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Transcript of 2007 Social Security
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SOCIAL SECURITY:
How It Works and How to Fix
ItJonathan Barry Forman (Jon)
Alfred P. Murrah Professor of Law
September 2007
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Overview
How Social Security Works Financing Social Security How Benefits Are Determined
Financial Troubles How to Fix It
Raise Taxes
Cut Benefits Increase Investment Returns
A two-tier System
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How Many People Get SocialSecurity?
47.7 million people receive Social Securityeach month
1 in 6 Americans get Social Securitybenefits
Nearly 1 in 4 households get income fromSocial Security
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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Who Gets Social Security?
30.0 million retired workers
4.8 million widows and widowers
6.2 million disabled workers 0.8 million adults disabled since
childhood
3.1 million children
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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How Much Does Social Security Pay?
www.ssa.gov/OACT/COLA/colaeffect.html
Type of Beneficiary Average
MonthlyBenefit
All Retired Workers $1,044
Aged widow(er), non-disabled $1,008
Disabled worker $979
Aged couple-both receiving $1,713
Widowed mother and two children $2,167
http://www.ssa.gov/OACT/COLA/colaeffect.htmlhttp://www.ssa.gov/OACT/COLA/colaeffect.htmlhttp://www.ssa.gov/OACT/COLA/colaeffect.htmlhttp://www.ssa.gov/OACT/COLA/colaeffect.html -
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Social Security and Poverty
2007 Poverty Levels Single individuals $10,210 ($851/month)
Married couples $13,690 ($1,141/month)
With Social Security only 9% were poor in 2000
Without it, 48% would have been poor
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Financing Social Security
Workers and their employers pay withSocial Security taxes
Workers pay
6.2% of their earning for Social Security, and 1.45% of their earnings for Hospital Insurance
under Medicare (Part A)
Employers pay an equal amount
The total is 12.4% for Social Security and2.9% for HI Social Security tax base is $97,500 in 2007
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Worker Benefits
Workers over 62 are eligible If they have worked 10 years
Benefits are based on a workers earningshistory Career-average earnings
Average Indexed Monthly Earnings (AIME)
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Average Indexed MonthlyEarnings (AIME)
Determine how much the worker earnedevery year through age 60 Determine Benefit Computation Years And Earnings in those years
Index those Earnings for Wage Inflation Up to the year the worker turns 60
Subsequent Work Years Also Count Pick the Highest 35 Years
Drop the rest
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Average Indexed MonthlyEarnings (AIME), continued
Add those highest 35 years ofearnings up
Divide by 35; Divide by 12 Result is called Average Indexed
Monthly Earnings (AIME) AIME is then linked by formula to the
basic retirement benefit Result is called Primary Insurance
Amount (PIA) Paid at full retirement age
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Full Retirement Age
http://www.ssa.gov/retire2/retirechart.htm
Year of Birth Full Retirement Age
1937 or earlier 65
1938 - 1942 plus 2 months per year
1942 1954 66
1955 - 1959 plus 2 months per year
1960 and later 67
http://www.ssa.gov/retire2/retirechart.htmhttp://www.ssa.gov/retire2/retirechart.htmhttp://www.ssa.gov/retire2/retirechart.htm -
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Primary Insurance Amount(PIA)
For a worker turning 62 in 2007,
PIA = 90% of first $680 of AIME
+ 32% of AIME from $680 to $4,110 (ifany)
+ 15% of AIME over $4,110 (if any)
$680 and $4,110 are called bend points PIA indexed by cost of living after 62
Provides higher benefits relative to earnings
for lower paid
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Primary Insurance Amount (PIA) formula
for persons turning age 62 in 2007
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000
Average Indexed Monthly Earnings
PrimaryInsurance
Amo
PIA
Second
Bend Point
$4,110
First
Bend Point
$680
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How do benefits compare to earnings?
$19,600$22,500
$15,800
$35,300
$55,400
$90,000
$14,800
$9,000
57%
42%
35% 25%
$0
$20,000
$40,000
$60,000
$80,000
"low" "medium" "high" "maximum"
Earnings Amount
Past Wages Benefits
Retired worker age 65, 2005
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Worker Benefits:Increases and Decreases
Indexed for inflation Actuarial decrease for early retirement
Example: average-wage worker, 62 in 2006
Will get $1,332.80 per month at her fullretirement age of 66
or $999 per month at 62
Actuarial increase for later retirement
8 percent per year Retirement Earnings Test
In 2007, early retirees lose $1 of benefits foreach $2 of earnings over $12,960
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How many people rely on SocialSecurity for most of their income?
90% of people 65 and older get SocialSecurity
Nearly 2 in 3 (66%) get half or moreof their income from Social Security
About 1 in 5 (22%) get all theirincome from Social Security
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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Most elderly dont receive pensions
Percent with Employer-SponsoredPensions
All age 65+ 41%
Couples 51%
Unmarried men 39%
Unmarried women 32%
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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Family Benefits
Spouses, dependents, and survivors
Husband or wife gets 50% of workers
PIA Together, couple gets 150% Widow or widower gets 100% of
workers PIA
A joint and two-thirds annuity
Dual entitlement rule limits benefits
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Estimates for 2006 Finances
Trust Fund income = $745 billion (taxes)
Trust Fund outgo = $555 billion (benefits)
Surplus = $190 billion
By law, surpluses are invested in U.S.
government securities and earn interestthat goes to the trust funds.
Social Security Administration 2007 Trustees Report
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How do actuaries estimate thefuture?
Review the past: birth rates, death rates,immigration, employment, wages,inflation, productivity, interest rates
Assumptions for the next 75 years
Three scenarios: Low cost; High cost;Intermediate (best estimate)
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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21Social Security Administration, 2007 Trustees Report
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The Long-Range Forecast(Best estimate)
In 2017, tax revenues into the trust fundsforecasted to be less than benefits duethat year. Interest on the reserves andthe assets themselves will help pay for
benefits until 2041. In 2041, reserves are projected to be
depleted. Income is forecast to cover75% of benefits due then.
By 2081, assuming no change in taxes,benefits or forecasts, revenue would cover70% of benefits due then.
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Social Securitys Financing Problem
2007 Trustees Report shows Expenses will exceed payroll tax income in 2017
Trust funds will be out of money in 2041
75-year deficit equals 1.95% of taxable payroll Immediate payroll tax increase of 1.95% needed to
restore actuarial balance
Alternatively, immediate ~12.8% across-the-board
benefit cut $4.7 trillion unfunded liability
About 0.7% as a share of the entire economy (GDP)
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Why is the deficit so muchsmaller as a share of GDP?
The answer is because Social Securitytaxable wages are only a relativelysmall part of GDP. Wages taxed for Social Security are 39
percent of GDP.
The other 61 percent of national income
is not taxed to help pay for SocialSecurity.
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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What is that non-taxableincome?
Income not subject to Social Securitytaxes includes: earnings above the tax cap ($97,500 in
2007); tax exempt compensation (non-taxable
fringe benefits, tax-deferred accounts, etc); wages of about one in four state and local
workers who are not covered by Social
Security; income from property stock dividends,
interest, and rental income.
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
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Only 3 Ways to Fix Social Security
Raise Taxes
Cut Benefits
Increase Investment Returns Private investment
Either government or individual
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Options: Raise Taxes
OPTION
Increase tax rate by2% total
Tax all earnings Tax 90% of earnings
Include new state &
local govt. workers Tax SS benefits like
pensions
% of Deficit Eliminated
104%
93%
40%
10%
20%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy ofActuaries (2004).
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Options: Cut Benefits
OPTION Raise retirement age
(to 67 faster & index)
Reduce COLA by %each year
Cut benefits by 5% forthose starting to get
benefits in 2005 Increase # years in
wage avg. to 40
% of Deficit Eliminated
28%
41%
32%
21%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy ofActuaries (2004).
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Options: Increase InvestmentReturns
OPTION
Investments in equities
% of Deficit Eliminated
36% - 50%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy ofActuaries (2004).
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Long-term Reform
Social Security should ensure thatevery elderly American has anadequate retirement income
We could redesign the system
Two-tier system First tier: poverty-level benefit
Second tier: earnings-related benefit
Earnings sharing
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First Tier: Basic Benefit
Government guarantee of poverty-levelincome
2007 Poverty Levels Single individuals $10,210 ($851/month)
Married couples $13,690 ($1,141/month)
Would replace SSI and redistribution
within the current SS system Pay for with general revenues
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Second Tier: Earnings-relatedBenefit
Individual accounts Hypothetical (cash balance) accounts
Invested by professionals
Pay for with reduced payroll taxes
Pay out lifetime annuities Inflation-adjusted annuities
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Earnings Sharing
Credit each spouse with one-half ofcouples combined earnings duringmarriage
At retirement, each spouses benefitwould be based on her half of thecouples earnings, plus her prior
earnings Would replace spousal benefits
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Conclusions
$4.7 Trillion Unfunded Liability
Oldest baby-boomers are 60
Social Security should provideadequate incomes throughoutretirement
Reform is needed
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Sources American Academy of Actuaries, Social Security Reform: Solutions Inside
the Box: Proposals Not Including Individual Accounts (2004), available athttp://www.actuary.org/pdf/socialsecurity/briefing_041604.pdf.
Jon Forman, Reforming Social Security, 76 (9) Oklahoma Bar Journal657-661 (March 12, 2005), available athttp://jay.law.ou.edu/faculty/jforman/SS-OBJ-2005.pdf.
National Academy of Social Insurance, Social Security Finances: A Primer(April 2005), available at http://www.nasi.org/usr_doc/Financing_Social_Security.ppt.
National Academy of Social Insurance, Options to Balance Social SecurityOver the Next 25 Years (Social Security Brief No. 18, February 2005),available at http://www.nasi.org/usr_doc/SS_Brief_18.pdf.
Social Security and Medicare Boards of Trustees, 2007 Annual Report of theBoard of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds (2007), available athttp://ssa.gov/OACT/TR/TR07/tr07.pdf.
http://www.actuary.org/pdf/socialsecurity/briefing_041604.pdfhttp://jay.law.ou.edu/faculty/jforman/SS-OBJ-2005.pdfhttp://www.nasi.org/usr_doc/Financing_Social_Security.ppthttp://www.nasi.org/usr_doc/Financing_Social_Security.ppthttp://www.nasi.org/usr_doc/SS_Brief_18.pdfhttp://ssa.gov/OACT/TR/TR07/tr07.pdfhttp://ssa.gov/OACT/TR/TR07/tr07.pdfhttp://www.nasi.org/usr_doc/SS_Brief_18.pdfhttp://www.nasi.org/usr_doc/Financing_Social_Security.ppthttp://www.nasi.org/usr_doc/Financing_Social_Security.ppthttp://jay.law.ou.edu/faculty/jforman/SS-OBJ-2005.pdfhttp://www.actuary.org/pdf/socialsecurity/briefing_041604.pdf -
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About the Author Jonathan Barry Forman (Jon) is the Alfred P.
Murrah Professor of Law at the University of OklahomaCollege of Law, where he teaches courses on tax,pension, and elder law.
Professor Forman is also Vice Chair of the Board of
Trustees of the Oklahoma Public Employees RetirementSystem (OPERS) and the author ofMaking America Work(Washington, DC: Urban Institute Press, 2006).
Prior to entering academia, Professor Forman served inall three branches of the federal government. He has alaw degree from the University of Michigan, and he alsohas masters degrees in economics and psychology.
Jon can be reached [email protected] or (405) 325-4779. His web page iswww.law.ou.edu/faculty/forman.shtml.
mailto:[email protected]://www.law.ou.edu/faculty/forman.shtmlhttp://www.law.ou.edu/faculty/forman.shtmlmailto:[email protected]