Pensions: Social security
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Pensions: Social security

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Overview. Questions From Last TimeHistory of Social SecurityWhat caused the need for Social Security?How has Social Security changed over time?Social Security TodayCurrent criticismSocial Security ProjectionsSocial Security Reform. Questions From Last Time. Could you explain vesting mor
Pensions: Social security

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1. Pensions: Social security By: Richard Hurst

2. Overview Questions From Last Time History of Social Security What caused the need for Social Security? How has Social Security changed over time? Social Security Today Current criticism Social Security Projections Social Security Reform

3. Questions From Last Time Could you explain vesting more ? what does it mean to own a percentage of a plan? How do companies decide which plan to use? How are pensions affected when you change employers? What are the implications of pension funds comprising a large part of the stock market?

4. Questions From Last Time Which plan is most prevalent? Which one is always the best? What percentage of employers offer pensions?

5. Questions From Last Time Success of plans? Vesting - Vesting -

6. Questions From Last Time Pension plans offered by major companies Source: Watson Wyatt, 2007 Microsoft and JetBlue Airways only offer 401K?s. IBM, Verizon, and Nextel recently froze their DB plansMicrosoft and JetBlue Airways only offer 401K?s. IBM, Verizon, and Nextel recently froze their DB plans

7. Questions From Last Time If pensions are not covered by taxpayers, where is the money coming from? Insurance Premiums Assets held from plans that PBGC takes over Income from current investments What caused the shift away from Defined Benefit plans? What are the benefits of Defined Benefit plans?

8. Questions From Last Time Who is the calculator good for to predict accurately? Does it not take into account raises and job changes over a lifetime? With the current economic downfall, the funding of pension plans rested on the companies. Is the stimulus from the government supposed to only help companies to fund pension plans, or are there stimulus or government actions to fund pensions outside of individual company contributions? Obama administration recently told South Carolina that it could use a portion of its stimulus cash for pension funds (public pension system only thus far).Obama administration recently told South Carolina that it could use a portion of its stimulus cash for pension funds (public pension system only thus far).

9. History of Social Security U.S. shifted in the mid-1880s from an agricultural society to an industrialized one Economic security was tied to one?s ability to maintain a job and be a wage earner This shift and? Urbanization of America, New nuclear family standard, Average lifespan increase, and?

10. History of Social Security Stock Market Crash and the Great Depression Unemployment exceeded 25% Wages paid to workers went from $50 billion in 1929 to $30 billion in 1932 2 million adult men were homeless Majority of elderly lived in a state of dependency Mass movements started that pushed for help for poorer Americans Share Our Wealth Program The Townsend Movement Father Charles Coughlin Share Our Wealth - called upon the federal government to guarantee every family in the nation an annual income of $5,000, so they could have the necessities of life, including a home, a job, a radio and an automobile. He also proposed limiting private fortunes to $50 million, legacies to $5 million, and annual incomes to $1 million. Everyone over age 60 would receive an old-age pension. Had 7.7 million members. The Townsend Movement - In 1933 Francis Townsend, a doctor from California, found himself unemployed at age 66 with no savings and no prospects. The basic idea of the Townsend Plan was that the government would provide a pension of $200 per month to every citizen age 60 and older. The pensions would be funded by a 2% national sales tax. Had 2.2 million members. Father Charles Coughlin - At the height of his popularity, Father Coughlin had a greater share of the weekly broadcast audience than Howard Stern, Rush Limbaugh, Paul Harvey and Larry King combined. Weekly radio program with 35-40 million listeners. Called on government to form social programs.Share Our Wealth - called upon the federal government to guarantee every family in the nation an annual income of $5,000, so they could have the necessities of life, including a home, a job, a radio and an automobile. He also proposed limiting private fortunes to $50 million, legacies to $5 million, and annual incomes to $1 million. Everyone over age 60 would receive an old-age pension. Had 7.7 million members. The Townsend Movement - In 1933 Francis Townsend, a doctor from California, found himself unemployed at age 66 with no savings and no prospects. The basic idea of the Townsend Plan was that the government would provide a pension of $200 per month to every citizen age 60 and older. The pensions would be funded by a 2% national sales tax. Had 2.2 million members. Father Charles Coughlin - At the height of his popularity, Father Coughlin had a greater share of the weekly broadcast audience than Howard Stern, Rush Limbaugh, Paul Harvey and Larry King combined. Weekly radio program with 35-40 million listeners. Called on government to form social programs.

11. The Social Security Act August 15, 1935 ? signed into law by Roosevelt Included unemployment insurance, old age assistance, aid to dependent children, and state grants to provide medical care Did not include disability coverage and medical benefits Benefits were based on a payroll tax President Roosevelt signing Social Security Act of 1935 in the Cabinet Room of the White House. Also shown, left to right: Rep. Robert Doughton (D-NC); Sen. Robert Wagner (D-NY); Rep. John Dingell, Sr. (D-MI); Unknown man in bowtie; Secretary of Labor, Frances Perkins; Senator Pat Harrison (D-MS); Congressman David L. Lewis (D-MD). Library of Congress photo, LC-US262-123278.President Roosevelt signing Social Security Act of 1935 in the Cabinet Room of the White House. Also shown, left to right: Rep. Robert Doughton (D-NC); Sen. Robert Wagner (D-NY); Rep. John Dingell, Sr. (D-MI); Unknown man in bowtie; Secretary of Labor, Frances Perkins; Senator Pat Harrison (D-MS); Congressman David L. Lewis (D-MD). Library of Congress photo, LC-US262-123278.

12. Changes to the Social Security Act 1950 ? Cost of Living Allowances (COLAs) 1960 ? Disabled workers of any age (and their dependents) could receive benefits 1965 ? Health benefits to those aged 65+ (Medicare) 1972 ? Automatic COLAs and 20% increase in benefits 1975 ? Trustees noticed a funding shortfall: Fund would be exhausted by 1979 Raised taxes to 7.65%, reduced benefits, and increased the wage base 1950 ? COLAs ? doubled the value of Social Security benefits 1956 ? Tax rate was raised to 4% (2% for employers, 2% for employee) 1960 ? signed by Pres. Eisenhower 1961 ? Tax rate was increased to 6% 1965 ? LBJ ? New social insurance program that extended health benefits to Americans age 65 or older 1972 ? Tied the automatic adjustment to CPI, didn?t have to go specifically through Congress to raise benefits. Instead it would be automatic 1950 ? COLAs ? doubled the value of Social Security benefits 1956 ? Tax rate was raised to 4% (2% for employers, 2% for employee) 1960 ? signed by Pres. Eisenhower 1961 ? Tax rate was increased to 6% 1965 ? LBJ ? New social insurance program that extended health benefits to Americans age 65 or older 1972 ? Tied the automatic adjustment to CPI, didn?t have to go specifically through Congress to raise benefits. Instead it would be automatic

13. Changes to the Social Security Act 1981 ? Greenspan Commission put together to solve another funding crisis Taxation of Social Security benefits Increase in the retirement age in the next century Exclude the Trust Fund from the unified budget 1996 ? Disability benefits were not offered if drug addiction or alcoholism was a material factor 1996 ? Previously if a person had a medical disability that prevented them from working, that disability would be enough to qualify them for the payments1996 ? Previously if a person had a medical disability that prevented them from working, that disability would be enough to qualify them for the payments

14. Social Security Today Income tax is not used to fund Social Security, but rather a 12.4% FICA tax If revenues are greater than expenses, the excess is invested in Government bonds Indirectly finances the government?s deficit spending End of 2008, Trust Fund valued at $2.4 trillion 2008 ? Paid out $625B in benefits, and collected $805B (surplus of $180B) Provides roughly 40% of the final year earnings for someone that has had median earnings all of their life, and retires at normal retirement age (65-67) 12.4% - 10.6% payroll tax + 1.8% tax for disability 4 out of 5 tax dollars go immediately to current beneficiaries, the remaining dollar is used to purchase US Treasury securities12.4% - 10.6% payroll tax + 1.8% tax for disability 4 out of 5 tax dollars go immediately to current beneficiaries, the remaining dollar is used to purchase US Treasury securities

15. Social Security Criticism Discriminates against the poor and minorities Rich don?t have to pay FICA tax on any income over $108k Wealthy usually live longer than poorer citizens Earns lower rate of returns than private accounts Expected be less than 2% for most of today?s workers Party splits: Democrats: Obligatory social insurance program Republicans: Big government program that reduces individual ownership and bypasses the free market Giant Ponzi scheme

16. Bush and Social Security Reform Inaugural Address (2001) ? Social Security and Medicare reform would be a priority In February 2001, in first speech to Congress, said he would appoint a Presidential Commission to address reform Must preserve the benefits of current retirees Must return Social Security to sound footing Must offer personal savings accounts to younger workers At the beginning of his 2nd term, again said Social Security reform would be a top priority

17. Social Security Projections Projections typically go out 75 years Social Security Administration typically looks at 3 different models to predict future needs: CBOLT Model: Congressional Budget Office Long-Term Model TL Model ? Developed by Shripad Tuljapurkar and Ron Lee (formerly of the Retirement Research Center) OCACT ? Office of the Chief Actuary of the Social Security Administration Projections go out 75 years ? good estimate, b/c typically enter the workforce at 20/25 and few will live beyond 95/100 years of ageProjections go out 75 years ? good estimate, b/c typically enter the workforce at 20/25 and few will live beyond 95/100 years of age

18. Social Security Projections CBOLT ? Congressional Budget Office Long Term modelCBOLT ? Congressional Budget Office Long Term model

19. Social Security Projections TL - TL -

20. Social Security Projections OCACT ? Office of the Chief Actuary (SSA)OCACT ? Office of the Chief Actuary (SSA)

21. Social Security Reform If we keep tax at current levels, benefits will need to be cut by 1/3, or raise taxes to 14.5% in 2030, 15.4% in 2050, and 16.6% in 2075 Share of U.S. population over 65 will be 14.5% in 2015 and 16.3% in 2020 5.1 workers per beneficiary in 1960, 3.4 in 2000, and 2.3 in 2025 Annual costs will start exceeding benefits by roughly 2018 1954: Exhausted by 1995 1970: Exhausted by 2040 1980s: Exhausted in 1 year 6.2% - CATO Institute6.2% - CATO Institute

22. Social Security Reform 6.2% Solution Mixed Solution Arguments Against Privatization Fully-Funded Solution Obama?s Plan 6.2% - CATO Institute6.2% - CATO Institute

23. 6.2% Solution Current Pay-As-You-Go system displaces private, fully-funded alternatives Results in large net loss of savings, which reduces capital investments, wages, national income, and economic growth Divert half of the payroll tax to individually owned, privately invested accounts Increase national investment, productivity, wages, jobs, and economic growth Remaining tax would be used to pay transition costs and to fund disability and survivor?s benefits Possible increase in productivity ? because it would be based on a part of a worker?s direct compensation, stimulating more employment and outputPossible increase in productivity ? because it would be based on a part of a worker?s direct compensation, stimulating more employment and output

24. 6.2% Solution Beneficial to minorities Would pay greater benefits, and could leave their remaining benefits to their children or heirs Help break out of the cycle of poverty (redistribution of wealth) According to a Harvard economist in 1997, if Social Security were privately invested, the net benefit would be $10 ? 20 trillion Why not invest all? Forcing high and middle income individuals to invest all might cause them to invest less in other accounts Social Security is seen as a disadvantage to minority groups ? as most middle class people put their money into the stock market, the minorities are missing out on this rate of return on their retirement Social Security is seen as a disadvantage to minority groups ? as most middle class people put their money into the stock market, the minorities are missing out on this rate of return on their retirement

25. 6.2% Solution

26. 6.2% Solution

27. Mixed Solution Combines the current Pay-As-You-Go system with an investment-based portion Period of transition: individual out of pocket contributions to personal retirement accounts When fully phased in: 9.1% to current PAYGO system, and would account for 60% of the ?benchmark? benefits in the current system 1.5% to personal retirement accounts, and would account for the remaining 40% 60% of above is placed in a broad equity mutual fund (S&P 500), and 40% in a corporate bond fund At retirement ? you could get a lump sum or an annuityAt retirement ? you could get a lump sum or an annuity

28. Arguments Against Privatization Every dollar shifted away from Social Security programs is a dollar less to provide benefits to disabled workers Add $1 trillion in Federal debt in the first decade of implementation, $3.5 trillion the next decade, and trillions more after Privatization has been a disappointment elsewhere Chile ? Private accounts were much smaller than predicted, as commissions and admin costs took up large shares of accounts United Kingdom ? Many citizens suffered from poor investment choices and unscrupulous brokers; government was left with new admin expenses, lost tax revenues, and had to bail out some failed private pension plans 37% of people that are on Social Security are not retired workers These numbers are based off of President Bush?s proposal37% of people that are on Social Security are not retired workers These numbers are based off of President Bush?s proposal

29. Arguments Against Privatization Odds are against individuals investing successfully What you get will depend on when the market is up or down 2001 ? OTC shares fell almost 80%, and the NYSE fell by more than 40% Private accounts would require a new government bureaucracy Women, African Americans, and Hispanics would become more vulnerable Higher returns come with increased risk Typically the argument for privatization is that the S&P average return has been much higher than the SSTF return, however, average people are not equipped to successfully pick correct investments. For example, a Securities and Exchange Commission report synthesizing surveys of investors found that only 14 percent knew the difference between a growth stock and an income stock, and just 38 percent understood that when interest rates rise, bond prices go down. Almost half of all investors believed incorrectly that diversification guarantees that their portfolios will not suffer if the market drops, and 40 percent thought that a mutual fund?s operating costs have no impact on the returns they receive. Typically the argument for privatization is that the S&P average return has been much higher than the SSTF return, however, average people are not equipped to successfully pick correct investments. For example, a Securities and Exchange Commission report synthesizing surveys of investors found that only 14 percent knew the difference between a growth stock and an income stock, and just 38 percent understood that when interest rates rise, bond prices go down. Almost half of all investors believed incorrectly that diversification guarantees that their portfolios will not suffer if the market drops, and 40 percent thought that a mutual fund?s operating costs have no impact on the returns they receive.

30. Fully Funded Solution Combines the benefits of a Defined Benefit plan with a Defined Contribution plan DB: All funds are pooled together and invested in a highly diversified portfolio, managed by the U.S. government DC: Each participant has their own account and contributions come from their taxed dollars Fix the rate in advance, and the government should be ready to swap the return of the portfolio against a real rate of return Transition: Start simple by investing small amounts (and use any surplus funds) Expected to take over 60 years

31. Fully Funded Solution Superior to other privatization plans, because: Increase the risk They are okay for voluntary savings, but not for savings for the nation as a whole If the market went down significantly, the government could absorb and spread out the loss among everyone It costs a lot to manage small portfolios Superior to current system, because: Required contribution is very susceptible to small and plausible changes (productivity and age) Pay-As-You-Go system will not be sustainable They are okay for voluntary savings, but not for savings for the nation as a whole ? should not gamble with the country?s nest egg They are okay for voluntary savings, but not for savings for the nation as a whole ? should not gamble with the country?s nest egg

32. Obama?s Plan Strongly opposed to privatizing Social Security Does not want to raise the retirement age Instead supports higher taxes on the rich Those making over $250k would pay 2-4% more (employer and employee contributions) Expand Individual Retirement Savings: Match 50% of the first $1,000 in savings for families that earn less than $75,000 Provide cheaper prescription drugs by negotiation and allowing seniors to buy prescriptions overseas In the Stimulus Program: Each senior on SS will receive an extra $250, and if there is a 3 month cumulative decline in employment, they will receive an additional $250In the Stimulus Program: Each senior on SS will receive an extra $250, and if there is a 3 month cumulative decline in employment, they will receive an additional $250

33. Conclusion

34. Works Cited Aaron, Henry J. Another Lesson from Today?s Financial Meltdown. 22 Sept. 2008. The Brookings Institution. 20 Apr. 2009 <http://www.brookings.edu/opinions/2008/0922_social_security_aaron.aspx>. Anrig, Greg, and Bernard Wasow. Twelve Reasons Why Privatizing Social Security Is A Bad Idea. Publication. New York: The Century Foundation, 2005. Burdick, Clark, and Joyce Manchester. Stochastic Models of the Social Security Trust Funds. Mar. 2003. Social Security Administration. 20 Apr. 2009 <http://www.ssa.gov/policy/docs/rsnotes/rsn2003-01.html>. Effect of Pension Reform on Retirement Plan Sponsorship Unclear. 10 May 2007. Watson Wyatt Worldwide. 18 Apr. 2009 <http://www.watsonwyatt.com/us/news/press.asp?ID=17361>. Feldstein, Martin. "Structural Reform of Social Security." The Journal of Economic Perspectives 19 (2005): 33-55. Greider, William. Looting Social Security. 11 Feb. 2009. The Nation. 20 Apr. 2009 <http://www.thenation.com/doc/20090302/greider>. Hines, Jr., James R., and Timothy Taylor. "Shortfalls In The Long Run: Predictions About the Social Security Trust Fund." The Journal of Economic Perspectives 19 (2005): 3-9. Historical Background and Development of Social Security. Ed. Larry DeWitt. Mar. 2003. Social Security Administration. 20 Apr. 2009 <http://www.ssa.gov/history/briefhistory3.html>. Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers. Nov. 2007. United States Government Accountability Office. 24 Apr. 2009 <http://www.gao.gov/new.items/d088.pdf>. Office of Management and Budget. A New Era of Responsibility: Renewing America's Promise. 2009. Pension Coverage of Workers on Current Job. Center for Retirement Research. 20 Apr. 2009 <http://crr.bc.edu/images/stories/download/pension_coverage_03_03_2009.pdf>. Seniors & Social Security. Organizing For America. 21 Apr. 2009 <http://origin.barackobama.com/issues/seniors/>. Social Security (United States). Wikipedia.org. 21 Apr. 2009 <http://en.wikipedia.org/wiki/Social_Security_(United_States)>. Social Security Debate (United States). Wikipedia.org. 21 Apr. 2009 <http://en.wikipedia.org/wiki/Social_Security_debate_(United_States)>. Tanner, Michael. The 6.2 Percent Solution: A Plan For Reforming Social Security. Rep. The CATO Institute, 2004. Trust Fund Data. 29 Jan. 2009. Social Security Administration. 20 Apr. 2009 <http://www.ssa.gov/OACT/STATS/table4a3.html>.


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