Social Security Past, Present, and Future Preston Sockwell Davidson Sidden Lee Biggerstaff Matt Aldridge Ryan Helton

History of Social Security

Why did a government managed social security system become necessary? Four changes occurred in America starting in the 1880s causing new economic insecurity in some groups: The Industrial Revolution The Urbanization of America (Mass movement to cities) The Disappearance of extended family Increased Longevity Then the Great Depression of the 1930s made action from the Federal Government necessary Neither the states nor the local communities nor private charities had the financial resources to cope with the growing need among the American people

The Setting for the Birth of Social Security By 1929, workers’ compensation laws were in effect in all but four states. In the late 19th century (way before the Great Depression) the new idea for solving this new problem of economic insecurity came from Europe. They called it social insurance. Social insurance – its basic features: the insurance principle - a group of persons are "insured" in some way against a defined risk a social element – usually means the program is shaped in part by broader social objectives, rather than being shaped solely by the self-interest of the individual participants. First nation to adopt social insurance was Germany in 1889. 34 European nations had insurance programs before the US. Social insurance starts with workers compensation. A Federal law covering civilian employees of the Government in hazardous jobs was adopted in 1908.

The Social Security Act FDR signed the Social Security Act on August 14, 1935. The 1935 law contained: a retirement benefits system for the primary worker (changed in 1939 to include survivors benefits and benefits for the retiree’s spouse and children, and disability benefits were added in 1956). the first national unemployment compensation program. aid to the states for various health and welfare programs. the Aid to Dependent Children program. First taxes collected and some lump some payments made in 1937 Regular ongoing monthly benefits started in 1940 07/30/1965—President Lyndon B. Johnson signed the Medicare Bill (as part of the Social Security Amendments of 1965) in the presence of former President Truman who proposed this legislation in his message to Congress in 1945.

Interesting Social Security Facts The groups of numbers of your Social Security number do have meaning The first three digits are assigned according to where you lived when you got your number (generally assigned beginning in the northeast and moving westward). The remaining six digits are randomly assigned. From November of 1936 (when social security numbers were first issued) to now over 400 million different numbers have been used. From 1937 to 99 the Social Security program paid out over $5.896 trillion in benefits. Also, the medicare program paid over $2.514 trillion in medical expenses between 1966 and 99.

Social Security Now

Requirements for Social Security Benefits An individual must: be at least 62 years old have worked have paid social security taxes have earned at least 40 credits (10 years of work) apply.

Disability Benefits An individual must be disabled (unable to engage in substantial gainful activity), earned a minimum number of credits from work covered under SS and apply. Generally, you need 20 credits earned in the last 10 years, ending with the year you became disabled.

Survivors Requirements When a person dies, certain members of the family may be eligible for survivors’ benefits if the deceased worked, paid SS taxes, and earned enough credits. The number of credits a person needs depends on their age at the time of death. The younger a person is , the fewer credits are needed to be eligible for survivors’ benefits.

Spouse Requirements A former spouse can receive benefits under the same circumstances as a widow/widower if the marriage lasted 10 years or more. Benefits paid to a surviving divorced spouse will not affect the benefit rates for other survivors receiving benefits.

Applying for Benefits You must apply for them using special forms. You may also have to provide several documents, including your SS card, birth certificate, and proof of U.S. citizenship, if you weren’t born in this country.

Checking Your Benefit Amount Most Americans receive a SS statement every year. This statement lists the amount of money you have contributed each year to SS. Make sure you’re getting full credit for the years you worked. It’s important to correct any mistakes, so you will receive all your benefits.

Do I have to pay income tax on my SS benefits? Some people who get SS benefits have to pay income taxes on them. This will apply to you only if you have other substantial income in addition to your benefits (for example, wages, self-employment, interest, dividends and other taxable income that you have to report on your tax return). No one pays taxes on more than 85 percent of his or her SS benefits and some pay on a smaller amount, based on these IRS rules:

Individual - If you file a federal tax return as an "individual" and your combined income* is between $25,000 and $34,000, you may have to pay income tax on 50 percent of your SS benefits. If your combined income is above $34,000, up to 85 percent of your SS benefits is subject to income tax.

Joint Return - If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income* that is between $32,000 and $44,000. If your combined income is more than $44,000, up to 85 percent of your SS benefits is subject to income tax.

File Separate Returns - If you are married and file a separate tax return, you probably will pay taxes on your benefits

Medicare Covers The medical expenses of almost all persons age 65 and older. Disabled persons younger than age 65 who have been entitled to disability benefits for at least 24 months. Persons younger than age 65 who need long term kidney dialysis treatment or a kidney transplant.

Medicare Consists Of ? Hospital Insurance (Part A) Supplementary Medical Insurance (Part B) Medicare + Choice

The Problem of Social Security

How will Social Security be Funded? In the 1940s-50s social security was successful because there was a high ratios of contributing workers to retired individuals. Today the ratio has dropped considerably from 16:1 to 3.4:1 and speculation suggest the ratio will continue to drop in the future.

Why did the ratio drop? The reduction is a result of 2 factors 1. Technology and manufacturing jobs leaving the US have reduced the amount of working, tax paying individuals. 2. The population is living longer today than when social security was conceived. The increase in life expectancy has also increased the amount of retired people who require benefits.

The reduction in jobs is causing a downward push on the working class side of the ratio while the increased life expectancy causes an upward push on its side of the ratio. This ratio will continue to fall as the baby boomer generation begins to retire If things continue as they are Social Security will run out of funding in a a little more than a decade.

Low Rates of Return Social Security has very low rates of return Low income workers receive 2.6% Average middle wage worker receives an approximate return of 1.8% High wage earners receive a paltry 0.03% These rates of return are significantly lower than returns on other investment opportunities.

Raising taxes or reducing benefits could solve the problem but rates of return will diminish even further

Summary Social Security will fail due to the current trends in tax payer base and the number of citizens requiring benefits. The significantly low rates of return suggest that Social Security is not the best method to plan for retirement anymore. Reform will be a hot political topic for the upcoming election and hopefully we can get the program repaired.

Social Security’s Future

President’s Commission to Strengthen Social Security Established May 2, 2001 16 member bipartisan commission Preserve Social Security for seniors and build wealth for younger Americans President set forth guidelines to modernize and stabilize Social Security

Guiding Principles Modernization must not change Social Security benefits for retirees or near-retirees. The entire Social Security surplus must be dedicated only to Social Security. Social Security payroll taxes must not be increased. The government must not invest Social Security funds in the stock market. Modernization must preserve Social Security's disability and survivors insurance programs. Modernization must include individually controlled, voluntary personal retirement accounts, which will augment Social Security.

3 Reform Plans for Social Security The Commission released 3 plans to reform and modernize Social Security All 3 feature personal accounts and they all expect benefits equal or greater then today’s benefits

Reform Model 1 Creates voluntary personal account (up to 2% of taxable wages) Social Security benefits are offset by contributions compounded at a rate 3.5% above inflation No other changes to Social Security

Reform Model 2 Creates voluntary personal account where workers can redirect up to 4% of their payroll taxes (up to 1000/year) Social Security benefits are offset by contributions compounded at a rate 2% above inflation Positive cash flows by the end of 2075

Reform Model 3 Personal accounts are created by a match of part of the payroll tax – 2.5 percent up to $1000 annually – for any worker who contributes an additional 1 percent of wages subject to Social Security payroll taxes. Social Security benefits are offset by contributions compounded at a rate 2% above inflation 1% contribution subsidized by tax credit

United States Social Security System vs. Japan’s