SOCIAL SECURITY Lindsay Nolan Marcus Smith Amy Huff

SOCIAL SECURITY Lindsay Nolan Marcus Smith Amy Huff Soheil Zamanianpour Erik Sordahl

History of Social Security

Pre-Social Security l 1862 Civil War Pension program l 1896 New Jersey Teacher’s Pension Plan – Oldest retirement plan l 1920 New York State and City retirement system for employees – Civil Services Retirement System set up for Federal employees.

Depression Causes Pension Proposals l Estimates state that in 1934 over ½ of the elderly in America lacked sufficient funds to be self-supporting. l 1928 Everyman a King – Huey Long Governor of Louisiana l 1930’s Ham & Eggs – Robert Noble l 1933 End Poverty in California Plan – Upton Sinclair

Pension Proposals l 1933 Townsend Plan Francis E. Townsend from Long Beach, CA l Government provide a pension of $200 per month to every citizen age 60 and older. l Pension funded by 2% of national sales tax. l 3 Requirements l – Person had to be retired – “Their past life is free from habitual criminality” – The money had to be spent within the US by the pensioner within 30 days of receipt.

Pension Proposals l Social Insurance Movement – Tradition began in Europe – 1 st Adopted by Germany – Social Insurance emphasized government sponsored efforts to provide for economic security of its citizens.

Social Security Act l 1934 Committee on Economic Security – Committee was instructed to study the entire problem of economic insecurity and to make recommendations. l 1935 Social Security Act – Included unemployment insurance, old-age assistance, aid to dependent children and grants to the states to provide various forms of medical care.

Social Security Act l Major provisions of the act – Title I – Grants to states for old-age assistance – Title II – Federal old-age benefits. l Social Security Board – Contains 3 members l Social Security numbers – John David Sweeny Jr. was the first social security number account

Social Security Act l First payments – Ernest Ackerman-lump sum of 17 cents. l 1939 Amendments – Added payments to spouse and minor of retired workers

Social Security Act l Milton Friedman – Claims Division of SSA – Started working in November of 1939. – Believes that Social Security should become privatized.

Social Security Act l 1950 Amendments – Increased benefits for existing beneficiaries – COLA’s-cost of living allowances – Disability-1954 President Eisenhower l Medicare and other changes – Amendments of 1961 lowered the age at which men are first eligible for old-age insurance – Medicare bill signed on July 30 th, 1965 by President Lyndon Johnson

Social Security Act l SSI-Social Security Income – 1977 Amendment was to address the financing of the program l Disability in the 1980’s – 1984 congress passed the Disability Benefits Reform Act l Social Security reform in the Bush Administration – Reform of Social Security and Medicare.

Benefits and Administration

Social Security Components l Old Age retirement- a compulsory insurance program designed for retirement benefits for people who pay into the program. l Survivors benefits- paid to the dependents of a deceased worker who is fully insured. l Disability Benefits- paid to disabled workers who meet certain eligibility requirements.

Qualifying For Old-Age Benefits l Insured is eligible with l PIA Primary Insurance 40 credits paid in to Amount. The monthly Social Security amount of benefits received. l Or earning 6 credits in the last 13 calendar quarters l AIME Average Indexed Monthly Earnings.

Determining Old-Age Insured Eligibility Year of birth Normal retirement age 1937 and prior 65 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943 -54 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67 Note: Persons born on January 1 of any year should refer to age previous year.

Qualifying For Old-Age Benefits l Early retirement. Up to 4 years before Full Retirement with penalty – 3 years early 20% of benefits as opposed to 36% – 4 years early a 5% penalty each month l Full Retirement l Delayed Retirement 4 years after reaching Full Retirement receiving up to 8% extra for delay

www. ssa. gov

Disability Benefits • Insured must be working to qualify for disability benefits. l Disability Compared to Workers Comp. is much more strict for qualifying • With disability comes 100% of primary insurance – You must meet SSA’s 21 -24 Years Old At least 6 Credits – You have to go through a 5 24 -30 Years Old 27 Credits in 3 of last 6 years 31 or Older 20+ Credits definition of disabled month waiting period – The injury will either cause disability for at least 1 year or result in cause of death

Survivor Benefits l Paid to dependents of deceased workers – Surviving Spouses older than 60 – Disabled Children – Unmarried Children 18 or younger – Disabled Spouse 50+ – Dependent Parents 62 or older – $255. 00 death benefit to Beneficiary – Maximum paid out benefits $2119. 70 as of 2003

Social Security and The Wheel l Taxation – 25, 000 -34, 000 up to 50% benefits taxed – 34, 000+ up to 85% benefits taxed – Working with IRS designed form to determine the SSA amount of benefits taxed l Inflation (AIME’s adjustment) l Legal Requirements

Social Security Today

Today’s Beneficiaries l 46 Million beneficiaries accounted for in 2003 OASDI Trustees Annual Report Ø Ø Ø l 32 Million retired workers + their dependents 7 Million survivors of deceased workers 7 Million disabled workers + their dependents Average monthly benefits of $863. 24 Ø Ø $922. 08 for Retired workers, $444. 20 for their dependents $563. 79 to $887. 74 for Survivors $723. 15 for Disabled persons $$411. 87 to $567. 04 for Children (dependents of retired/deceased/disabled workers)

Today’s Beneficiaries Number of Beneficiaries by Fiscal Year (In Millions) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 OASI 37. 2 39. 4 DI 5. 5 SSI/OASDI 1 2. 5 SSI only 3. 7 37. 5 37. 6 37. 8 37. 9 38. 0 38. 7 38. 9 39. 2 5. 8 2. 5 4. 0 6. 0 2. 4 4. 2 6. 1 2. 4 4. 2 6. 3 2. 4 4. 2 6. 5 2. 4 4. 2 6. 6 2. 4 4. 2 6. 8 2. 4 4. 3 7. 1 2. 4 4. 4 1. Includes individuals receiving benefits from more than one program. 7. 5 2. 5 4. 4

Today’s Beneficiaries Total annual benefits paid, by type of benefit and trust fund, 2003 (Amounts in millions) CASH BENEFITS 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 $316, 835 332, 580 347, 088 361, 970 374, 990 385, 768 407, 644 431, 947 453, 815 470, 798 SERVICE (HOSPITAL) REHAB SERVICES $161, 900 181, 340 197, 230 210, 519 210, 115 209, 490 217, 351 240, 846 260, 913 275, 909 $40 39 31 53 51 68 63 60 75 47

Today’s Beneficiaries l Today’s beneficiaries treat Social Security as a sort of Financial Safety Net l l Workers rely solely on these benefits for their future financial needs Social Security treated as most important form of savings and most valuable financial asset

Today’s Beneficiaries

Today’s Beneficiaries

The Unified Budget l The Unified Budget, or “Whole Budget”, is a combination of Trust Funds and Federal Funds l l Trust Funds include taxes and revenues received for Social Security, Civil Service/Military retirement, Medicare, etc. Federal Funds include all other revenues l By combining the two, or unifying them, the “surpluses” received by Social Security can be used to conceal part of the federal funds deficit. l The Unified Budget has created the Pay-As-You-Go basis that Social Security operates on l l The required annuity payments have not been made to the Trust Funds which will later provide benefits for today’s workers Today’s struggling young workers are actually financing the retirement of aging Baby Boomers’ high standard of living

Strategic Plan of the Social Security Administration “Advance the economic security of the nation’s people through compassionate and vigilant leadership in shaping and managing America’s social security programs. ”

Strategic Plan of the Social Security Administration l GOALS: 1) Deliver high-quality, citizen-centered service 2) Ensure superior stewardship of Social Security programs and resources 3) Achieve sustainable solvency and ensure Social Security programs meet the needs of current and future generations 4) Manage and align staff to support the Administration’s mission.

Problems With The Social Security System

Retiring Baby Boomers • 75 million baby-boomers will retire in coming years • The number of retirees collecting benefits in 20 years is expected to increase 60% • The number of workers paying taxes to support those benefits is projected to increase a mere 14% • SSA Estimated contribution to Social Security will equal only 3/4 of the current benefits given to retirees

In the Future, Fewer Workers Will Support More Retirees As a matter of simple math, when the ratio of workers to retirees falls, each worker must bear a greater financial burden. 1960: 5. 1 to 1 Today: 3. 4 to 1 2030: 2. 1 to 1

Low Birth Rates Mean Fewer New Workers

Increasing Life Expectancies Mean More Retirees to Support Future retirees will live years longer than today’s 65 -year-olds, and collect thousands more in benefits.

Government Spending Leads To Social Security Deficits • Since the 1980’s, American workers have been contributing more into Social Security than retirees have been taking out • The average surplus amount has been $100 Billion p/year • By year 2021, the Trust Fund is projected to have close to $4 Trillion • Social Security Fund is used to pay for all current Social Security claims • Funds left over are spent by the government • This is how part of the Social Security deficit is formed

Social Security Prevents Savings • Paying more on Social Security taxes reduces individual disposable income, which in turn reduces the amount of savings • People are more reluctant to save money for retirement on their own – Social Security may reduce private saving by as much as 50% • Lowered Growth (GDP) – Reduced savings results in decreased private investing – Decrease in capital stock ownership could easily exceed $10 trillion, which is equivalent to 2% of GDP per year

Reduced Pension Plans

High Social Security Taxes (cont. )

Social Security Fraud • Criminal activity – – – False statements on claims Concealment of material facts or events affecting eligibility Misuse of benefits by a representative payee Buying or selling Social Security cards or SSA information SSN misuse involving people with links to terrorist groups or activities – Crimes involving SSA employees – Identity theft • Other violations – – Conflict of interest Fraud or misuse of grant or contracting funds Significant mismanagement and waste of funds Standards of conduct violations

Social Security Penalizes Education

Other Problems • Workers have no legal right to Social Security benefits – Helvering v. Davis (1937) – Flemming v. Nestor (1960) • Loss of benefits in case of death

Other Problems (cont. ) • Poor Rate of Return On Taxes Paid – Workers born before World War II paid significantly less in taxes than they will receive in benefits - and can expect a higher rate of return than subsequent generations. – Assuming that the program can pay full promised benefits, Baby Boomers can expect a rate of return of less than 2%, and Generation X’ers can expect less than 1%. Children born today can expect a rate of return from Social Security of almost ZERO • Under the current system, benefits must be cut in order to reduce the deficit. For Americans benefits would be cut 16% for today's 30 yr-olds, 29% for today's 20 yr-olds and 35% for today's newborns. • The only other options under the current system is to raise taxes or the retirement age even more

Social Security Reform Why Pay into a Fund We May Never See?

Solution: Privatization The ability to choose your investment portfolio instead of putting money into Social Security

Positives about Privatization l l l The ability to choose the combination of risk and return in which you wish to take Allows worker to gain higher rate of return compared to the weak return of Social Security Allows retirees to leave accumulated savings to someone if he or she happens to die before retirement The ability to choose lump-sum distribution of retirement savings, rather than being forced to receive a monthly annuity The ability to use accumulated funds for emergencies that might occur prior to retirement The ability to retire and live on accumulated savings before the official retirement age

1) The Chilean Social Security System The Chilean system links benefits to contributions 2) Workers are required to contribute a minimum of of 10% of their salary, but may contribute up to 20% 3) The contributions are tax deductible 4) The investors cannot direct their own investments 5) At retirement, the worker converts his account into an annuity with an insurance company 6) The annuities are taxed, but usually at a low rate

The Chilean Social Security System (cont’d) 7) If the annuities are not sufficient to bring the worker above the minimum living income, the state makes up the difference from general revenues 8) A Private Pension Fund Administration (AFP) invests the contributions in mutual funds, stocks, corporate bonds, and government bonds 9) Workers that have contributed to the old government system and retirees were given options to stay in the old system or move to the new system 10) The transition was financed without raising tax rates, generating inflation, or pushing up interest rates

Outperforming United States Social Security Returns l A single U. S. male with average earnings, born in 1937, has realized only a 1. 6% annual rate of return l Between 1981, when private pension plans were implemented in Chile, and 1998, Chilean workers have realized an 11% rate of return on their private accounts l The average retiree from Chile’s private system gets a pension that is 80% of his average income l From 1986 to 1995, workers in the United Kingdom achieved an annual average growth of 8. 7% in their private pension plans.

Singapore’s Privatizing Success l Residents of Singapore are forced to save 40% of their incomes l Singapore has the highest savings rate in the world l 85% of Singapore’s population own their homes

Negatives about Privatization l Privatization Is Risky l Privatization Hurts Women l Privatization Reduces Disability and Survivors Benefits l Privatization Implementation is Costly

President Bush’s Solution: Private Accounts Gives younger workers the option of putting part of their payroll tax into personal retirement accounts, in return for smaller Social Security benefits.

Private Accounts l Allows workers to divert part of their payroll taxes into personal savings accounts l Allows this portion of Social Security taxes to be invested in stocks and bonds that typically yield higher returns than the current government-managed system l In the short-term, private accounts would worsen Social Security’s financial condition l Private accounts are a better alternative for younger workers

Website Resources l www. actuary. org/socialsecurity l www. cato. org l www. mysocialsecurity. org l www. ssa. gov