Major Dates in Social Security History 1935Social Security Act passes 1939Dependents and survivors benefits established 1950-4Coverage expanded 1956Disability benefits established 1961Early retirement age at 62 for all retirees 1975Automatic cost-of-living adjustments 1983Bipartisan solvency deal
WHAT ARE ITS GOALS? WHY SOCIAL INSURANCE? Social Security’s Purpose
Goals of Social Security Equity What you get out is based on what you put in Mandatory saving protects both the short-sighted people who won’t save and those who would be forced to bail them out Adequacy Insures against disability and premature death Supplements incomes of those who wouldn’t otherwise have a decent standard of living
Social Insurance vs. Welfare Social InsuranceWelfare Qualify based on:Earnings & contributionsNeed Benefits based on:Earnings & contributionsNeed Purpose:Replace lost wagesProvide a floor of income Participation:Near-universalLimited Funding:Payroll taxesGeneral revenues Relationship to personal savings: Supplements savingsDiscourages savings Anti-poverty strategy:Poverty preventionPoverty alleviation General model:Pools risks & resourcesRicher people assisting poorer people
BENEFICIARIES AVERAGE BENEFITS BALANCING EQUITY & ADEQUACY Social Security Benefits
Who Receives Social Security? About 1 in 6 Americans (57 million people) Source: SSA, http://www.ssa.gov/oact/FACTS/index.html Note: As of December 2012
How Much Do Average Beneficiaries Get? Source: Social Security Administration: http://www.ssa.gov/OACT/FACTS/ Note: As of June 2013 Benefit typeAverage monthly benefit Average annual benefit Retired workers$1,269~$15,000 Spouses of retired workers $632~$8,000 Disabled workers$1,129~$14,000 Surviving children$802~$10,000 Children of disabled workers $303~$4,000 Poverty guideline$930$11,170
Balancing Equity & Adequacy Higher earners have greater monthly benefits than lower earners, since benefits are based on earnings Note: Hypothetical scaled earners who turn 65 and retire in 2012 Source: 2012 Social Security Trustees Report, intermediate assumptions
Balancing Equity & Adequacy Lower earners have higher replacement rates than higher earners, since the benefit formula is progressive Note: Hypothetical scaled earners who turn 65 and retire in 2012 Source: 2012 Social Security Trustees Report, intermediate assumptions
Who is Covered by Social Security? About 19 in 20 workers (161 million people) Source: SSA, http://www.ssa.gov/oact/FACTS/index.html Note: As of December 2012
How Much Do We Pay? Payroll tax rate: Employees = 6.2% of covered earnings Employers = 6.2% of covered earnings Total contribution = 12.4% of covered earnings Payroll tax cap: $113,700 in earnings for 2013
INCOME & OUTGO TRUST FUNDS SOLVENCY OUTLOOK OPTIONS TO RESTORE SOLVENCY Social Security’s Finances
How Much Money Does Social Security Take In? In 2012, Social Security took in $840 billion. Source: 2013 Social Security Trustees Report, http://www.ssa.gov/oact/tr/2013/II_B_cyoper.html#94983
How Much Money Does Social Security Spend? Source: 2013 Social Security Trustees Report, http://www.ssa.gov/oact/tr/2013/II_B_cyoper.html#94983 In 2012, Social Security spent $786 billion.
Key Solvency Dates 2010: Cash-flow deficits began In other words, spending exceeds tax revenue (i.e., payroll taxes + taxation of benefits). Accumulated trust fund bonds are redeemed from the Treasury. 2033: Trust fund assets will be exhausted At this point, about 77% of scheduled benefits will be payable with tax revenue. Source: 2013 Social Security Trustees Report, intermediate assumptions
Projected Trust Fund Exhaustion Source: 2013 Social Security Trustees Report, Figure II.D7 The Treasury will gradually repay Social Security $2.7 trillion until its reserves are exhausted.
Why Does Social Security Have a Solvency Gap? Demographics Aging baby boomers Declining fertility rates Increasing life expectancies Rising real benefits Initial benefits are indexed to wages Wages typically rise faster than prices Thus, real benefits rise for each generation
Fewer Workers Per Beneficiary Source: 2013 Social Security Trustees Report, intermediate assumptions
How to Restore Solvency? More Money In Raise the payroll tax immediately by 2.66 percentage points (raising the combined tax from 12.40% to 15.06%). Less Money Out Cut benefits immediately by 16.5%. Larger changes are needed to maintain solvency beyond 75 years. Source: 2013 Social Security Trustees Report, intermediate assumptions.