Social Security:

Social Security: Details Social Security/Medicare – Fat Cat of federal budget Provides old age, survivors’ and disability insurance to approximately 45 million Americans Workers and their employers fund the system by each paying payroll taxes equivalent to 6.2% of covered wages –Self-employed people pay 12.4% of taxable self-employment income IRS collects the taxes and deposits the money into government-administered accounts –Old Age and Survivors and Disability Insurance Trust Funds (OASDI)

Social Security: Details Payroll tax revenues are used to pay benefits to those currently collecting Social Security pensions –“Pay-as-you-go” Social Security taxes also pay for Medicare, the national health program for the elderly –Patient and hospital care, skilled nursing care

Social Security: Details Workers who receive enough earnings credits become eligible to receive a Social Security pension when they reach the early retirement age of 62 (or become too disabled to continue working, at any age) Workers’ dependent spouse and non-adult children can draw monthly survivors’ pensions when the worker dies

Social Security: Details Social Security is a defined-benefit pension program –Each pension is based on the worker’s average career earnings and on the age when the worker or worker’s dependents first obtain the pension –Social Security benefit formula Benefit formula is skewed in favor of workers with low career earnings, those who face high risk of becoming totally disabled, and married couples with only one wage-earner Others receive less favorable treatment (high income, unmarried and childless, dual-income married couples)

The End is Near… When Social Security was created in 1935, the average life span was 61.7 years –In 1995, the average life span was 75.8 years Those who turned 60 in were expected to live for another 15.9 years on average –Those who turned 60 in 1995 were expected to live for another 21 years

The End is Near… In 1999, the system took in $526.6 billion and paid out $385.8 billion The Social Security trust funds are expected to cover benefits until 2037 –2015: Benefit payments will begin to exceed income –2025: Interest income on bonds will expire –2037: Trust funds will be completely exhausted Taxes will only be able to cover about 75% of benefit obligations

Budget Deficits/Surpluses

Possible Reforms Increase retirement age from 65 to 70 Decrease Social Security benefits Increase the payroll tax for Social Security Allow government to invest Social Security surplus in the private market –Currently the government must invest surplus in government securities