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Income Security. Social Security I. Buffer This at start of Lecture. 2005 State of the union 23:17min The Problem 28 min – 33:20 various solutions proposed (30 min voluntary personal retirement accounts). Social Security.

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Income Security

Social Security I

Buffer This at start of Lecture

2005 State of the union

23:17min The Problem

28 min – 33:20 various solutions proposed (30 min voluntary personal retirement accounts)

Social Security

Social Security for Kids

  • Social Security helps people help themselves!

  • People work and give a little money to Social Security 

    • When some people get so sick that they can't work they get money from Social Security.

    • When people get older and don't work anymore, they can get money from Social Security.

    • When people die, their family can get money from Social Security.


To Qualify for Social Security

  • Retirement age = 65 to 67 depending on when born (see next page)

  • Reduced Benefit age = 62

  • If delay until 70, receive special credit for each month between 65 and 70 that do not receive benefits.


Social Security for Kids


  • “Piggy Bank” and

  • “Social Security Card”

  • Others show rationale behind social security.

Did Spending on Medicare growing each year since the 1950’s?

False, Medicare did not exist until the 1960’s, also it began to decline in 1996, in this chart.

  • Social Security

  • Began with Social Security Act of 1935 to deal with the financial chaos of the Great Depression.

  • Paid retirement benefits to contributing workers

1937 began collecting Social Security taxes

  • 1939 law changed to add survivors benefits

  • 1940 began regular pension payments

1956 disability benefits added

Social Security Facts

  • Administered by the Social Security Administration (made independent from the DHHS in 1994)

    • pays monthly benefits to retirees and people who are disabled as well as a survivor’s benefit to families.

    • It is a source of income for more than 44 million Americans

  • currently covers 96% of all jobs in the US (see slide 19)

  • since 1975 benefits have been indexed for inflation through the use of a Cost of Living Adjustment (COLA)

  • the largest program in the federal government (accounts for nearly 24 cents of every federal dollar spent)

Source: Rahm 2004

  • Funded by taxes collected under the authority of the Federal Insurance Contribution Act (FICA) enacted 1935. Look Familiar?

  • FICA tax is paid into three trust funds:

    • 1. OASI: the Federal Old-Age and Survivors Insurance

      • used to pay for retirement and survivor’s benefits (what is commonly referred to as “social security”)

      • collects the bulk of the funds (10.7% of each employee’s gross wages)

The Post Standard, Sunday Feb 20, 2005 Page C-1

  • payroll tax of 15.3% of gross wages (employee and employer each pay 7.65%)

    • the employer deducts 7.65 percent of the employee’s earnings, matches that amount, and sends it to the IRS. (self-employed pay the full amount)

  • 2. DI: the Federal Disability Insurance trust fund

    • used to pay for benefits to the disabled

    • (1.7% of each employee’s gross wages)

  • 3. Medicare: helps pay for healthcare of elderly (2.9% of each employee’s gross wages)

Devolution as Seen from the Budget

Author(s):C. Eugene Steuerle, Gordon Mermin

Other Availability:PDF |  Order Online |  Printer-Friendly Version

Published: January 01, 1997

Citation URL:

To qualify for Soc Sec:

  • accumulate credits associated with your social security number

    • earn a maximum of 4 credits per year

    • each year amount of earnings needed for a credit rises as average earnings levels rise

      • (i.e. in 2001 $830 paid into the fund earned 1 credit toward future benefits – in 2012 it is $1,130)

    • the # of credits required for benefits varies by age and the type of benefits claimed

    • for most taxpayers it takes 40 credits (approx. 10 years of work) to qualify for retirement benefits.

Source: Rahm 2004

To qualify for Soc Sec:

  • Not everyone earns credits

    • many federal and state employees not included

    • also excluded: railroad workers, children <21 who work in their parents’ business

Source: Rahm 2004

The Social Security Benefit

  • Benefits vary by how much you pay into the fund

  • Typically, receive benefits that approximate 40% of your average lifetime earnings.

  • Since your wages typically are lower at your first job and then grow, your average lifetime earnings are almost certainly lower than your earned income over the last few years of working

Source: Rahm 2004

The “Three-Legged Stool”

  • 1. Social Security

  • 2. Private Pension

  • 3. Personal Savings and Investment

  • Unfortunately many over-rely on Soc Sec

  • Source: Devroye 2003

Sources of Income Among those Aged 65-69 (1994)

Quinn 1998

Quinn 1998

Approaching the root of today’s problems…

Building towards the question of: What do you think we should do about social security?

The Present Configuration

  • Defined-benefit pension:

    • Can compute the benefits you will receive based on payments you make when you are working

  • An Alternative: defined contribution

    • where you would make specific payments now and your benefits would depend on how the stock market performed

  • Source: Devroye 2003

The Present Configuration

  • Pay-as-you go plan

    • The payroll taxes paid by today’s workers and their employers are used mostly to fund benefits for today’s retirees.

  • Source: Devroye 2003

The Post Standard, Sunday Feb 20, 2005 Page C-1

So what is the problem?

2005 State of the union

23:17min The Problem

28 min – 33:20 various solutions proposed (30 min voluntary personal retirement accounts)

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