Transcript SOCIAL SECURITY - University of Oklahoma

SOCIAL SECURITY:
How It Works and How to Fix It
by Jon Forman
Professor in Residence
IRS Office of Chief Counsel, Room 3501
&
Alfred P. Murrah Professor of Law
University of Oklahoma
Norman, Oklahoma
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 Social
Security?
 52 million people receive Social
Security each month
 1 in 6 Americans get Social Security
benefits
 Nearly 1 in 4 households get income
from Social Security
National Academy of Social Insurance, Social Security Finances: A Primer 4 (2008).
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Who Gets Social Security?
(June 2009 Beneficiary Data)





33 million retired workers
2.9 million dependents
7.6 million disabled workers
1.8 million dependents
6.4 million survivors
Social Security Administration, Social Security Basic Facts (2009),
http://www.ssa.gov/pressoffice/factsheets/basicfact-alt.pdf.
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How Much Does Social Security Pay?
(June 2009 Beneficiary Data)
 Retired workers
 $1,159 average monthly benefit
 Disabled workers
 $1,062 average monthly benefit
 Survivors
 $1,118 average monthly benefit
Social Security Basic Facts.
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Social Security and Poverty
 2009 Poverty Levels
 Single individuals – $10,830 ($903/month)
 Married couples – $14,570 ($1,214/month)
 With Social Security only 9% were poor
(in 2000)
 Without it, 48% would have been poor
2009 HHS Poverty Guidelines, http://aspe.hhs.gov/POVERTY/09poverty.shtml; Social Security
Administration, Social Security Bulletin: Annual Statistical Supplement: 2001 (2002), at 9.
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Financing Social Security
 Social Security taxes
 Workers pay
 6.2% of their earnings 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 and
2.9% for HI
 Tax base is $106,800 in 2009
 Unchanged for 2010
Social Security Administration, Contribution and Benefit Base (2009),
http://www.socialsecurity.gov/OACT/COLA/cbb.html.
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Worker Benefits
 Workers over 62 are eligible
 If they have worked 10 years
 Benefits are based on a workers earnings
history
 Career-average earnings
 Average Indexed Monthly Earnings (AIME)
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Average Indexed Monthly
Earnings (AIME)
 Determine how much the worker earned
every 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
Social Security Administration, Benefit Calculation Examples for Workers Retiring in 2010 (2009),
http://www.socialsecurity.gov/OACT/ProgData/retirebenefit1.html.
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Average Indexed Monthly
Earnings (AIME), continued
 Add those highest 35 years of
earnings 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
 The Primary Insurance Amount (PIA)
 Paid at full retirement age
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Full Retirement Age
Year of Birth
1937 or earlier
Full Retirement Age
65
1938 - 1942
plus 2 months per year
1942 – 1954
66
1955 - 1959
plus 2 months per year
1960 and later
Social Security Administration, Full Retirement Age,
http://www.ssa.gov/retire2/retirechart.htm.
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Primary Insurance Amount
(PIA)
 For a worker turning 62 in 2010,
PIA = 90% of first $761 of AIME
+ 32% of AIME from $761 to $4,586 (if any)
+ 15% of AIME over $4,586 (if any)
 $761 and $4,586 are called bend points
 PIA indexed by cost of living after 62
 Provides higher benefits relative to
earnings for lower paid
Social Security Administration, Benefit Formula “Bend Points” (2009),
http://www.ssa.gov/OACT/COLA/bendpoints.html.
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Primary Insurance Amount (PIA)
formula for persons turning age 62 in 2009
Primary Insurance Amount
$2,500
$2,000
$1,500
First Bend Point
$744
Second Bend Point
$4,483
$1,000
PIA
$500
$0
$0
$1,000
$2,000
$3,000
$4,000
Average Indexed Monthly Earnings
$5,000
$6,000
$7,000
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How do benefits comparte to earnings?
Retired worker age 65, 2007
$100,000
$80,000
Past Wages
$87,800
Benefits
$60,000
$58,900
$40,000
$37,200
$20,000
$0
$16,700
$9,400
"low"
$15,570
"medium"
$20,610
"high"
$24,000
"maximum"
Earnings Amount
Social Security Basic Facts; Social Security Finances: A Primer, 7.
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Worker Benefits:
Increases and Decreases
 Indexed for inflation
 Actuarial decrease for early retirement
 Actuarial increase for later retirement
 8 percent per year
 Example: maximum-wage worker, 62 in 2010
 Will have AIME of $7,949
 Will get $1,820 per month at age 62
 Or $2,191 per month at age 65
 Or $3,119 per month at age 70
Social Security Administration, Workers with Maximum Taxable Earnings (2009),
http://www.ssa.gov/OACT/COLA/examplemax.html.
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Retirement Earnings Test
 Applies only to people below normal
retirement age (NRA), which ranges
from age 65 to 67 depending on year of
birth.
 In 2010, early retirees lose $1 of
benefits for each $2 of earnings over
$14,160
Social Security Administration, Exempt Amounts Under the Earnings Test (2009),
http://www.ssa.gov/OACT/COLA/rtea.html.
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How many people rely on Social
Security for most of their income?
 90% of people 65 and older get
Social Security
 Social Security represents 40% of the
income of the elderly
 Nearly 2 in 3 (66%) get half or more
of their income from Social Security
 About 1 in 5 (22%) get all their
income from Social Security
Social Security Basic Facts; Social Security Finances: A Primer, 8.
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Reliance on Social Security
Benefits by Race
 Percent of beneficiaries who receive half or
more of their income from Social Security




65%
74%
67%
78%
of
of
of
of
Whites
Blacks
Asians
Hispanics
 Percent of Beneficiaries who receive all of their
income from Social Security




19%
40%
28%
43%
of
of
of
of
Whites
Blacks
Asians
Hispanics
Social Security Finances: A Primer, 9.
18
Most elderly don’t receive
pensions
Percent with Employer-Sponsored Pensions
All age 65+
Couples
Unmarried men
Unmarried women
Social Security Finances: A Primer, 10.
41%
51%
42%
34%
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How are Benefits Projected to
Change in the Future?
 Benefits will grow faster than prices, but
slower than wages.
 The increase in the full benefit age from
65 to 67 over the next 20 years means
that benefits will replace a smaller share
of retirees’ past earnings.
Social Security Finances: A Primer, 11.
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Under Current Law Net
Replacement Rates will Decline
 An average earner at 65 today gets a
benefit that replaces about 39% of
earnings after deducting Medicare
premiums.
 A similar earner age 65 in 2030 will
have a benefit that replaces about 32%
of earnings
 Higher age for full benefits lowers wage
replacement at 65
 Medicare premiums will take a bigger bite
Virginia P. Reno, Are Social Security Benefits Adequate? 4 (2009),
http://www.nasi.org/usr_doc/Virginia_Reno_NASI_Presentation_05_15_2009.pdf.
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Family Benefits
 Spouses, dependents, and survivors
 Husband or wife gets 50% of worker’s
PIA
 Together, couple gets 150%
 Widow or widower gets 100% of
worker’s PIA
 A joint and two-thirds survivor
annuity
 Dual entitlement rule limits benefits
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The Need for Reform
 Social Security is in financial trouble
and will not be able to meet its future
benefit commitments.
 Social Security redistributes payroll
tax revenues in many ways that are
quite simply unfair.
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Estimates for 2009 Finances
Trust Fund income = $819 billion (taxes)
Trust Fund outgo = $682 billion (benefits)
Surplus =
$137 billion
By law, surpluses are invested in U.S. government
securities and earn interest that goes to the trust
funds.
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds 41 (2009), http://www.socialsecurity.gov/OACT/TR/2009/tr09.pdf.
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How do actuaries estimate the
future?
 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)
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The Long-Range Forecast
(Best estimate)
 In 2016, tax revenues into the trust funds
forecasted to be less than benefits due
that year. Interest on the reserves and
the assets themselves will help pay for
benefits until 2037.
 In 2037, reserves are projected to be
depleted. Income is forecast to cover
76% of benefits due then.
 By 2083, assuming no change in taxes,
benefits or forecasts, revenue would cover
74% of benefits due then.
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 9.
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2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 10.
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 12.
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 13.
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 15.
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Social Security’s Financing Problem
 2009 Trustees Report shows
 Expenses will exceed payroll tax income in 2016
 Trust funds will be out of money in 2037
 75-year deficit equals around 2% of taxable
payroll
 Immediate payroll tax increase of 2% needed to
restore actuarial balance
 Alternatively, immediate ~13% across-the-board
benefit cut
 $5.3 trillion unfunded liability (over 75 years)
 About 0.7% as a share of the entire economy (GDP)
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 2-3.
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Unfunded Obligations
(Present values as of January 1, 2009; trillions of dollars)
Present
value
Over the
next 75
years
Over the
infinite
horizon
5.3
$15.1
As a % of
future
payroll
1.9
As a % of
GDP
3.4
1.2
.7
2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, 63 (table IV.B6).
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Why is the deficit so much
smaller as a share of GDP?
 The answer is because Social Security
taxable wages are only a relatively
small 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 Social
Security.
Social Security Finances: A Primer, 30.
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What is that non-taxable income?
 Income not subject to Social Security
taxes includes:
 Earnings above the tax cap ($106,800 in
2009 & 2010)
 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.
Social Security Finances: A Primer, at 31.
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Social Security Shortfall and
Other Policy Changes
 The Social Security shortfall over the
next 75 years is smaller than the lost
revenue from making permanent the tax
cuts of 2001 and 2003. The Social
Security shortfall is about one-third the
size of the tax cuts over the next 75
years.
 Social Security deficit
 Tax cuts made permanent
Social Security Finances: A Primer, at 32.
0.56% of GDP
1.95% of GDP
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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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Second problem: Social Security
Redistributes Economic Resources
 Evaluate the program’s impact over
the course of a worker’s lifetime.
 Compare Social Security taxes paid
by a worker and expected benefits.
 Linkage between the Social Security
taxes and benefits is loose.
 Can vary dramatically depending on
such factors as family status,
income, and age.
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Social Security favors
 Early generations of retirees over later
generations,
 Workers with low career-average earnings
over workers with high career-average
earnings,
 Married couples over singles individuals,
 One-earner couples over two-earner
couples,
 Larger families over smaller families, and
 Elderly retirees over elderly workers.
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Social Security's Transfer of Wealth Among
Generations by Each Cohort's Year of Birth
(Billions of 2003 dollars)
Congressional Budget Office, How Pension Financing Affects Returns to Different Generations (2004).
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OPTIONS

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

Raise Taxes
Cut Benefits
Increase Investment Returns
Sources:
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
National Academy of Social Insurance, Fixing Social Security: Adequate
Benefits, Adequate Financing (2009),
http://www.nasi.org/usr_doc/Fixing_Social_Security.pdf.
Craig Copeland, Social Security Reform: How Different Options Might Affect
Future Funding, 30(9) ebri.org Notes 13 (2009).
American Academy of Actuaries, Social Security Reform Options (2007),
http://www.actuary.org/pdf/socialsecurity/reform_07.pdf
Center for Retirement Research at Boston College, The Social Security Fix-It
Book (2007), http://crr.bc.edu/special_projects/the_social_security_fixit_book.html.
National Academy of Social Insurance, Options to Balance Social Security
Over the Next 25 Years (2005),
http://www.nasi.org/usr_doc/SS_Brief_18.pdf.
Options: Raise Taxes
OPTION
 Increase tax rate by
2% 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%
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Options: Cut Benefits
OPTION
% of Deficit Eliminated
 Raise retirement age
28%
(to 67 faster & index)
 Reduce COLA by ½%
41%
each year
 Cut benefits by 5% for
those starting to get
32%
benefits in 2005
 Increase # years in
21%
wage avg. to 40
42
Options: Increase Investment
Returns
OPTION
% of Deficit Eliminated
 Investments in equities
36% - 50%
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Long-term Reform
 Social Security should ensure that
every elderly American has an
adequate 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-level
income
 2009 Poverty Levels
 Single individuals – $10,830 ($903/month)
 Married couples – $14,570 ($1,214/month)
 Would replace SSI and redistribution
within the current SS system
 Pay for with general revenues
45
Second Tier: Earnings-related
Benefit
 Individual accounts
 Hypothetical (“cash balance”) accounts
 Invested by professionals
 Pay for with payroll taxes
 Pay out lifetime annuities
 Inflation-adjusted annuities
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10% Individual Accounts
 Workers work every year between ages 22
and 65
 Each worker contributes 10% of payroll up
to Social Security taxable maximum
 3% annual real return (6% nominal; 3%
inflation
 Money must remain in the account until age
65 and then must be annuitized
 In the long run, these accounts would
replace around 45% of final wages
Jonathan Barry Forman, Should We Replace the Current Pension System with a Universal
Pension System, 16(2) Journal of Pension Benefits 48-51 (Winter 2009)
Earnings Sharing
 Credit each spouse with one-half of
couple’s combined earnings during
marriage
 At retirement, each spouse’s benefit
would be based on her half of the
couple’s earnings, plus her prior
earnings
 Would replace spousal benefits
48
Conclusions
 $5.3 Trillion Unfunded Liability
 Oldest baby-boomers are 62
 Social Security should provide
adequate incomes throughout
retirement
 Reform is needed
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About the Author
 Jonathan Barry Forman (“Jon”) is
 the Professor in Residence at the Internal Revenue
Service Office of Chief Counsel, Washington, DC, for the
2009-2010 academic year;
 the Alfred P. Murrah Professor of Law at the University of
Oklahoma College of Law, teaching tax and pension law;
and
 the author of Making America Work (Washington, DC:
Urban Institute Press, 2006).
 Prior to entering academia, Professor Forman served in
all three branches of the federal government. He has a
law degree from the University of Michigan and
master’s degrees in both economics and psychology.
 Jon can be reached at [email protected], 405-325-4779
 Slides, etc. at www.law.ou.edu/faculty/forman.shtml
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