1. Pensions in the U.S. - The Role of Social Security A Brief Overview

2. Bismarck & Beveridge Club - Budapest Presentation by Martin B. Tracy, Ph.D. Social Insurance Research International 1519 Canterbury Drive Murray, Kentucky 42071-3250 USA 7 May 2007

3. Historic Context Social Security pensions in the United States clearly play a significant role in the redistribution of income within a framework of individual equity and social adequacy. What is the historical context for this role?

4. Committee on Economic Security When President Roosevelt created the CES in 1934, he appointed a group of Wisconsin economists lead by Edwin Witte to develop the principles on which social security was to be based.

5. Committee on Economic Security Influence of programs in other nations, as reflected in 4 reports prepared for the CES: – Financial History of the Worker’s Invalidity, Old Age and Survivor’s Insurance of Germany – British Old Age Pensions and Old Age Insurance – Report on Canadian System – Old Age Pension Statistics by Wilbur J. Cohen

6. Wilbur J. Cohen Special mention because of his influence in research and in understanding international policies, including conventions of the International Labour Conference, as well as principles of Bismarck and Beveridge Instrumental in adding provisions to the SS Act to mandate continuing study of programs abroad

7. Major Principles Adapted to US Culture & Political Realities 1. Universal coverage 2. Compulsory coverage 3. An earned right to benefits/pensions 4. A contributory and self-financed system 5. Wage related contributions

8. Major Principles Continued 6. Old-age pensions that are not means-tested 7. A pension formula that redistributes contributions from higher paid to lower paid workers 8. Pensions protected against inflation

9. Opposing Distributional Measures Opposite distributional measures reflect different perspectives as to purposes of SS:  Individual equity (a fair return on contributions)  Social adequacy (reduce dependency and poverty)

10. Individual Equity Pensions based on a worker’s age and employment that are paid without regard to need Pension formula that pays higher benefits to workers with higher earnings (a fair return on contributions)

11. Social Adequacy A basic pension amount that favors lower paid workers – higher replacement rate for lower income workers Favors workers with dependent spouses & children Favors workers who are less healthy or who die before retirement

12. Progressive Formula Progressive formula for calculating pensions gives a greater percentage of pre-retirement income to lower wage earner For first dollar of average lifetime income, pension beneficiaries receive $0.90. At higher incomes, a $1 increase in average lifetime income adds only $0.15 to annual pension

13. Progressive Formula & Women Under the pension formula women pay 39% of social security payroll taxes and receive 50% of social security pensions For the median income woman retiree, social security replaces about 54% of average lifetime earnings, compared to 41% for the median male

14. Higher Risk for Women Despite the advantages, women are at higher risk of poverty because of lower earnings, longer lives, and divorce when the marriage terminates before ten years Married women are better off economically. Poverty rate for unmarried women is 4 times as high as it is for married women

15. Policy Issues Lack of understanding – Many still believe that social security is an individual private savings account – Often perpetuated by politicians favoring privatization – Little promotion of role of social security as an instrument of social adequacy, social solidarity, social cohesion, or social capital

16. Privatization Debate between equity and adequacy has been intensified by recent proposals to partially privatize social security Such proposals have led to efforts by opposing groups to document the importance of the role of social security pensions in the distribution of income and in promoting social adequacy

17. Sources of Income 88% of persons 65+ receive social security 52% - interest income 31% - private pension 18% - earnings 8% - rents, royalties, estates, or trusts 3% - Supplementary Security Income (welfare)

18. Distribution by Median Income For median income persons 65+, social security is 67% of income For age 75+ - 77% Non-married women – 84% African-American – 82% Hispanic – 84%

19. Majority of Income for Elderly One-third of 65+ depend on social security for 90% or more of their income, especially low-income women and minorities Sixty-five percent depend on social security for 50% or more of their income

20. Distribution to Lower Income Groups Over 87% of income for 65+ with personal income under $10,000 is from social security 76% of income for persons with income between $10,000 and $20,000 20% of income for $50,000 to $75,000 9.6% of income over $75,000

21. Social Security and Poverty Rates Without social security, 47% of Americans age 65+ would have income below the poverty line. The poverty rate for white women would more than double 13 million Americans are kept out of poverty by social security

22. Rural Communities People in rural communities rely on social security nearly twice as much as non-rural communities Rural communities have a higher percentage of elderly persons, particularly women who are widowed or disabled

23. Rural Communities Continued 90% of communities with an elderly population of 20% or more are in rural areas 13% of rural elderly live in poverty compared to 9% in metropolitan areas The state with the highest reliance on social security is the rural state of Arkansas with 77% for 65+ and 86% for 75+

24. Economic Benefit Social security pensions are the economic lifeblood of rural communities, as small businesses depend on the purchasing power of the elderly They are also the lifeblood of businesses in many low-income urban neighborhoods

25. Summary Social Security pensions are critical for a majority of persons age 65 and over, especially women, minorities, and persons living in rural areas and low-income neighborhoods Social Security pensions have been an effective instrument in redistributing income in the context of social adequacy, while maintaining the principle of individual equity