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Social Security Forum, February 24, 2005

Social Security Forum, February 24, 2005. Presenter: Dr. R. Steven Daniels Department of Public Policy and Administration. Characteristics of Social Security. Eligibility 40 quarters (10 years) of covered work at least $920 per quarter (2005). Spouse or dependent of covered worker. Disabled.

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Social Security Forum, February 24, 2005

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  1. Social Security Forum, February 24, 2005 Presenter: Dr. R. Steven Daniels Department of Public Policy and Administration

  2. Characteristics of Social Security • Eligibility • 40 quarters (10 years) of covered work at least $920 per quarter (2005). • Spouse or dependent of covered worker. • Disabled

  3. Characteristics of Social Security • Revenues • Payroll tax rates: 6.2% employer and 6.2% employee. • Maximum taxable income is $90,000 in 2005. • Benefits • Benefits based on Average Indexed Monthly Earnings (Monthly average of best 35 years indexed to wages). • The Principal Insurance Amount, with first eligibility in 2005, equals the sum of the following: • A. 90 percent of the first $627 of the AIME, plus • B. 32 percent of the amount above $627 up through $3,779, plus • C. 15 percent of any amount in excess of $3,779.

  4. Characteristics of Social Security • At the end of 2003, 47 million people were receiving benefits: 33 million retired persons and their dependents, 7 million survivors of deceased workers, 8 million disabled workers and their dependents. • In 2003, 154 million people had earnings covered by Social Security.

  5. Social Security Shortfall • Social Security Trustees 2004 estimate. • Surplus increases until 2018. • Outlays exceed income in 2018. • OASDI trust fund reaches zero in 2042. • In 2043, revenue covers 73% of benefit. • Congressional Budget Office 2004 estimate. • Surplus increases until 2019. • Outlays exceed income in 2019. • OASDI trust fund reaches zero in 2052. • Differences due to different estimates in real earnings growth, real interest rate, inflation, and unemployment.

  6. Social Security Shortfall • Measures necessary to maintain solvency until 2078 (Social Security Trustees). • Increase tax rate from 12.4% to 14.29%. • Or, all current and future benefits could be reduced by 13%. • Or, raise maximum wage cap to $200,000. • Or, move money from general revenues or use combination of approaches. • Does not guarantee solvency after 2078.

  7. Social Security Shortfall

  8. Caveat about Projections

  9. Bush Social Security Plan • Caveats: • No formal plan submitted yet. • Submitted components are incomplete. • Other components are based on trial balloons and high placed administration sources.

  10. Bush Social Security Plan • No changes for Americans 55 and older = Current social security plan. • Gradual changes. • Reforms on the table: • Limiting benefits to wealthy retirees. • Indexing benefits to prices rather than wages. • Increasing the retirement age. • Discouraging early collection of retirement benefits. • Changing the way benefits are calculated.

  11. Bush Social Security Plan • Negotiable reforms (?): Maximum taxable income. • Nonnegotiable: Increases in tax rate. • Centerpiece: Personal Retirement Accounts

  12. Personal Retirement Accounts • Yearly contribution limits raised over time, eventually permitting workers to set aside 4 percentage points of their payroll taxes in their accounts. • Starts at $1,000 per year going up $100 per year to 4 percentage points (maximum 32% of total FICA taxes). • Benefits reduced by one dollar for every dollar contributed plus yearly percentage increase in wages (usually 3 percent).

  13. Proposed Benefits of Private Retirement Accounts • Centralized administrative structure. • Personal retirement accounts build “nest egg”. • Ownership and control. • Inheritability. • Better for younger workers. • Retirement accounts voluntary.

  14. Proposed Benefits of Private Retirement Accounts • Available accounts similar to Thrift Savings Plan of federal retirees. • U.S. Treasury securities - 3.67% real interest. • An index fund comprising investment grade bonds – 4.58% real interest. • Small and mid-cap stock index fund – 8.62% real interest. • Large cap stock index fund – 7.33% real interest. • International stock index fund – 1.95% real interest. • Life-cycle portfolios at age 47. • Invested in a mix of conservative bonds and stock funds.

  15. Proposed Benefits of Private Retirement Accounts • Not eaten up by Wall Street fees. • Not accessible prior to retirement. • Accounts paid out over time rather than all at once. • Accounts phased in. • Transition financing equal to $754 billion over 10 years.

  16. Personal retirement account caveats. • Accounts do not make Social Security solvent. • Transition costs could be as high as $2 trillion over 10 years. • Plan shifts resources from current beneficiaries to future recipients. Program needs to account for shortfall ($2.6 trillion over 75 years).

  17. Personal retirement account caveats. • System does not allow as much individual flexibility as advertised. • Program requires annuities, which limits the inheritability. • Program places heavy burden on health of stock market. • Plan assumes poor economic performance to produce crisis • Plan assumes good economic performance to ensure adequate payoff for private accounts.

  18. Components to Balance Plan • Phase I - Renege on treasury notes in Social Security Trust Fund (covers tax cuts). Low probability. • Phase II – Recalculate initial benefit formula, shifting from wage increases in the 35-year average to price increases. (See next table).

  19. Components to Balance Plan

  20. Conclusion • Private accounts with limited control for up to 32% of payroll taxes (although contributions are voluntary). • Probable shift in benefit calculation. • Additional one-time, transition costs ($750 million to $2 billion). • Borrowing costs to cover lost revenue to be paid to current beneficiaries.

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