Chapter 11 - Social security. The main contents of the chapter consist of the following: Why have social security? other justifications, explicit transfers, benefits, benefit structure, adjustments, financing, distributional issues, other distributional issues,. | SOCIAL SECURITY Chapter 11 Social Security Expenditures (1939-2011) Source: Social Security Trustees [2012]. 11- Why Have Social Security? Consumption Smoothing and the Annuity Market How Social Security works Annuity Consumption smoothing Adverse Selection and the Annuity Market Asymmetric information Adverse selection 11- Other Justifications Lack of foresight and paternalism Moral hazard Economize on decision-making and administrative costs Income Redistribution Improve the Economic Status of the Aged 11- Fully Funded Plan Period 1 Period 2 Period 3 Period 4 contribute benefits contribute benefits contribute benefits The Greatest Generation The Baby Boom Generation Generation X Work Retire Dead Unborn Work Work Retire Still Dead Dead Childhood Childhood Retire 11- Each generation’s benefits based on deposits it made during working life plus accumulated interest Period 1 Period 2 Period 3 Period 4 The Greatest Generation The Baby Boom Generation . | SOCIAL SECURITY Chapter 11 Social Security Expenditures (1939-2011) Source: Social Security Trustees [2012]. 11- Why Have Social Security? Consumption Smoothing and the Annuity Market How Social Security works Annuity Consumption smoothing Adverse Selection and the Annuity Market Asymmetric information Adverse selection 11- Other Justifications Lack of foresight and paternalism Moral hazard Economize on decision-making and administrative costs Income Redistribution Improve the Economic Status of the Aged 11- Fully Funded Plan Period 1 Period 2 Period 3 Period 4 contribute benefits contribute benefits contribute benefits The Greatest Generation The Baby Boom Generation Generation X Work Retire Dead Unborn Work Work Retire Still Dead Dead Childhood Childhood Retire 11- Each generation’s benefits based on deposits it made during working life plus accumulated interest Period 1 Period 2 Period 3 Period 4 The Greatest Generation The Baby Boom Generation Generation X Work Retire Dead Unborn Work Work Retire Still Dead Dead Childhood Childhood Retire contribute benefits contribute benefits contribute benefits benefits Pay As You Go (or Unfunded) System 0 11- Each generation’s benefits come from tax payments made by current workers Period 1 Period 2 Period 3 Period 4 The Greatest Generation The Baby Boom Generation Generation X Work Retire Dead Unborn Work Work Retire Still Dead Dead Childhood Childhood Retire contribute benefits contribute benefits contribute benefits benefits Today’s Partially Funded System 0 Baby Boomers and Gen X are also contributing to their own retirement 11- Explicit Transfers Benefits for dependents and survivors (1939) Supplemental Security Income 11- Benefits How to calculate benefits AIME (Average Indexed Monthly Earnings) – average monthly earnings in 35 highest paid years Wages indexed for inflation Ceiling on AIME – up to tax ceiling 0 11- Benefit Structure If AIME < $711 .
