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1、2 of 36,13.5 Conclusion,Social Security,13.3 Social Security and Retirement,13.2 Consumption-Smoothing Benefits of Social Security,13.1 What Is Social Security and How Does It Work?,Chapter 13,13.4 Social Security Reform,Social Security A federal program that taxes workers to provide income support
2、to the elderly.,3 of 36,What Is Social Security and How Does It Work?,Program Details,How Is Social Security Financed?,Almost all workers in the United States pay the Federal Insurance Contributions Act (FICA) tax on their earnings.,Who Is Eligible to Receive Social Security?,A person must have work
3、ed and paid this payroll tax for 40 quarters (10 years) over their lifetime, and must be age 62 or older.,4 of 36,What Is Social Security and How Does It Work?,Program Details,How Are Social Security Benefits Calculated?,annuity payment A payment that lasts until the recipients death.,The amount of
4、this annuity payment is a function of the recipients average earnings over the persons 35 highest earning years where each months earnings are expressed in todays dollars.,5 of 36,Why Choose 35 Years?,First, individuals should not be penalized for years of part-time work or particularly low earnings
5、. Second, if the averaging period is too short, it can have perverse incentives for behavior by older workers. A 61-year-old subway driver for the Boston MBTA fell asleep at the wheel, causing a crash in which 18 people were injured. An investigation revealed that this driver had been working 25 hou
6、rs straight in an effort to maximize his overtime pay. The pension that the driver would be able to claim was a function of his earnings during his last 5 years of work. In the wake of this accident, the MBTA changed its pension plan to no longer reward such excessive work at the end of ones career.
7、,6 of 36,What Is Social Security and How Does It Work?,Program Details,replacement rate The ratio of benefits received to earnings prior to the entitling event.,How Are Social Security Benefits Calculated?,7 of 36,What Is Social Security and How Does It Work?,Program Details,Full Benefits Age (FBA)
8、The age at which a Social Security recipient receives full retirement benefits (Primary Insurance Amount).,How Are Social Security Benefits Paid Out?,Early Entitlement Age (EEA) The earliest age at which a Social Security recipient can receive reduced benefits.,8 of 36,What Is Social Security and Ho
9、w Does It Work?,Program Details,Can You Work and Receive Social Security?,The earnings test reduces the benefits of 62 to 64-year olds by $0.50 for each dollar of earnings they have above $12,480. These benefits are returned later when the workers earnings fall below this threshold.,Are There Benefi
10、ts for Family Members?,AIME is Average Indexed Monthly Earnings PIA is the Primary Insurance Amount FBA is the Full Benefits Age (currently age 65, rising to 67) EEA is the Early Entitlement Age (currently age 62) DRC is the Delayed Retirement Credit amount,Spouses of claimants. Children of deceased
11、 workers. Spouses who survive a Social Security recipient.,9 of 36,What Is Social Security and How Does It Work?,How Does Social Security Work Over Time?,funded Refers to retirement plans in which todays savings are invested in various assets in order to pay future benefits.,unfunded Refers to retir
12、ement plans in which payments collected from todays workers go directly to todays retirees, instead of being invested in order to pay future benefits.,10 of 36,What Is Social Security and How Does It Work?,How Does Social Security Work Over Time?,How Social Security Redistributes Income,11 of 36,Ida
13、 May Fuller,The very first beneficiary of Social Security was Ida May Fuller. May worked for only three years after the establishment of the Social Security system, and paid a total of $24.75 in Social Security taxes. The first Social Security check in U.S. history was issued to her on January 31, 1
14、940, for $22.54. May went on to live for 35 more years, dying at age 100 in 1975. Over those 35 years, she collected a total of $22,888.92 in Social Security benefits. Ida May is a striking example of the first generation of Social Security beneficiaries who were the big winners under this new socia
15、l program.,12 of 36,What Is Social Security and How Does It Work?,How Does Social Security Work Over Time?,Lessons Learned,legacy debt The debt incurred by the government because early generations of beneficiaries received much more in benefits than they paid in taxes.,13 of 36,What Is Social Securi
16、ty and How Does It Work?,How Does Social Security Redistribute in Practice?,Social Security Wealth (SSW) The expected present discounted value of a persons future Social Security payments minus the expected present discounted value of a persons payroll tax payments.,SSW is computed as follows: Calcu
17、late the entire future stream of benefits that a person expects to receive before he or she dies. Use a discount rate to calculate the present discounted value (PDV) of that stream of benefits. Calculate the entire future stream of taxes that a person expects to pay before he or she dies. Compute the PDV of that stream of taxes. Take the difference between these two to get the SSW.,
