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

SOCIAL SECURITYSOCIAL SECURITY

Lindsay Nolan

Marcus Smith

Amy Huff

Soheil Zamanianpour

Erik Sordahl

History of Social SecurityHistory of Social Security

Pre-Social SecurityPre-Social Security 1862 Civil War Pension program

1896 New Jersey Teacher’s Pension Plan– Oldest retirement plan

1920 New York State and City retirement system for employees– Civil Services Retirement System set up for

Federal employees.

Depression Causes Pension Depression Causes Pension ProposalsProposals

Estimates state that in 1934 over ½ of the elderly in America lacked sufficient funds to be self-supporting.

1928 Everyman a King– Huey Long Governor of Louisiana

1930’s Ham & Eggs– Robert Noble

1933 End Poverty in California Plan– Upton Sinclair

Pension ProposalsPension Proposals1933 Townsend Plan

Francis E. Townsend from Long Beach, CA Government provide a pension of $200 per month to

every citizen age 60 and older. Pension funded by 2% of national sales tax. 3 Requirements

– 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 ProposalsPension Proposals

Social Insurance Movement– Tradition began in Europe

– 1st Adopted by Germany

– Social Insurance emphasized government sponsored efforts to provide for economic security of its citizens.

Social Security ActSocial Security Act

1934 Committee on Economic Security– Committee was instructed to study the entire problem

of economic insecurity and to make recommendations.

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 ActSocial Security Act Major provisions of the act

– Title I – Grants to states for old-age assistance– Title II – Federal old-age benefits.

Social Security Board– Contains 3 members

Social Security numbers– John David Sweeny Jr. was the first social security number

account


First payments– Ernest Ackerman-lump

sum of 17 cents.

1939 Amendments– Added payments to

spouse and minor of retired workers


Milton Friedman– Claims Division of

SSA– Started working in

November of 1939.– Believes that Social

Security should become privatized.


1950 Amendments– Increased benefits for existing beneficiaries– COLA’s-cost of living allowances– Disability-1954 President Eisenhower

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 30th, 1965 by President

Lyndon Johnson


SSI-Social Security Income– 1977 Amendment was to address the financing of the

program Disability in the 1980’s

– 1984 congress passed the Disability Benefits Reform Act

Social Security reform in the Bush Administration– Reform of Social Security and Medicare.

Benefits and AdministrationBenefits and Administration

Social Security ComponentsSocial Security Components

Old Age retirement- a compulsory insurance program designed for retirement benefits for people who pay into the program.

Survivors benefits- paid to the dependents of a deceased worker who is fully insured.

Disability Benefits- paid to disabled workers who meet certain eligibility requirements.

Qualifying For Old-Age BenefitsQualifying For Old-Age Benefits

Insured is eligible with 40 credits paid in to Social Security

Or earning 6 credits in the last 13 calendar quarters

PIA Primary Insurance Amount. The monthly amount of benefits received.

AIME Average Indexed Monthly Earnings.

Determining Old-Age Determining Old-Age Insured EligibilityInsured Eligibility

Year of birthNormal

retirement age

1937 and prior 65

1938 65 and 2 months





1943-54 66






1960 and later 67

Note: Persons born on January 1 of any year should refer to age previous year.

Qualifying For Old-Age BenefitsQualifying For Old-Age Benefits

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

Full Retirement

Delayed Retirement- 4 years after reaching Full Retirement receiving up to 8% extra for delay

www.ssa.govwww.ssa.gov

Disability BenefitsDisability Benefits Disability Compared to

Workers Comp. is much more strict for qualifying

– You must meet SSA’s definition of disabled

– You have to go through a 5 month waiting period

– The injury will either cause disability for at least 1year or result in cause of death

21-24 Years Old At least 6 Credits

24-30 Years Old 27 Credits in 3 of last 6 years

31 or Older 20+ Credits

•Insured must be working to qualify for disability benefits.

•With disability comes 100% of primary insurance

Survivor BenefitsSurvivor Benefits

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 WheelSocial Security and The Wheel

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

Inflation (AIME’s adjustment)Legal Requirements

Social Security TodaySocial Security Today

Today’s BeneficiariesToday’s Beneficiaries

46 Million beneficiaries accounted for in 2003 OASDI Trustees Annual Report

32 Million retired workers + their dependents 7 Million survivors of deceased workers 7 Million disabled workers + their dependents

Average monthly benefits of $863.24 $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)


Number of Beneficiaries by Fiscal Year (In Millions)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

OASI 37.2 37.5 37.6 37.8 37.9 38.0 38.7 38.9 39.2 39.4

DI 5.5 5.8 6.0 6.1 6.3 6.5 6.6 6.8 7.1 7.5

SSI/OASDI1 2.5 2.5 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.5

SSI only 3.7 4.0 4.2 4.2 4.2 4.2 4.2 4.3 4.4 4.4

1. Includes individuals receiving benefits from more than one program.


Total annual benefits paid, by type of benefit and trust fund, 2003 (Amounts in millions)

CASH BENEFITS SERVICE (HOSPITAL) REHAB SERVICES

1994 $316,835 $161,900 $40

1995 332,580 181,340 39

1996 347,088 197,230 31

1997 361,970 210,519 53

1998 374,990 210,115 51

1999 385,768 209,490 68

2000 407,644 217,351 63

2001 431,947 240,846 60

2002 453,815 260,913 75

2003 470,798 275,909 47


Today’s beneficiaries treat Social Security as a sort of Financial Safety Net

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



The Unified BudgetThe Unified Budget The Unified Budget, or “Whole Budget”, is a combination of Trust

Funds and Federal Funds Trust Funds include taxes and revenues received for Social Security, Civil

Service/Military retirement, Medicare, etc. Federal Funds include all other revenues

By combining the two, or unifying them, the “surpluses” received by Social Security can be used to conceal part of the federal funds deficit.

The Unified Budget has created the Pay-As-You-Go basis that Social Security operates on

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 Strategic Plan of the Social Security AdministrationSocial 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 theStrategic Plan of theSocial Security AdministrationSocial Security Administration

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

1960: 5.1 to 1 Today: 3.4 to 1 2030: 2.1 to 1

As a matter of simple math, when the ratio of workers to retirees falls, each worker must bear a greater financial burden.

Low Birth Rates Mean Fewer New Workers

1.5

2

2.5

3

3.5

41940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

Fert

ilit

y R

ate

(num

ber

of

childre

n p

er

wom

an)

The Baby Boom

The Baby Bust

Birth Rates

Continue at Low

Levels

Increasing Life Expectancies Mean More Retirees to Support

76

78

80

82

84

86

881940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

Tota

l life

expect

ancy

for

indiv

idual re

ach

ing a

ge 6

5

Male

Female

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

With each passing year, Social Security's long- term

deficits grow larger

$20.09

$22.17$22.84

$25.03

$23.87

$21.74$21.14

$18.71

$15

$17

$19

$21

$23

$25

$27

1999 2000 2001 2002Year of Trustees' projections

Trillion

s $

20

02

75- Year Balance (surpluses minus deficits)Long- term Deficits (if short- term surpluses aren't saved)

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

51%

13%

17%

19%

Not Covered

Defined BenefitOnly

DefinedContributionOnly

Both DC & DB

High Social Security Taxes (cont.)

7.5

10

12.5

15

17.5

201970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

Inco

me/C

ost

as

perc

enta

ge o

f ta

xable

payro

ll

Cost

I ncome

1970:

8.1

2002: 10.8

percent

2025: 16

percent

2080: 20.1

percent

Payroll tax

surpluses

Payroll tax

deficits

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

Social Security Paym ents Over The Am ount Of Benefits Received

$32,667.00

$63,363.00

$93,170.00

$0.00$20,000.00$40,000.00$60,000.00$80,000.00

$100,000.00

Male HighSchool

Graduate

Male CollegeGraduate

Male CollegeGraduate

With aGraduateDegree

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 30yr-olds, 29% for today's 20yr-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 ReformSocial Security Reform

Why Pay into a Fund We May Never See?

Solution: PrivatizationSolution: Privatization

The ability to choose your investment portfolio instead of putting money into Social

Security

Positives about PrivatizationPositives about Privatization

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

The Chilean Social Security SystemThe Chilean Social Security System1) 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 The Chilean Social Security System (cont’d)(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 Outperforming United States Social Security ReturnsSocial Security Returns

A single U.S. male with average earnings, born in 1937, has realized only a 1.6% annual rate of return

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

The average retiree from Chile’s private system gets a pension that is 80% of his average income

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 SuccessSingapore’s Privatizing Success

Residents of Singapore are forced to save 40% of their incomes

Singapore has the highest savings rate in the world

85% of Singapore’s population own their homes

Negatives about PrivatizationNegatives about Privatization

Privatization Is Risky

Privatization Hurts Women

Privatization Reduces Disability and Survivors Benefits

Privatization Implementation is Costly

President Bush’s Solution:President Bush’s Solution:Private AccountsPrivate 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 AccountsPrivate Accounts Allows workers to divert part of their payroll taxes into

personal savings accounts

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

In the short-term, private accounts would worsen Social Security’s financial condition

Private accounts are a better alternative for younger workers

Website ResourcesWebsite Resources

www.actuary.org/socialsecurity

www.cato.org

www.mysocialsecurity.org

www.ssa.gov

Documents

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