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Lecture Issues in economics today - Chapter 27: Social security

After studying this chapter you will be able to: Describe what Social Security is and its basic tax and benefit structure, detail the history of changes to the program since its inception, explain the economic rationale for having such a system, enumerate the effects of the program on work and savings,. | Chapter 27 Social Security Chapter Outline THE BASICS WHY DO WE NEED SOCIAL SECURITY SOCIAL SECURITY’S EFFECT ON THE ECONOMY WILL THE SYSTEM BE THERE FOR ME Social Security’s Origin The 1935 Social Security Act Part of the FDR “New Deal” Intended to be a “third leg” of a retirement tripod Social Security Individual Savings Company Pensions How to Fund Social Security Every retirement system must be funded by using currently generated money to pay current retirees or use the balances of previously saved money to pay current retirees. Pay-as-you-go : a system where current workers’ taxes are used to pay pensions to current retirees Fully-Funded: system where for every benefit dollar it is required to pay in the future there is an off-setting amount currently invested that is sufficient to pay off that dollar The Current Funding System Social Security was, until 1982, a pay-as-you-go system. The baby-boom (1946-1964) created a problem for the system starting in 2010. Recognizing this, . | Chapter 27 Social Security Chapter Outline THE BASICS WHY DO WE NEED SOCIAL SECURITY SOCIAL SECURITY’S EFFECT ON THE ECONOMY WILL THE SYSTEM BE THERE FOR ME Social Security’s Origin The 1935 Social Security Act Part of the FDR “New Deal” Intended to be a “third leg” of a retirement tripod Social Security Individual Savings Company Pensions How to Fund Social Security Every retirement system must be funded by using currently generated money to pay current retirees or use the balances of previously saved money to pay current retirees. Pay-as-you-go : a system where current workers’ taxes are used to pay pensions to current retirees Fully-Funded: system where for every benefit dollar it is required to pay in the future there is an off-setting amount currently invested that is sufficient to pay off that dollar The Current Funding System Social Security was, until 1982, a pay-as-you-go system. The baby-boom (1946-1964) created a problem for the system starting in 2010. Recognizing this, Congress created the Social Security Trust Fund in 1982. This makes Social Security a hybrid of a pay-as-you-go and fully funded system. $430 billion in spending, $530 in taxes The Basics: Taxes Social Security is funded with a payroll tax (taxes owed on what workers earn from their work) Employers and employees both pay an equal amount. The amount for Social Security is 6.2%* of payroll up to the Maximum Taxable Earnings (the maximum of taxable earnings subject to the payroll tax). *the tax is 7.65% minus the 1.45% Medicare tax The Basics: Benefits People who have reached the retirement age (the age at which retirees get full benefits) are eligible for a benefit check. The amount of the benefit check is a factor (1 plus the number of dependents) times the Primary Insurance Amount (PIA, the amount single retirees receive in a monthly check if they retire at their retirement age). The PIA is a function of the Average Index of Monthly Earnings (AIME, the monthly average of the 35 highest .