features of Social Security Program

• Earned benefit• Guaranteed life-time benefit protected from inflation

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• Higher the contribution, higher the benefit

• Progressive benefits

The Key Features of the Social Security program are: It is an earned benefit that a worker pays into and is deserving of its benefit return. It is a guaranteed life-time benefit that is protected from inflation. Benefits are automatically adjusted by the consumer price index. The more you contribute into the system, the higher the benefit you get Use of a progressive benefit formula. A higher portion of pre-retirement earnings are replaced for low earners than higher earners. We need Social Security more than ever. Current economic conditions have had a devastating effect on the retirement savings of millions of Americans, leaving them with significant reductions in their 401(k)s and other retirement vehicles. At the same time housing values have dropped dramatically. Social Security was created in times much like today to provide Americans with a foundation of security they could count on in uncertain economic times. Social Security smoothes the risks of these economic cycles over large groups of people and long periods of time, and it remains the most secure retirement income in America. In order for Social Security to continue to be a lifetime family protection program for all workers there must be some changes to the ensure its solvency. (need a transition sentence here)
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Solvency Options:Revenue Enhancements

• Increase level of earnings subject to the payroll tax

• Increase payroll tax rate

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• Increase payroll tax rate• Tax salary reduction plans in same

manner as 401(K) plans

Here are some Social Security Solvency options that would generate revenue for Social Security: Increase the level of earnings subject to the payroll tax. This means there would be a cap on taxable income that would gradually raise so that nationwide 90% of covered earnings are taxable – that would translate to $190,000 in today’s dollars. Once 90% reached, it would stay at 90% each year afterwards. Increase the payroll tax rate (OASDI). The current rate is 12.4% (6.2% each employee and employer). An annual increase rate of .05% for both the employee and employer would gain a 1% total increase over 10 years and 2% total increase over 20 years. Tax salary reduction plans in the same manner as 401(K) plans. Contributions to the 401(K) plans are exempt from income tax, but subject to Social Security tax. Currently, other employee salary reducing contributions to benefits, such as employer provided health and childcare flexible spending accounts and parking and transit account, are not subject to Social Security payroll taxes. This proposal would tax, at the Social Security payroll tax rate, employee contributions to income tax exempt (or deferred) plans.
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Solvency Options:Benefit Adjustments

• Increase the full retirement age• Adjust benefit formula to decrease

benefits for higher earners

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• Change basis for annual COLA• Means-test to eliminate benefit for

highest incomes• Longevity indexing of full

retirement age

Here are some Social Security Solvency options that would make adjustments to Social Security benefits: Increase the full or normal retirement age gradually from 67 to 68 by 2028. Or to 70 by 2040. This would allow workers to stay in the workforce longer paying into the system, which will help Social Security meet the its obligations. Adjust the benefit formula to decrease benefits for higher income earners. There are ways to adjust the benefit formula so that any cuts would affect only high earners who tend to be less reliant on Social Security. Change the basis for annual cost of living increases by adopting the “chained” or superlative consumer price index (CPI) to compute the COLA. The “chained” CPI is considered to more accurately reflect the effect of price changes by accounting for the substitution among goods when relative prices change. The effect of making this change is slightly smaller annual COLA’s. Means-test to eliminate the benefit for the highest incomes. This would eliminate the Social Security benefit for workers earning over X amount (to be determined) a year, even though they would still have to pay into Social Security. Begin longevity indexing of benefits. Gradually modify the annual benefits paid by Social Security to reflect that people are living longer. This would result in paying lower benefits per year to reflect that people are receiving them over a longer period of time. The purpose is to maintain , on average, similar total lifetime benefit amounts for each generation
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Social Security Campaign

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Social Security: Keep it StrongYou Earned It. Let’s Protect It.You Earned It. Let’s Protect It.

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Question & Answer period [ NOTE: at this time be prepared to review the campaign strategy & message framework. Have the one page handout on principles]