Social Security Flashcards

1
Q

Social Security

A

a government program for retirement insurance in the US

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2
Q

SS is run by

A

the federal social security administrates

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3
Q

SS operates as follows

A

– People pay a tax on their earnings during their working years
– When they retire, the government pays them income support

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4
Q

Payroll Tax

A

a tax on a worker’s earnings
– currently 12.4% of earnings

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5
Q

SS is by funded

A

payroll tax

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6
Q

Annuity

A

a fixed (real) amount of money paid in each year until the recipient dies

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7
Q

SS Eligibility

A

must have worked 40 quarters (10 years)

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8
Q

Average Indexed Monthly Earnings (AIME)

A

the amount of the annuity payment depends on how much a person earned during her working years
– person’s avg monthly earnings during their 35 years of highest earnings

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9
Q

Primary Insurance Amount (PIA)

A

the AIME in a monthly payment

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10
Q

SS is mostly not redistrubtive bc

A

The ratio of total lifetime payments to total lifetime earnings is similar across the income distribution

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11
Q

Social Security Timing

A

67 is the full benefits age
62 is the early entitlement age

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12
Q

SS adjusts the benefit level depending on when a person claims benefits

A

– The adjustments that SS makes are actuarially fair
– If claim at the full-benefit age (67), receive the PIA
– If claim earlier, receive a monthly payment that is less than the PIA
– If claim later, receive a payment that is more than the PIA

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13
Q

4 Rationales for SS

A

– Adverse selection in annuity markets
– Internalities
– Administrative costs in annuity markets
– financial illiteracy

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14
Q

SS allows people to

A

smooth consumption
– enables for a decrease in elderly poverty

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15
Q

Relation between SS and elderly poverty rate

A

as SS has become more generous over time, the elderly poverty rate fell

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16
Q

SS Moral Hazard

A

it may induce people to retire earlier than they otherwise would

17
Q

May be benefits to having people retire early

A

Old people often hold onto jobs despite being bad at them
– Blocks younger, more effective people from taking over

18
Q

Combatting Early Retirements

A

Can combat early retirements by having a high min. retirement age
– This way, few people will retire early due to the offer of benefits

19
Q

Potential Issue with high minimum retirement age

A

Some people will grow sick and unable to work before they hit this age
– But can help these people using a separate program: disability insurance

20
Q

Funded Retirement Program

A

A worker’s contributions go to the same worker when he retires
– The worker contributes to the plan when he works
– The contributions are set aside and saved
– When the worker retires, is paid benefits that come out of his savings

21
Q

Unfunded Retirement Program

A

The money that a worker contributes is used to pay current retirees
– Contributions from today’s workers go to today’s retirees
– Retirement benefits for today’s workers will come from future workers

21
Q

The Rate of Return for a Retirement Plan

A

The payouts that a person gets from the plan relative to the contributions that the person paid to the plan

21
Q

Funded Rate of Return

A

Rate of return depends on the return to saving
– on how much a person’s financial investments grow over time

21
Q

Unfunded rate of return (provided by the gov and paid for via payroll taxes)

A

Rate of return depends on the amount of tax revenue per retiree
– Tax revenue per retiree depends on two factors:
(a) The age distribution: how many workers there are per retiree
(b) The wage level: how much tax rev. is obtained per worker
→ High wages, many workers, few retirees ⇒ can afford generous benefits

21
Structure of Social Security
A partially funded retirement plan
22
Social Security Trust Fund (SSTF)
a pool of money that can stabilize SS's budget in a given year
22
Reforms to fix SS Financing Problem
1. Raise the payroll tax 2. Reduce the benefit level 3. Take the Money in the SSTF and invest it in the stock market 4. Raise taxes on the well-off
22
SS's financing problem
It now receives less in tax revenue than it has promised to pay in benefits