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Solutions to the Social Security Crises. Professor Dr. Paul Lockard Principles of Economics. Solutions to the Social Security Crises. Fiscal Background. Fiscal Future of Social Security.

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solutions to the social security crises
Solutions to the Social Security Crises

Professor Dr. Paul Lockard

Principles of Economics

fiscal future of social security
Fiscal Future of Social Security
  • Currently, Social Security has an annual surplus: it collects more in revenues than it pays out to retirees, widows, orphans, and the disabled.
  • Social Security has an accumulated fund of $1,531 billion dollars, ($1.5 trillion), earning 6% interest, on average.
fiscal future of social security1
Fiscal Future of Social Security
  • Social Security’s annual surplus is shrinking.
  • In the year 2018, the surplus will end.
fiscal future of social security2
Fiscal Future of Social Security
  • Starting in 2018, Social Security will use its surplus to make up the gap between revenues and spending.
  • It will do this by selling its stockpile of Treasury Bonds.
fiscal future of social security3
Fiscal Future of Social Security
  • By the year 2042, the surplus will have run out.
  • Will Social Security be bankrupt then?
  • No!
fiscal future of social security4
Fiscal Future of Social Security
  • Social Security will still be able to pay 73% of its promised benefits, with its revenues at that time.
  • Is this really bankruptcy?
fiscal future of social security5
Fiscal Future of Social Security
  • It is also very important to understand that these figures are based on the idea that the United States economy will grow very slowly over the next 40 years.
  • And no serious economist believes that.
solutions to the social security crises3
Solutions to the Social Security Crises
  • I will summarize 4 plans:
    • the Ball plan (status quo)
    • the Bush plan (partial privatization)
    • the Scheiber plan (full privatization)
    • progressive alternative
the ball plan
The Ball Plan
  • Proposes a series of minor changes, and one major change.
  • The minor changes would increase taxes slightly.
  • The major change would alter how Social Security invests its money.
the ball plan minor changes
The Ball Plan: Minor Changes
  • Bring all employees and employers into the system.
    • Currently certain workers, such as state employees, don’t pay taxes into Social Security.
  • Raise the ceiling on what is taxable income.
the ball plan minor changes1
The Ball Plan: Minor Changes
  • Put an inheritance tax on estates worth at least $3.5 million and send the money to Social Security.
  • Adjust the annual cost of living adjustment.
the ball plan major change
The Ball Plan: Major Change
  • Social Security currently invests its surplus only in U. S. Treasury bonds.
  • Have Social Security purchase stocks.
    • Phase in the purchases slowly, so as to not upset the market.
    • No more than 50% of total trust funds.
arguments in favor of the ball plan
Arguments in Favor of the Ball Plan
  • Investing 50% of the funds would boost overall rates of return to the Social Security Trust fund.
  • All other changes are minor adjustments.
  • Would maintain the existing system, which is working well.
  • Would be cheaper for everybody than alternative plans.
arguments against the ball plan
Arguments Against the Ball Plan
  • Do we want the U. S. government in the business of investing in stocks?
    • How to prevent favoritism and corruption?
    • How to pick good stocks?
  • If you believe that there is a major crises, this is only a band-aid solution.
arguments against the ball plan1
Arguments Against the Ball Plan
  • Then there are the arguments against taxation of the wealthy.
    • It has been argued that taxation of the wealthy punishes smart and hardworking people.
the bush plan partial privatization
The Bush Plan: Partial Privatization
  • This plan has a number of minor changes, and one large change, which would result in partial privatization of Social Security.
  • The minor changes would reduce benefits.
  • The major change would reduce funding.
the bush plan partial privatization1
The Bush Plan: Partial Privatization
  • Notice that the Bush plan was changed a number of times during spring 2005 in response to popular pressure.
  • Discussion has been dropped since then, and so the final plan is not completely worked out.
the bush plan minor changes
The Bush Plan: Minor Changes
  • Change in how benefits are computed, which would result in a fall in benefits, compared to the current system.
  • Guaranteed benefits would be cut back further by the amount contributed to personal accounts.
the bush plan minor changes1
The Bush Plan: Minor Changes
  • However, notice that these two changes have not been discussed in the most recent versions of the President’s plan.
  • It may be that they have been dropped.
the bush plan minor changes2
The Bush Plan: Minor Changes
  • Long term low wage workers would be guaranteed a minimum benefit set at 120% of the poverty level.
the bush plan private savings accounts
The Bush Plan: Private Savings Accounts
  • Younger workers would be allowed to set up private savings accounts.
  • These private savings accounts would be through “a centralized administrative structure”.
  • Private investment managers would be chosen through a competitive bidding process to manage the accounts.
the bush plan private savings accounts1
The Bush Plan:Private Savings Accounts
  • The funds for the private savings accounts would come from Social Security taxes.
  • Instead of paying 6.25% of your income in taxes, you would pay 2.25%.
  • The remaining 4%, up to $1,000, would go to the private savings accounts.
arguments in favor of the bush plan
Arguments in Favor of the Bush Plan
  • Would be painless, since investment in the stock market would allow the investment to grow quickly.
  • The growth in personal savings accounts would be so large that they would more than compensate for any future cut in Social Security benefits.
arguments in favor of the bush plan1
Arguments in Favor of the Bush Plan
  • These plans are voluntary.
  • The money would be invested in a mix of conservative bond and stock funds, which would prevent them from being wasted.
  • In other words, there would be a limited number of funds to choose from.
arguments in favor of the bush plan2
Arguments in Favor of the Bush Plan
  • The costs would be low.
  • Accounts not accessible prior to retirement, so they won’t be frivolously spent.
  • They would be paid out gradually.
arguments in favor of the bush plan3
Arguments in Favor of the Bush Plan
  • Social Security is bankrupt, and this solution is the least painful.
  • This will increase national savings.
  • This will increase the flow of funds to the private sector, which will use it to create new jobs and new products.
arguments against the bush plan
Arguments Against the Bush Plan
  • This is a more expensive system than Social Security:
    • Social Security uses 1.5% of its income to run.
    • Notice that the government pays all costs, and private managers control. Can we guarantee low cost?
arguments against the bush plan1
Arguments Against the Bush Plan
  • There will be drastic cuts in benefits, but not right away.
  • By 2052, the typical retiree will receive 32.5% less in Social Security benefits, under the new formula.
arguments against the bush plan2
Arguments Against the Bush Plan
  • For the vast majority of Americans, there is simply no possibility that their investments will grow large enough to compensate for the cuts in benefits.
arguments against the bush plan3
Arguments Againstthe Bush Plan
  • There will be very high transition costs, possibly as much as $200 billion a year for 30 years.
    • This is because the lost revenues won’t be matched by cuts in benefits, so the Federal Government will have to borrow more money and pay more interest.
arguments against the bush plan4
Arguments Againstthe Bush Plan
  • This is the back door to privatization:
    • People will argue that if we turn over part of the Social Security funds to individuals, why not the entire fund?
the scheiber plan
The Scheiber Plan
  • This is a full privatization plan that would phase out Social Security.
  • Funds to Social Security will be cut off.
  • Current retirees will be taken care of.
  • A return to a system of everybody is on their own.
the scheiber plan1
The Scheiber Plan
  • Sets up a two tier system for Americans.
  • Everyone over 55, when the plan goes into effect, would receive something from Social Security when they retire.
  • Everyone under 55, when the plan goes into effect, would receive nothing from Social Security when they retire.
the scheiber plan benefits to retirees
The Scheiber Plan: Benefits to Retirees
  • Just what would people over 55 receive?
  • If they are currently retired, either what they currently receive, or unspecified cuts.
  • Those who are between 55 and 65, when they retire, would receive $410 a month at retirement.
the scheiber plan revenues
The Scheiber Plan: Revenues
  • The Social Security tax would be abolished immediately.
  • When the plan goes into effect, everyone under 25 would have most of their FICA taxes refunded.
  • Everyone over 55 would receive no refund.
  • People between 25 and 55 would receive something back.
the scheiber plan other little details
The Scheiber Plan: Other Little Details
  • Should the plan run into a shortfall, borrow money from the rest of the Federal government.
  • Pay for these shortfalls by additional taxes.
  • Raise the retirement age to 67, and then later to 69.
arguments in favor of the scheiber plan
Arguments in Favor of the Scheiber Plan
  • The Social Security crises will be resolved.
  • Taxes will be lowered.
  • People would be free to choose.
  • More funds would be available for capital investment.
arguments in favor of the scheiber plan1
Arguments in Favorof the Scheiber Plan
  • The Social Security crises would be resolved: sacrifices will have to be made, and this is the least painful.
  • Taxes will be lowered because Social Security taxes will be abolished.
arguments in favor of the scheiber plan2
Arguments in Favor of the Scheiber Plan
  • People will be free to choose:
    • People can save and invest the money they used to spend in Social Security taxes.
    • People can choose smart investments and earn far greater than Social Security would ever be able to pay them.
arguments in favor of the scheiber plan3
Arguments in Favorof the Scheiber Plan
  • More funds will be available to businesses to invest.
    • Instead of the money taken as taxes and locked away in US Treasury bonds, the money will flow to private investment companies.
    • These companies will invest the money in private businesses, which will create jobs and develop new products.
arguments against the scheiber plan
Arguments Against the Scheiber Plan
  • The transition to a fully privatized system will not be painless.
    • Depending upon how much we give retirees, it will cost between $100 and $200 billion dollars, after the Social Security Trust Fund runs out.
arguments against the scheiber plan1
Arguments Against the Scheiber Plan
  • Who will pay the taxes for the additional $100 to $200 billion?
  • If we borrow from the Federal Government, what programs will have to be sacrificed to pay for this?
  • So taxes will not be lowered after all!
arguments against the scheiber plan2
Arguments Against the Scheiber Plan
  • There is no guarantee that the money that flows to private companies will actually generate new jobs.
  • The tax cuts of the past 20 years should make us suspect that much of the money will go into the stock market boom.
solutions to the social security crises6
Solutions to the Social Security Crises

The Progressive Alternative

the progressive alternative
The Progressive Alternative
  • Raise the income ceiling.
  • Make the tax genuinely progressive.
  • Add in all employees and all employers.
the progressive alternative1
The Progressive Alternative
  • Raise the income ceiling.
    • Currently, we pay taxes only up to $90,000 in income.
  • Raise the ceiling to include all income.
the progressive alternative2
The Progressive Alternative
  • Currently, the tax is 6.25% on all incomes.
    • Why not make the tax rate lower on lower incomes, and higher on higher income
    • This would shift the tax burden up the social scale.
the progressive alternative3
The Progressive Alternative
  • Currently, only wages and salaries are taxed.
    • Why not include capital gains, interest, dividends: the income of the wealthy?
    • This income is currently not taxed for Social Security.
the progressive alternative4
The Progressive Alternative
  • Currently, some employees and employers are not part of the system.
    • Gradually phase in all employees and employers.
arguments in favor of the progressive alternative
Arguments in Favorof the Progressive Alternative
  • Remember that most models assume slow economic growth in the future?
  • If we have normal growth, and we add these taxes, then Social Security will have enough revenue to completely solve the problem.
arguments in favor of the progressive alternative1
Arguments in Favorof the Progressive Alternative
  • By shifting taxes upwards, and by taxing the income of the wealthy, we shift the tax burden away from working Americans to those who can most afford higher taxes.
  • In other words, tax relief and help for Social Security.
arguments against the progressive alternative
Arguments Againstthe Progressive Alternative
  • The main argument is that this a tax on the:
    • Successful
    • The hard working
    • The most productive
    • The most useful members

Of our society

arguments against the progressive alternative1
Arguments Againstthe Progressive Alternative
  • A second argument is that some people believe the system is so broken that it can’t be fixed.
  • So why bother?