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By: Richard Hurst. Pensions: Social security. 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. Overview.

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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
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?
Questions From Last Time
questions from last time1

Which plan is most prevalent? Which one is always the best? What percentage of employers offer pensions?

Questions From Last Time

Source: Center for Retirement Research

questions from last time4

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?
Questions From Last Time
questions from last time5

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?
Questions From Last Time
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…
History of Social Security
history of social security1

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
History of Social Security
the social security act
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
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
Changes to the Social Security Act
changes to the social security act1

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
Changes to the Social Security Act
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)
Social Security Today
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
Social Security Criticism
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
Bush and Social Security Reform
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 ShripadTuljapurkar and Ron Lee (formerly of the Retirement Research Center)
    • OCACT – Office of the Chief Actuary of the Social Security Administration
Social Security Projections
social security projections1
Social Security Projections


“Stochastic Models of the Social Security Trust Funds”,

social security projections2
Social Security Projections

TL Model

“Stochastic Models of the Social Security Trust Funds”,

social security projections3
Social Security Projections

OCACT Stochastic Model

“Stochastic Models of the Social Security Trust Funds”,

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
Social Security Reform
social security reform1

6.2% Solution

  • Mixed Solution
  • Arguments Against Privatization
  • Fully-Funded Solution
  • Obama’s Plan
Social Security Reform
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
6.2% Solution
6 2 solution1

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
6.2% Solution
6 2 solution2
6.2% Solution

Zogby International Poll, provided for CATO Institute (2004)

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
Mixed Solution
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
Arguments Against Privatization
arguments against privatization1

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
Arguments Against Privatization
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
Fully Funded Solution
fully funded solution1

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
Fully Funded Solution
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
Obama’s Plan
  • Since severe problems can be seen in advance, moderate changes taken now can succeed. But, if we wait, the changes will need to be more severe in the future.
works cited

Aaron, Henry J. Another Lesson from Today’s Financial Meltdown. 22 Sept. 2008. The Brookings Institution. 20 Apr. 2009 <>.

  • 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 <>.
  • Effect of Pension Reform on Retirement Plan Sponsorship Unclear. 10 May 2007. Watson Wyatt Worldwide. 18 Apr. 2009 <>.
  • 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 <>.
  • 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 <>.
  • 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 <>.
  • 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 <>.
  • Seniors & Social Security. Organizing For America. 21 Apr. 2009 <>.
  • Social Security (United States). 21 Apr. 2009 <>.
  • Social Security Debate (United States). 21 Apr. 2009 <>.
  • 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 <>.
Works Cited