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Social Security and Reform: What it Does Now Will it be Around to Keep Doing It? Karen Holden, Ph.D. Professor of Consumer Science and Public Affairs Co-Interim Director Center for Financial Security Associate Director, La Follette School of Public Affairs
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Karen Holden, Ph.D.
Professor of Consumer Science and Public Affairs
Co-Interim Director Center for Financial Security
Associate Director, La Follette School of Public Affairs
University of Wisconsin-Madison
Employer provided plans
MAJORITY OF AWARDEES ARE WOMEN—57.2%
Retired workers 44.5% are women
Disabled workers 45.5%
1. Pay-as-you-go financing
2. Pays a mandatoryannuity (benefit for remaining life)
3. Annuity is fully inflation-adjusted
4. Benefit based on average covered wage adjusted earnings over highest 35 years (including zero years)
5. Progressive benefit formula: provides higher replacement to life-long low earnings
6. Survivor benefits financed by system rather than worker; no reduction in worker’s benefit
payers / beneficiaries
Productivity growth, labor force and retirement timing increasingly matters
U.S. 2.1 Germany 1.3
Sweden 1.8 Italy 1.2
Ireland 1.8 Japan 1.5
Canada 1.7 China 1.8
Britain 1.7 S. Korea 1.8
France 1.6 Thailand 1.8
Netherlands 1.5 Russia 1.3
FICA (as percent of taxable payroll)
Employer & Total employee, each
Old Age & Survivor5.30% 10.60%
Disability 0.90 1.80
Medicare (Part A) 1.45 2.90
Total 7.65 15.30
Expectations of life 16.6yrs 19.5yrs
Percent alive at 85 36% 50%
Percent alive at 90 18% 29%Program basics 2 & 3: Annuity guards against uncertainty about length of life & inflation
U.S. 2002 Life table
Example of indexing past wages for subsequent wage growth
Average Indexed Monthly Wage = Indexed wages averaged over 35 years
Primary Insurance Amount (PIA)=
.90 of first $627 AIME +
.32 of $628 - $3779 of AIME +
.15 of Average Indexed Monthly earnings above $3,779
Turning 62 Full Retirement Age
2005 - 2016 66
2017 66 and 2 months
2018 66 and 4 months
2022 and later 67
Reduction 5/9 of 1% each month for first 36 earlier than FRA;
5/12 of 1% each additional month to 62
Up to 100% of amount primary beneficiary would have received as retired/disabled worker
Divorced survivor eligible if married 10 years
Survivor receive higher of own or survivor benefit;
but can begin survivor earlier and not have retired-worker benefit reduced
Reduced for earnings if < age FRA (above $1,000 per month)
Ineligible if remarried before age 60
If widowed again will receive the higher benefit from either spouse
1/. Fund is not estimated to be exhausted within the projection period
Modifiers do it with combination
Increased revenues and reductions in benefits;
private pensions increasingly shifting market, inflation, survival risks onto workers
Cover currently uncovered state and local: 10%
Speed rise in Full retirement age
to 67 and raise gradually to 68: 28%
to 67 and raise gradually to 70: 36%
Change COLA post-benefit adjustments
COLA – 1 percentage point: 79%
40 percent of Trust Funds into equities with
6.5% real return: 48%
Total shortfall estimated = $4.0 trillion, though predicted with uncertainty.
In long-term: tax and benefits must be sufficient to balance system
Diversion of FICA in Individual Accounts MUST increase shortfall in short run and must lead to smaller traditional benefits than currently payable because no pooling of risk.
Question for all reforms and modifications:
How important is the social insurance nature of Social Security?
Accounts introduce the market risks inherent in any defined contribution pension plan.
Individuals will gain if individual accounts earn more than Treasury Bills. Will lose if accounts earn less.
Accounts will require federal property law and probably more federal insurance company oversight.
Social insurance features must be paid out of individual accounts, rather than being pooled.