Social Insurance: Social Security Flashcards
Philosophy: Risk/Uncertainty
In an industrial society there are risks
- Uncertainty about future wealth and health
Prior to industrialization families often cared for members who needed help
Modern industrial societies are typified by a mobile work
force
- Families in different locations
These risks can often not be borne by an individual alone
Social Security Benefits
Social Security: pays cash benefits to retired and disabled workers and their families and to the families of deceased workers
- Federal old-age and survivors insurance (OASI)
- Federal Disability Insurance (DI) - cash program that provides benefits to replace a portion of earnings lost due to a severe disabling condition that can be expected to last for 12 months or result in death.
How is Social Security Funded?
FICA - Federal Insurance Contributions Act requires payments of the payroll tax by employees and their employers
Workers pay 6.2 percent of their earnings up to $132,900 a year in 2019.
- The cap on taxable earnings generally rises each year with the national
average wage index, however, if there are no COLA adjustments (based
on the CPI-W) taxable earnings do not increase by law
The FICA taxable wage limit was $128,400 in 2018
Employers pay a matching amount for a combined tax of 12.4 percent of
earnings. The OASDI tax rate for wages is set by statute.
Self-employed persons pay both the employee and employer share for a total 12.4
percent.
Half of this tax (the employer share) is a deductible business expense for income tax purposes.
Higher-income Social Security beneficiaries pay federal income taxes on their benefit income, and these taxes help pay for Social Security.
How much taxes do workers
pay?
An individual with wages =/> $132,900 will contribute
a maximum of….
- $8,239.80 into OASDI in 2018, their employer
would contribute the same amount
Medicare hospital insurance (HI) is levied on all
earnings
- 1.45 employee and 1.45 employer (2.9)
- As of 1/2013, individuals with earned income >$200,000 ($250,000 couples) pay an additional 0.9 in HI taxes.
Social Security Trust Funds
Payroll taxes from employees, employers, the self-
employed, and a small amount of general revenues are credited in an account
in the Treasury
Treasury has the authority to pay for benefits and
administrative expenses out of these funds.
Trust Funds: Which Programs?
[Old-Age and Survivors Insurance (OASI) trust fund]
Benefits paid to
- Retired workers and their families
- Families of deceased workers, are paid from the OASI Trust Fund
[Disability Insurance (DI) trust fund]
Benefits paid to
- disabled workers and their families are paid from the DI Trust Fund
Medicare Trust Funds
Funds health services for beneficiaries of Medicare.
HI: hospital insurance trust fund
- Financed through payroll taxes
SMI: supplemental medical insurance
- Financed through general funds
What “type of taxes” are
payroll taxes?
Payroll taxes are said to be a regressive tax.
OASDI taxes are
considered a regressive
tax b/c they take
a larger share of the income of middle and lower income workers than higher income
worker
- Levied against wages only not dividends, rents or
interests
- Social Security taxes are levied on earnings up to $132,900 so every dollar above $132,900 is not subject to the 6.2% FICA taxes
What do you need to know to understand Social
Security?: How does the program work?
Social Security is largely a
“pay-as-you go” program
Today’s workers pay Social Security taxes (OASDI), this money is used for benefits for current retirees.
Not like a pre-funded company pension where money is accumulated in advance and paid out at retirement.
- This is important to understand so you have the tools to understand
conversation about potential reforms
OASDI program: 2017
benefit payments to
about 62 million people:
- 45 million retired workers and dependents of retired
workers
- 6 million survivors of deceased workers
- 10 million disabled workers and dependents of disabled workers.
During the year, an estimated
174 million people had earnings covered by Social Security and paid payroll taxes on those earnings
Total expenditures were $952
billion.
Total income was $997 billion
DI Trust Fund asset reserves are projected to become depleted in 2032, at which time continuing income to
the DI Trust Fund would be sufficient to pay 96 percent of DI scheduled benefits
The OASI Trust Fund reserves are projected to become depleted in 2034, at which time OASI income would be
sufficient to pay 77 percent
of OASI scheduled benefits
How much are benefits on average?
The average monthly benefit for
- retired worker: $1,234
- wives/husbands of retired workers: $610
- children of retired workers: $605
- survivors of deceased workers: $1,190
- disabled workers: $1,100
- wives/husbands of disabled workers: $299
- children of disabled workers: $330
The office of the Chief Actuary of Social Security makes
projections about Social Security finances that are used in an annual report to Congress
- in order to do so, assumptions about population growth, the performance of the economy, wages and unemployment must be made to develop estimates
this is why you may hear different dates between political actors, it depends on which scenario the actor chooses to highlight
2017 Social Security Trustees Report: Projections
Under the Trustees’ assumptions, Social Security’s total income is
projected to exceed its total cost through 2021. This is the OASI Trust Fund
The OASI Trust Fund reserves are projected to be depleted in 2035. This means that OASI income would be sufficient to pay 75% of scheduled benefits.
Under the Trustees, assumptions the DI Trust Fund asset reserves
are projected to be depleted in 2028. This means that the DI Trust Fund would have sufficient funds to pay 93% of DI scheduled benefits
How to evaluate different
proposals?
The how, who, how much
- This gives you the mechanism (how the system
works)
- Who the system effects (magnitude of the program,
demographic impacts)
- The level of benefits
Knowing the source of record for actuarial reports to congress – solvency dates, etc.
Policy Levers
To bring the system into long-term balance congress has to
either
- Reduce benefits
- Increase revenue
- Some combination of these two approaches, there is no
other way
Private accounts do not deal with the shortfall and are a
separate issue so should not be conflated
Moving to a different system structure is a separate, very
large conversation and would need an interim transition plan
Options for Social Security
Increasing revenue
- Raise taxable earnings cap from $132,900
- Raise the Social Security tax rate from 12.4%
- Extend FICA taxes to other sources of income (rents, dividends rather than just wages)
- Invest part of trust funds in equities
- Earmark specific taxes for Social Security
- Extend Social Security coverage to current state/local governments employees who are not covered
Lowering benefits
- Raise retirement age for full benefits
- Raise retirement age for early benefits
- Index benefits to keep pace with inflation instead of wage increase; moving from “wage indexing” to “price indexing”
- Reduce cost of living
adjustment; using a different adjuster
