A.K.A. – Social Security

* Pay as you go program with benefits to three distinct groups – retirees, survivors, and disable workers SS Trust Fund workersworkers $$ $$ Annual Payouts $$ Government Extra money to Fed for interest bearing IOU…short of money, redeem IOU to Trust

* Started in 1935 by FDR Administration * Objective: Reduce Unemployment * Covered approximately 50% of workforce * Did not include secretaries, domestic workers, service workers such as hotels – written mainly for white male working jobs * Thus discriminated against females and minorities * Over the years switched to cover all “payroll” workers and self employed * Today ( ) * 157 million pay into system * 54 million receive benefits from all programs * Key Term is: OASD Insurance

* Annual Projections by OASDI provide the following estimates of Income and Outflow * Income just matches outflow 2011 * Starting in 2012 outflows exceed inflow * Interest income sufficient to cover shortfall * Starting in 2023 interest income will be insufficient to cover the shortfall (under current entitlements) * By 2036 the U.S. Treasury IOUs will be fully redeemed (principal of Trust is at zero) * In 2037 Benefits will be funded at 74% of current rate if no additional income is available * Why the shortfall? Multiple Factors…living longer is major factor and ratio falling of workers to retirees

* Raise the age of recipients (recently did this as retirement age is rising from 65 to 67), so what’s left to do? * (1) Raise the Tax Rate * (2) Eliminated the wage cap on applicable salary * (3) Means Test * (4) Reduce Benefits * (5) Privatize Social Security * Pros and Cons of each fix…who pays the burden and what are the unintended consequences?

* Current rate * Employees and Employers pay 6.2% each on first $113,700 wages earned each year (total tax rate is 12.4%) * Non wages are not taxed * Rate needed to sustain current benefits * Increase payroll tax to 16.41% by 2041 * and then to 17.61% by 2081 * Unintended Consequences * Very regressive tax * Reduces discretionary income of workers (up to $2300 per year) * Transfers from poor to rich (Nobel Laureate Milton Freidman)

* Tax all wage income (no limit at $113,700) * Two years ago this “fix” would have solved 98% of the shortfall for Social Security * Following the “holiday tax” which reduced tax to 4.2% for workers and the recent higher unemployment rate now only fixes about 78% of the shortfall * Removes regressive tax structure * Does not remove transfer of wealth from poor to rich * Rich tend to live longer – if you die early (more likely to be poor) pay in with no benefit stream or if you live longer you draw more benefits (rich tend to live longer due to access to health care, nutrition, etc.)

* Currently when you retire at full retirement age (FRA) you receive benefits regardless of wealth * Test need of individual for payment from Social Security Trust * If wealth above certain amount then benefits reduced until some level where they reduced to zero * Example: * if you have net worth below $1,000,000 receive full benefits (currently $2,533 per month) * Between net worth of $1,000,000 and $5,000,000 you gradually have benefits reduced on sliding scale to $0 per month. * Unintended Consequences? None if you think insurance

* Currently full benefits * By 2037 benefits would need to fall to 74% of current rates * Hurts the poor – estimates are that those most impacted by reduction of benefits are those that can least afford to carry the burden * Those that earned lower wages throughout their lifetime already received lower benefits and this would cause many to fall below the poverty line * Those that earned lower wages throughout their lifetime in general have more health issues and pay a higher percentage of income on prescription drugs leaving less for other necessities * Again, think insurance plan and benefits cover need

* Again this is an insurance program not a retirement (pension) program * But what if you did privatize? * Starting next year, 2014, all individuals less than 25 would be “on their own” (pay into personal retirement plan) * Fast forward to 2081…all have reached the FRA that have paid into Social Security…no current individuals pay into Social Security (inflow of dollars is $0) * Projected outflow for all FRA beneficiaries is $1.2 trillion dollars…who pays for this entitlement? Court says it is a guaranteed benefit…then taxpayers must foot the bill * Tax rates must go up on everyone by, on average, 20%

* What would you do if you could pick the solution? * Just one of the five easy solutions? * Combination? * For example, remove cap and means test * For example, means test and reduce benefits * For example, remove cap and raise rates * For example, raise rates and means test * For example, remove cap and reduce benefits * Some combination of three or all four? * Any unintended consequences of your solution? * Questions?