1 social security finances a primer august 2008 national academy of social insurance www.nasi.org

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1 Social Security Finances A Primer August 2008 National Academy of Social Insurance www.nasi.org Slide 2 2 Overview What Social Security Does The Financial Outlook Context on Affordability Slide 3 3 WHAT SOCIAL SECURITY DOES Slide 4 4 How Many People Get Social Security? 50 million people receive Social Security each month 1 in 6 Americans get Social Security benefits Nearly 1 in 4 households get income from Social Security NASI SS Brief # 28 Slide 5 5 Who Gets Social Security? 31.7 million retired workers 4.6 million widows and widowers 7.1 million disabled workers 0.8 million adults disabled since childhood 3.1 million children NASI SS Brief #28 Slide 6 6 How Much Does Social Security Pay? www.ssa.gov/OACT/COLA/colaeffect.html Type of BeneficiaryAverage Monthly Benefit All Retired Workers$1,081 Aged widow(er), non-disabled$1,041 Disabled worker$1,004 Aged couple-both receiving$1,763 Widowed mother and two children$2,226 Slide 7 7 How do benefits compare to earnings? Annual Trustees Report, Social Security Administration, 2007; Table VI.F10 Retired worker age 65, 2007 Slide 8 8 How many people rely on Social Security for most of their income? 90% of people 65 and older get Social Security Nearly 2 in 3 (66%) get half or more of their income from Social Security About 1 in 5 (21%) get all their income from Social Security Income of the Population 55 or Older, 2004, SSA; Table 9.A.1 Slide 9 9 Reliance on Social Security Benefits by Race Percent of beneficiaries who receive half or more of their income from Social Security 65% of Whites 74% of Blacks 67% of Asians 78% of Hispanics Percent of beneficiaries who receive all of their income from Social Security 19% of Whites 40% of Blacks 28% of Asians 43% of Hispanics Income of the Population 55 or Older, 2004, SSA Slide 10 10 Most elderly dont receive pensions Percent with Employer-Sponsored Pensions All age 65+41% Couples51% Unmarried men42% Unmarried women34% Income of the Population 55 or Older, 2002, SSA Slide 11 11 How Are Benefits Projected to Change in the Future? Benefits will grow faster than prices, but slower than wages. The increase in the full benefit age from 65 to 67 over the next 20 years means that benefits will replace a smaller share of retirees past earnings. Slide 12 12 Under Current Law Net Replacement Rates will Decline An average earner at 65 today gets a benefit that replaces about 39 percent of earnings after deducting Medicare premiums. A similar earner age 65 in 2030 will have a benefit that replaces about 29 percent of earnings after deducting Medicare premiums and income taxes on Social Security benefits. Munnell, 2004. A Birds Eye View of the Social Security Debate Slide 13 13 Who pays for Social Security? Workers and their employers pay with Social Security taxes Slide 14 14 How much do workers pay? Workers pay 6.2% of their earning for Social Security, and 1.45% of their earnings for Hospital Insurance under Medicare (Part A) Employers pay an equal amount The total is 12.4 % for Social Security and 2.9% for HI Social Security tax base is $102,000 in 2008 Slide 15 15 Where does the money go? It is credited to the Social Security trust funds. Projections of income and outgo of the trust funds are made by the Office of the Chief Actuary, SSA. Annual Trustees Report, 2008 Slide 16 16 The Financial Outlook Slide 17 17 Estimates for 2008 Finances Trust Fund income =$820 billion (taxes) Trust Fund Outgo =$623 billion (benefits) Surplus =$196 billion By law, surpluses are invested in U.S. government securities and earn interest that goes to the trust funds. NASI SS Brief #28 Slide 18 18 Shares of Income to the Trust Funds Estimated for Calendar Year 2008 NASI SS Brief #28 Slide 19 19 How do actuaries estimate the future? Review the past: birth rates, death rates, immigration, employment, wages, inflation, productivity, interest rates Assumptions for the next 75 years Three scenarios: Low cost; High cost; Intermediate (best estimate) Slide 20 20 The Long-Range Forecast (Best estimate) In 2017, tax revenues into the trust funds forecasted to be less than benefits due that year. Interest on the reserves and the assets themselves will help pay for benefits until 2041. In 2041, reserves are projected to be depleted. Income is forecast to cover 78% of benefits due then. By 2082, assuming no change in taxes, benefits or forecasts, revenue would cover about 75% of benefits due then. Slide 21 21 Other Scenarios High cost: Trust fund reserves would be depleted in 2031, instead of 2041. Low cost: Social Security is solvent for 75 years and beyond. Slide 22 22 The Actuarial Deficit (Best Estimate) Long-range deficit is 1.70% of taxable payroll This means: The gap would be closed if the Social Security tax rate were 1.70% higher. That is, 0.85% higher for both workers and employers, or 7.05% instead of 6.2% today. Slide 23 23 Why will Social Security cost more in the future? The number of Americans over age 65 will grow faster than the number of workers. Boomers are reaching age 65 People are living longer after age 65 Birth rates are projected to remain stable in the future People 65 and older will increase from 13% to 20% of all Americans Slide 24 24 What Social Security Can Americans Afford in the Future? Slide 25 25 Population Ratio #1: Beneficiaries per 100 workers 20 per 100 workers in 1960 30 per 100 workers in 2005 50 per 100 workers in 2050 Annual Trustees Report, 2008 Slide 26 26 Population Ratio #2: How Many People Does Each Worker Support? All Americans rely on what workers produce. Workers support other people within families; between relatives in separate households; and taxes that support public benefits and services education, Social Security, Medicare, etc. Slide 27 27 Consumer-to-Worker Ratio Over Time Number of Persons Each Worker Supports NASI SS Brief #4 Chart 1 Slide 28 28 How fast is Social Security growing as a share of the economy? In 2007, Social Security benefits were 4.3% of GDP; Social Security taxes equaled 4.9% of GDP. By 2030, SS benefits are projected to be 6.0% of GDP an increase of 1.7 percentage points over Social Security taxes we are paying today. When boomers were children, spending on public education rose by more than twice as much over a similar period 2.9 percentage points in 25 years. Annual Trustees Report, 2005 Slide 29 29 How big is the Social Security financing shortfall as a share of GDP? The financing deficit as a share of taxable wages is 1.70 percent over the next 75 years The same deficit as a share of the entire economy (or GDP) is 0.6 percent. 2008 Trustees Report Slide 30 30 Why is the deficit so much smaller as a share of GDP? The answer is because Social Security taxable wages are only a relatively small part of GDP. Wages taxed for Social Security are 39 percent of GDP. The other 61 percent of national income is not taxed to help pay for Social Security. Slide 31 31 What is that non-taxable income? Income not subject to Social Security taxes includes : -- earnings above the tax cap, $102,000 in 2008; -- tax exempt compensation (non-taxable fringe benefits, tax-deferred accounts, etc); -- wages of about one in four state and local workers who are not covered by Social Security; -- income from property stock dividends, interest, and rental income. Slide 32 32 Social Security Shortfall and Other Policy Changes The Social Security shortfall over the next 75 years is smaller than the lost revenue from making permanent the tax cuts of 2001 and 2003. The Social Security shortfall is about one-third the size of the tax cuts over the next 75 years. Social Security deficit 0.56% of GDP Tax cuts made permanent 1.95% of GDP Center on Budget and Policy Priorities, March 31, 2008. Kris Cox and Richard Kogan, Long-Term Social Security Shortfall Smaller Than Cost of Extending Tax Cuts for Top 1 Percent. Slide 33 33 How to Afford the Baby Boom in Retirement? Balancing Social Security will require somewhat more in revenue or somewhat less in benefits. The question: Who should pay more in taxes or receive less in benefits? Additional ways to balance Social Security exist Slide 34 34 Recap Benefits are modest (dollars and replacement rates). Yet, they are most beneficiaries main source of income. Benefits will replace a smaller share of earnings in the future than they do today. Benefit cuts or revenue increases will be needed to balance Social Security. The long-range shortfall is small as a share of the whole economy. The question for Americans: Who should pay in the form of lower benefits or new contributions? Slide 35 35 References Board of Trustees. 2008. The 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Washington, D.C.: U.S. Government Printing Office. Cox, Kris and Richard Kogan. 2008. Long-Term Social Security Shortfall Smaller Than Cost of Extending Tax Cuts for Top 1 Percent. Washington, D.C.: Center on Budget and Policy Priorities. Lavery, Joni. 2008. Social Security Finances: Findings of the 2008 Trustees Report. Social Security Brief 28. Washington, D.C.: National Academy of Social Insurance. Munnell, Alicia H. 2004. A Birds Eye View of the Social Security Debate. An Issue in Brief 25. Trustees of Boston College: Center for Retirement Research. Reno, Virginia and Kathryn Olson. 1998. Can We Afford Social Security When Baby Boomers Retire? Social Security Brief 4. Washington, D.C.: National Academy of Social Insurance. U.S. Social Security Administration (SSA). 2008. Income of the Population 55 or Older, 2004. Washington, D.C.: Social Security Administration. U.S. Social Security Administration (SSA). 2004. Effect of COLA on Social Security Benefits. Washington, D.C.: Social Security Administration. Available at: www.ssa.gov/OACT/COLA/colaeffect.html.www.ssa.gov/OACT/COLA/colaeffect.html Ways and Means Committee. 2004. Background Material and Data