Social Security

Question 1

Social Security

Answer 1

a government program for retirement insurance in the US

Question 2

SS is run by

Answer 2

the federal social security administrates

Question 3

SS operates as follows

Answer 3

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

Question 4

Payroll Tax

Answer 4

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

Question 5

SS is by funded

Answer 5

payroll tax

Question 6

Annuity

Answer 6

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

Question 7

SS Eligibility

Answer 7

must have worked 40 quarters (10 years)

Question 8

Average Indexed Monthly Earnings (AIME)

Answer 8

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

Question 9

Primary Insurance Amount (PIA)

Answer 9

the AIME in a monthly payment

Question 10

SS is mostly not redistrubtive bc

Answer 10

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

Question 11

Social Security Timing

Answer 11

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

Question 12

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

Answer 12

– 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

Question 13

4 Rationales for SS

Answer 13

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

Question 14

SS allows people to

Answer 14

smooth consumption
– enables for a decrease in elderly poverty

Question 15

Relation between SS and elderly poverty rate

Answer 15

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

Question 16

SS Moral Hazard

Answer 16

it may induce people to retire earlier than they otherwise would

Question 17

May be benefits to having people retire early

Answer 17

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

Question 18

Combatting Early Retirements

Answer 18

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

Question 19

Potential Issue with high minimum retirement age

Answer 19

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

Question 20

Funded Retirement Program

Answer 20

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

Question 21

Unfunded Retirement Program

Answer 21

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

Question 21

The Rate of Return for a Retirement Plan

Answer 21

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

Question 21

Funded Rate of Return

Answer 21

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

Question 21

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

Answer 21

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

Question 21

Structure of Social Security

Answer 21

A partially funded retirement plan

Question 22

Social Security Trust Fund (SSTF)

Answer 22

a pool of money that can stabilize SS’s budget in a given year

Question 22

Reforms to fix SS Financing Problem

Answer 22

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

Question 22

SS’s financing problem

Answer 22

It now receives less in tax revenue than it has promised to pay in benefits