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1、CHAPTER 11,SOCIAL SECURITY,Why Have Social Security?,Consumption Smoothing and the Annuity Market How Social Security works Annuity Consumption smoothing Adverse Selection and the Annuity Market Asymmetric information Adverse selection,Other Justifications,Lack of foresight and paternalism Moral haz
2、ard Economize on decision-making and administrative costs Income Redistribution Improve the Economic Status of the Aged,Fully Funded Plan,The Greatest Generation,The Baby Boom Generation,Generation X,Work,Retire,Dead,Unborn,Work,Work,Retire,Still Dead,Dead,Childhood,Childhood,Retire,Each generations
3、 benefits based on deposits it made during working life plus accumulated interest,The Greatest Generation,The Baby Boom Generation,Generation X,Work,Retire,Dead,Unborn,Work,Work,Retire,Still Dead,Dead,Childhood,Childhood,Retire,benefits,Pay As You Go (or Unfunded) System,0,Each generations benefits
4、come from tax payments made by current workers,The Greatest Generation,The Baby Boom Generation,Generation X,Work,Retire,Dead,Unborn,Work,Work,Retire,Still Dead,Dead,Childhood,Childhood,Retire,benefits,Todays Partially Funded System,0,Baby Boomers and Gen X are also contributing to their own retirem
5、ent,Explicit Transfers,Benefits for dependents and survivors (1939) Supplemental Security Income,Benefits,How to calculate benefits AIME (Average Indexed Monthly Earnings) average monthly earnings in 35 highest paid years Wages indexed for inflation Ceiling on AIME up to tax ceiling,0,Benefit Struct
6、ure,If AIME $3955 PIA = .90*$656 + .32*($3955-$656) + .15*(AIME - $3955),First Bend Point,Second Bend Point,0,Adjustments,Annual inflation adjustment Age at which benefit is drawn Normal retirement age Early retirement benefit reduced 5/9th of one percent a month for first 36 months preceding normal
7、 retirement age Late retirement benefit increased 15/24th of one percent a month,0,Adjustments,Family Status +50% for spouse or dependent child If covered worker dies spouse receives 100% of workers benefit or spouses benefit Divorced spouse married at least 10 years gets spouse benefit if not remar
8、ried while covered worker alive Earnings test and taxing benefits Benefits reduced $1 for every $2 earned above $12,480 Individuals losing benefits may have later benefits increased Up to 85% of benefits taxed for recipients with income above a base amount ($25,000 for single and $32,000 for married
9、 taxpayers.),Financing,FICA (Federal Insurance Contribution Act) 2006 Social Security Tax rates Employee 6.2% (OASI - 5.6%, DI - .6%) of first $94,200 of earnings on both employee and employer Self-employed 12.4% 2006 Medicare Tax rates 1.45% on both employer and employee with no earnings ceiling Wh
10、y not fund Social Security through general tax revenues?,0,Distributional Issues,Actuarially fair return Intergenerational redistribution Total benefits = Nb * B Total taxes = t * Nw * w If total benefits = total taxes: Nb * B = t * Nw * w or B = t * (Nw/Nb) * w Ida Mae Fuller,Social Security Wealth
11、 for Representative Individuals,Other Distributional Issues,Redistribution within a generation Differences by earnings Differences by lifespan Differences by living arrangements Differences by number of earners in the family Normative evaluation,The Social Security Trust Fund,Social Security and Nat
12、ional Saving Budget Treatment of Social Security Off budget Unified budget,0,Social Security and Savings Behavior,Life-cycle theory of savings Wealth Substitution Effect Retirement Effect Bequest Effect,Empirical Evidence,Martin Feldsteins work CONS = f(DI, W, SSW, X) MPCssw = .028 60% reduction in
13、personal saving Others Rosen: Social security has had a negative effect on saving, but magnitude of effect is unclear,Effects on Retirement and Labor Supply,1930 LFPR 65+ was 54% 2001 LFPR 65+ was 18% Effect of Social Security Income Effect SS raises retirement income Substitution Effect SS reduces
14、the cost of retiring Earnings test Impact on Younger Workers?,0,Distribution of Wealth,Bequeathable v Annuitized Wealth Effect of Social Security on Bequeathable Wealth Effect on Wealth Mobility,Budget Constraint for Present and Future Consumption,Present consumption (c0),Future consumption (c1),N,M
15、,I0,I1,D,I0 - S,I1 + (1+r) S,S,(1+r)S,I1 - (1+r) B,F,B,(1+r)B,At endowment point consumer neither saves nor borrows,Utility-maximizing Choice of Present and Future Consumption,Present consumption (c0),Future consumption (c1),N,M,I0,I1,E1,c1*,A,c0*,Saving,Crowding out of private saving due to Social
16、Security,Present consumption (c0),Future consumption (c1),N,M,I0,I1,E1,c1*,A,c0*,R,T,I0T,(1+r)T,Saving before Social Security,Saving after Social Security,Other ways Social Security Affects Saving,Retirement effect Bequest effect Empirical evidence,Retirement Decisions,Social security wealth and the retirement decision Empirical evidence Diamond and Gruber 199 Gruber and Wise 2004,Long-Term Stresses on Social Security,So
