Social Security Flashcards
Social Security
a government program for retirement insurance in the US
SS is run by
the federal social security administrates
SS operates as follows
– People pay a tax on their earnings during their working years
– When they retire, the government pays them income support
Payroll Tax
a tax on a worker’s earnings
– currently 12.4% of earnings
SS is by funded
payroll tax
Annuity
a fixed (real) amount of money paid in each year until the recipient dies
SS Eligibility
must have worked 40 quarters (10 years)
Average Indexed Monthly Earnings (AIME)
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
Primary Insurance Amount (PIA)
the AIME in a monthly payment
SS is mostly not redistrubtive bc
The ratio of total lifetime payments to total lifetime earnings is similar across the income distribution
Social Security Timing
67 is the full benefits age
62 is the early entitlement age
SS adjusts the benefit level depending on when a person claims benefits
– 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
4 Rationales for SS
– Adverse selection in annuity markets
– Internalities
– Administrative costs in annuity markets
– financial illiteracy
SS allows people to
smooth consumption
– enables for a decrease in elderly poverty
Relation between SS and elderly poverty rate
as SS has become more generous over time, the elderly poverty rate fell
SS Moral Hazard
it may induce people to retire earlier than they otherwise would
May be benefits to having people retire early
Old people often hold onto jobs despite being bad at them
– Blocks younger, more effective people from taking over
Combatting Early Retirements
Can combat early retirements by having a high min. retirement age
– This way, few people will retire early due to the offer of benefits
Potential Issue with high minimum retirement age
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
Funded Retirement Program
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
Unfunded Retirement Program
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
The Rate of Return for a Retirement Plan
The payouts that a person gets from the plan relative to the contributions that the person paid to the plan
Funded Rate of Return
Rate of return depends on the return to saving
– on how much a person’s financial investments grow over time
Unfunded rate of return (provided by the gov and paid for via payroll taxes)
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
Structure of Social Security
A partially funded retirement plan
Social Security Trust Fund (SSTF)
a pool of money that can stabilize SS’s budget in a given year
Reforms to fix SS Financing Problem
- Raise the payroll tax
- Reduce the benefit level
- Take the Money in the SSTF and invest it in the stock market
- Raise taxes on the well-off
SS’s financing problem
It now receives less in tax revenue than it has promised to pay in benefits
