An Introduction to Social Security

1. An Introduction to Social Security Professor Dr. Paul Lockard Principles of Economics

2. Purpose of Social Security • Social Security is not an investment plan. • Social Security is not an insurance company. • Social Security is an agreement among Americans that no one should retire into poverty.

3. History of Social Security • Founded in 1935 • Intended to provide a minimum level of benefits, just above poverty. • Designed to help the poorest 70%. • Later expanded to include nearly all employees and employers

4. How Social Security Works • You pay 6.25% of your income in FICA taxes, but only up to $90,000 • Your employer pays an tax that equals your 6.25% tax. • The Federal government adds funds.

5. How Social Security Works • The taxes you and your employer pay, do NOT go into a retirement fund for you. • They take care of current retirees, widows, orphans and the disabled. • When you retire, people who are working will be paying taxes to take care of you.

6. Social Security Benefits • Your benefits are mostly based on how much you paid in Social Security taxes. • The higher your income, the more taxes you paid and the more you will receive. • The lower your income, the fewer taxes you paid and the less you will receive.

7. Social Justice and Social Security • Poorest part of the population receives more from Social Security than if it was based solely on income. • Widows receive the choice of their check, or their husbands, whichever is greater.

8. Social Security and Social Justice • Social Security is indexed to inflation: it rises at the same rate as inflation. • Therefore Social Security is insulated from inflation.

9. The Efficiency of Social Security • Social Security is highly efficient: costs are only 1.5% of revenue. • Due to lack of advertising. • Due to lack of marketing and sales costs. • Due to lack of large CEO salaries. • Due to lack of dividends to shareholders.

10. Surplus Funds • By law, if Social Security has any surplus, it is required to purchase certain types of United States Treasury bonds. • US Treasury bonds are basically IOU’s of the United States government.

11. The Social Security “Crises”

12. Why the Belief that Social Security is in a Crises? • Widespread media discussion. • Fear that Baby Boomers will swamp the system.

13. Economic Dependents • The fear about Social Security failing is a fear about economic dependents

14. Economic Dependents • Groups of people who are economically dependent on rest of society. • We measure the ratio of dependents to the rest of the population with: • Aged-Dependency Ratio • Total-Dependency Ratio

15. Aged Dependency Ratio • Total Number of Elderly • The total population • Elderly are 65 and older.

16. Total Dependency Ratio • Total number of [Elderly + disabled + children] • The total population • Children are aged 16 and under.

17. Forecasting • What will happen to Social Security depends on many factors. • It is not simply a matter of baby boomers retiring soon!

18. Factors that Impact Social Security • Labor market participation • Mortality and longevity • Birth rates • Immigration • Economic growth

19. Labor Market Participation • Defined as: • The percentage of the population 16 and older who work.

20. Labor Market Participation • For men 55-65, labor market participation has declined. • For women of all ages, labor market participation has dramatically increased.

21. Impact on Social Security • The greater the labor market participation rates, the more people working. • The more people working, the more taxes are paid to Social Security. • The more taxes collected, the greater the revenues. • Increased labor market participation is good for Social Security.

22. Mortality and Longevity • Defined as: • Mortality is how soon people die on average. • Longevity is how long people live on average.

23. Mortality • The lower the mortality rates, the more people in a group survive long enough to start collecting Social Security. • The more people who survive, the more Social Security has to pay out. • Lower mortality rates results in higher Social Security spending.

24. Longevity • The greater the longevity rates, the longer people live. • The longer they live, the longer they collect Social Security. • Greater longevity results in higher Social Security spending.

25. Birth Rates • Defined as: • How many children are born and survive past age one.

26. Birth Rates • Lower birth rates leads to fewer economic dependents in modern societies. • Lower birth rates also lead to fewer workers to pay into the Social Security system, later. • The long run trend has been falling birth rates in the United States.

27. Birth Rates • Falling birth rates have lead to fewer tax paying workers entering the labor market. • Falling birth rates in the United States have caused many people to worry about the future of Social Security.

28. Immigrants • Defined as: • People from other countries who move to the United States.

29. Immigrants • Most immigrants are of prime working age (25-40), and go to work right away. • Immigrants can’t collect until they become citizens. • Immigrants also have to work and pay taxes into the system, like everyone else. • Immigrants then have to retire.

30. Immigrants • Immigrants cancel out the effects of falling birth rates, by providing more taxpaying workers. • The higher the immigration rate, the more workers there are to pay into the system.

31. Economic Growth • Defined as: • How quickly the economy grows.

32. Economic Growth • Economic growth increases the number of people with jobs, and increases many peoples’ incomes. • This means more people pay taxes. • The faster the economy grows, the better it is for Social Security.

33. Forecasting • What will happen to Social Security depends on all of these factors, and many others. • It is not simply a matter of baby boomers aging!!!!

34. Opponents of Social Security • Some conservatives • Some wealthy • Some young people • Owners and managers of private financial companies, such as banks and MUTUALS funds.

35. Conservatives • Some conservatives hate any type of government program, simply because it is a government program.

36. The Wealthy • Some of the wealthy feel strongly that instead of paying Social Security taxes, they should have been left with the money, because they could have invested it better.

37. Young People • Some young people believe that Social Security won’t be around when they retire. • Therefore they don’t want to pay taxes to the system.

38. Managers of Private InvestmentCompanies • The owners and managers of private investment companies, such as bankers, stockbrokers and mutual fund managers, would like to abolish, shrink or take over Social Security.

39. Managers of Private Investment Companies • The owners and managers of private companies want the commissions and fees they would earn by managing the very large Social Security Trust fund. ($1,500.000,000,000 and growing.

40. Managers of Private Investment Companies • One study (from the mid-80’s) estimated that if Social Security had been privatized, (turned over to private companies) more than $5,000,000,000 (5 billion) in fees would be generated each year. • That is if the companies only charge 1% commission.

41. Managers of Private Investment Companies • Not surprisingly, when you look at who is most active in trying to persuade us that Social Security is failing and needs to be privatized to save it, it is the money managers.