What Is The Future of Social Security?
I Social Security Programs: A Short review
Although we typically think of Social Security as a retirement check there are actually four separate trust funds (or programs) that make up Social Security.
A. Social Security Trust Funds:
- Old age and survivors insurance
- Disability insurance
- Hospital insurance trust fund ( Medicare Part A)
- Supplementary Medical Insurance (or Medicare Part B)
We will discuss the Old age and Survivor's Benefits (OASI) portion here and discuss Medicare
benefits later.
When you work, you pay FICA taxes (or Federal Insurance Contribution Act) which is your contribution to Social Security. The amount you pay is based on your earnings and when you retire, or become disabled, you and your family members collect monthly benefits (based on your contributions). (Check you pay stub, you'll see FICA unless you are a teacher or railroad employee).
Your payroll tax (FICA) is 7.65% of your gross earnings. Go look at your pay stub, and see how much FICA was deducted from your last payroll check. Or ask your folks if they will show you theirs. Here is the breakdown of how the almost 8% taken from your check is spent. NOTE; In 2011 congress reduced the employee's share of the Social Security payroll tax by 2 percent. This was referred to as a "Tax Holiday".
- 5.35% is used for retirement and survivors benefits
- 1.45% for Medicare
- .85% for Disability Insurance
Total 7.65%
The 7.65% is then matched by your employer (unless you are self-employed- then you must pay both the employers (7.65%) contribution and the employees 7.65% )(2x7.65% or 15.3%) .
Taxes are paid on earrings up to a maximum earning in 2011 of $106,800. That means after you earn $106,800 .your earnings are no longer taxed for Social Security benefits. Thus, the higher your wages, the higher your taxes ( up to the max earnings amount) and the higher your benefits will be.
Did you Know?
Since 1939 the maximum annual salary subject to Social Security tax (FICA) increased by more than 10,000%.
The initial tax rate was 2.0% of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. After $3,000 the earnings were not longer taxed. The tax rate has been raised in several steps over the years, beginning in 1950, when it was raised to 3.0%.
Along with today's cap there are no limit on Medicare payments (you pay Medicare tax on all your earnings). You will see later that this is partly due to the need to pre-fund the program for the boomers.
Social Security Administration has one of the best web
sites around. Here are just a few of their great
pages.
For
an optional learning experience learn about the history of Social Security at
this very cool site. - Be sure to check the sights and
sounds section.
http://www.ssa.gov/history/history.html
NOTE: For disability access point to
Brief History of Social Security
pdf format.
Learn about Supplemental Security Income- SSI. You will need to know about this for later web postings. http://www.socialsecurity.gov/pubs/11000.html#PART%201
For more in-depth information about Medicare? Check out this site http://www.medicare.gov/Basics/Overview.asp
- Highlights Of The Benefits:
I just want to highlight some of the items from the web pages you visited for Social Security.
The average monthly benefit paid to a retired worker was $1,166. (about $14,000 annually) in January 2011. The average benefit was somewhat smaller for a disabled worker ($1,050.) and for widows and widowers age 60 and older it was $1,134.
Social Security is the main source of income for most beneficiaries 65 years of age or older. For the average wage earner, this amount replaces about half of their total income and 43% pre-retirement income. For the wealthy it replaces about 23% of their pre-retirement income. As you can see Social Security does not replace 100% of a persons wages. Once must have other sources of income.
For 2011, the maximum Social Security retirement benefit for a worker retiring at age 66 $27,876. per year for a single person and 1.5 times this amount for a married person. http://www.dinkytown.net/java/SocialSecurity.html
A person can also retire at age 62. However, if you start benefits early, your benefits are reduced a fraction of a percent for each month before your full retirement age http://www.ssa.gov/retire2/agereduction.htm
You can estimate your benefits here https://secure.ssa.gov/acu/ACU_KBA/main.jsp?URL=/apps8z/ARPI/main.jsp&LVL=4
- The Concept of Social Security
Social Security’s principle is that through payroll contributions workers earn a right to protection for themselves, and their families, against the risk of reduced income and economic uncertainty as a result of retirement or the death of the bread winner.
- Social Security benefits are earned and are not related to an individual’s other income (like income from investments) or assets. There is no means testing to qualify.
- Beneficiaries must have worked at least 10 years (40 quarters) in covered employment to quality.
- Your benefit amount is also affected by your age at the time you start receiving benefits.
As you saw above the earliest age that you can draw benefits is age 62. Normal retirement age is 65 (although that is increasing to age 67). If you elect to draw benefits at age 62 your benefit will be permanently lower than if you waited until a later age. The reduction is about 20% lower than the full benefits.
Full benefit age has always been age 65. But because of longer life expectancies, and a need to prop up a potentially bankrupt system, the full retirement age is increasing in gradual steps until it reaches age 67.
This change started in the year 2003 and it affects people born in 1938 and later. So if your full retirement age is 67 the reduction will be higher than 20% if you elect to retire at age 62.
- Delayed Retirement- If on the other hand you delay your retirement you can increase your benefits by 5.5% per year until the age of 70.
- Widow (ers) can begin receiving benefits at age 60 or at age 50 if they are disabled.
- If you receive widow or widowers benefits (even if you are divorced) you can switch to your own benefits as early as age 62 (assuming they are higher).
- Spouse benefits receive ½ of the retired workers full benefits unless the spouse begins collecting before age 65. Then the amount would be reduced.
- A divorced spouse can get benefits on a former husband's or wife’s Social Security (even if they have died) if the marriage lasted at least 10 years ( if married to more than one spouse for more than 10 years one can choose which spouse to draw from). You must be aged 62 or older. The amount of benefits a divorced spouse gets has no effect on the amount of benefits a current spouse can get.
II. Social Security Trust Fund Outlook:
1. How Social Security is Funded? (see lecture on Aging Boomers for more on this topic)
- Since 1983 Social Security has operated on a "partially pre-funded" basis meaning future benefits are anticipated and partially funded in advance. Social Security has historically been funded on a "pay as you go" basis where taxes and benefits are adjusted so that there is no reserve accumulated. Under the pay-as-you-go system the elderly are not supported by the payments they made, but instead by the current taxes paid by younger workers. This is essentially how Social Security was structured from the 1950-1970’s.
When the large number of baby boomers become eligible for benefits there will be just two workers for every senior citizen collecting benefits, (remember this compares to 15 to 1 ratio when the program first began). The government has foreseen the impending crisis and has taken some measures to compensate.
Remember the increase in maximum annual salary subject to Social Security tax? It was used to create a Social Security savings account in 1983. This created the current system of pre-funding. The creation of "pre-funding" allows the fund to have a surplus. Taxes collected are more than benefits paid out. The surplus is kept in a reserve (more about the reserve later) to fund the program when the workforce to beneficiary decreases.
This method of funding Social Security system shifts some of the retirement burden from future workers to the large, current working group itself. Vice President Gore tried to create a Social Security Lock Box that would prohibit the Federal Government from dipping into the fund but it did not work (more later on this).
Other steps taken to keep the fund solvent increased the age of retirement (remember the increase from age 65 to age 67?), reduce benefits at age 62, and the creation of a penalty for earnings over approximately $9,000. Until 2000 when President Clinton changed the law, Social Security benefits were penalized as follows:
- $1.00 for each $2. Earned if under age 65
- $1.00 for each $3. Earned if 65-69
- After age 70, there was no penalty
- Today, an elderly person can receive Social Security while remaining in their current job.
2. Show Me The Money?
Originally it was believed that pre-funding the system would keep Social Security solvent for the next 75 years but, the predictions were not accurate.
Because of large budget deficits the federal government borrowed Social Security's savings to meet the huge defense spending of the Regan years. For those who remember, Regan was spending large amounts of tax dollars on his "Star Wars" program. In order to gain support for the program he needed to assure the public that the money he was spending was not excessively outside of the federal budget.
Do you know the difference between the Federal Deficit and the Federal Debt?
Lets say that your budget is $2,000 per month but each month you spend $2,500. That means you have a monthly deficit of $500.00 ($2000 -$2500). If each month for one full year you continue to run this deficit at the end of one year your debt would be $6,000 ($500 x 12 months)With Social Security's savings (pre-funding monies) taken out of the trust fund and added to the federal revenues ,the taxes being collected for federal spending suddenly looked much larger than they were. This made it easier for Regan to continue running huge federal debts. Its analogous to you taking money from someone's piggy bank, to run your monthly expenses, and declaring that your income had suddenly increased.
Government borrowing resulting in undermining Social Security's goals. Social Security funds have been used to meet the federal deficit .
Did you know?
The Federal government still owes the Social Security Trust Fund billions of dollars. Want to see who the United States sells that debt to? http://www.treas.gov/tic/mfh.txt Note the large portion of debt owed to Japan and China. Some argue that China is actually financing our country's life style. What do you think?
However, the real issue is as you have seen is Medicare (check out the text on Medicare Eligibility. Read below what one of your colleagues posted last semester regarding this fund.
Well,
well. I found it very valuable to look more deeply into the Medicare
issue. We have a problem in River City and it's going
to take more than striking up the band to solve it. While a number of
issues could be listed, I see three major ones: The increasing rates of
Medicare expenditures and of the federal deficit. The need for the
Medicare system to be seen as a part of the country's overall health care
system - and to have a national health care policy. A shift in focus in
our national health care and in Medicare from management of disease and
illness to wellness and prevention.
In our text Moody states that Medicare costs are growing at three times the
rate of inflation. The Employee Benefit Research Institute said in a
February 2005 report that "Medicare will soon account for a 'greater and
rapidly growing share of the nation's gross domestic product, sending Medicare
into insolvency 23 years before Social Security,' and that Medicare has
'nearly $28 trillion in unfunded liability...more than seven times Social
Security's $3.7 trillion.'" (California Health line) . We have trillions of dollars in unfunded
liabilities and an increasing federal budget deficit that will become
unmanageable on our present course.
Read the NPR story here
Inexpensive
programs are being presented both by government agencies and private or
not-for-profit organizations on how to age with good health and on the
cost-lowering strategies of education and support for lifestyle change and of
prevention. However, the power of HMO's, doctors' organizations, drug
companies, and others with big financial interests in the current system
stands with the status quo.
The issue of Medicare, as is
Social Security, is inside of a context of American values and beliefs and
strong political forces. Given the urgent issues of care and attention
needed across society - the young, the poor, undereducated, etc - and the
shifting of global economic power from the United States east to China and
Southeast Asia, the future invites change.
I want to acknowledge a briefing paper by the Economic Policy Institute as one
from which I gained value: Sawicky, Max. "Collision Course:
The Bush Budget and Social Security." Economic Policy Institute.
18 Mar 2005. 10 April 2005.
3.Economic Growth:
The future has not looked bright for social security in this economy. The success of this program depends on economic growth. Not a realistic outlook for now. If workers earn more money, more taxes are paid into the fund that can be used to support retirees. But economists claim that the Social Security program is going to go bankrupt by the year 2029. The retirement of the boomers is cited as one reason. Later in the lecture on Aging Boomers we will discuss this outlook further.
How should we address this problem? We could cut benefits, or raise taxes. Here are some other solutions offered. (Just skim these articles so you get an idea of the issue).
Why Action Should Be Taken Soon Social Security Advisory Board
July 2001 http://www.ssab.gov/Publications/Financing/actionshouldbetaken.pdfPaying Social Security Benefits. http://www.cbpp.org/8-21-01socsec3.htm
Urban Institute: You might have to past this into another browser to get it to load.
http://search.urban.org/texis/search?mode=&opts=&pr=wwwurban&dropXSL=html&prox=page&rorder=500&rprox=500&rdfreq=500&rwfreq=750&rlead=
750&sufs=0&order=r&query=reform+social+security
Remember as you read the ideas of investing some or all of our taxes in the stock market (see handouts for this week Emotional Cycle of the Market) that historically the market rises and falls.
This could be an advantage for a retiree if the market is high when they retire or could be a terrible economic disaster if the market is low at the time of retirement.
That's the end of this weeks lecture. Be sure to check the assignments page.