Lecture Overheads for Monday, November 26

Announcements for Monday, November 26, 2001
For Wednesday 11/28:
Read chapter 13
Reading quiz #14 over chapter 13
Submit stage III project paper
Chapter 13 Lecture
For Monday 12/3:
Assignment 15/16 paper due
Group Presentations
Will distribute sheets to grade group
For Wednesday 12/5:
Group Presentations
Will distribute final exam review information
For Today:
Submit Reaction Paper, Assignment #13
Lecture Over Chapters 11 (welfare programs)
Chapter 12 (Social Insurance Programs)
Social Insurance Programs
I. Social Security
II. Medicare
III.Unemployment Insurance
Event-conditioned income transfer programs
designed to prevent people from falling into
poverty due to retirement, disability, illness, old
age, death of wage earner, and unemployment.
Why have socially provided insurance?
 Paternalism
 Adverse selection
 Government can economize on costs of setting up
insurance for individuals by handling many people as
a large group.
What programs together constitute social
O.A.S.D.H.I. Programs
 1935 Social Security Act created Old Age Insurance
(OAI) - designed to provide an income floor when
aged workers left the work force
 1939 amended to include Survivor's Insurance for
survivors and dependents of workers who die. (S)
 1956 added coverage for disabled workers disability insurance (D)
 1958 added benefits for dependents of disabled
 1965 added Health Insurance (HI) creating Medicare
How are the social security programs financed?
 Through a common payroll tax on wages and salaries.
 Pay-as-you-go basis - current contributions used to
pay current benefits
 For us, in future, part financed pay as you go, part
financed from trust fund being built up now.
What is the FICA Payroll Tax and how does it
 FICA - Federal Insurance Contributions Act - that
requires withholding of these contributions
 Employer must match the employee's contribution to
social security
 FICA payroll tax is 7.65% (5.6% OASI, .6% disability
insurance, 1.45% health insurance)
 For 2002 federal government has allotted 455 billion
for OASDI for 46 million people. They expect to
collect 539 billion through taxes for these programs.
When collecting the FICA tax, what is the "wage
 In 2000, earnings over $76,200 were not taxed for
OASDI, but any earnings below that level taxed at
6.2% total.
 HI taxes of 1.45% are levied on all earnings (no cap)
Why is social security financed through a specific
payroll tax instead of from general government
Read 184-185 of Rosen
What does it mean to say that the tax for OSADI,
with an income ceiling, is regressive?
 Someone earning $76,200 would be taxed at a rate of
7.65%, but someone earning twice that amount, pays
no additional payroll tax. The effective tax rate is
lower for the person earning more.
How are social security benefits calculated:
 Size of benefit depends on employment history
 To earn benefits, worker must have equivalent
of 10 years of work experience
Average Indexed Monthly Earnings (AIME):
 Average wages in covered employment for
length of working life
o Discard lowest five years of earnings
o Adjusted for inflation
o Wages over ceiling ($68,400 in ’98)
Benefit Formula or Primary Insurance Amount
 Calculation of PIA if 65 in 2001:
o PIA is 90% of 1st $561+
o 32% of AIME between $561 – 3,381 +
o 15% above $3,381
Is this benefit structure progressive or
Progressive - gives low-wage workers a higher wagereplacement rate
Benefit maximum of $1,433 per month in 2000.
What are replacement rates?
 Low earner has 57% of earnings replaced
 Average earner has 42%
 High earner has 26%
Average benefit amount for workers retiring at 65 was
$1,000 monthly.
How does benefit differ if you retire at age 62
instead of 65?
(Early Retirement)
 Can collect benefits starting at 62, but only 80% of
benefit amount.
 Also, if you work any, the marginal tax rate on your
benefit is 50%.
Can a non-working spouse receive a benefit?
Yes - 50% of spouse's benefit amount.
So married couple - one worker 150% of workers
benefit amount
Other factors that affect Social Security benefits:
 Age at which benefit is drawn –at 62 instead of
65 receive a 20% reduction, each year past 65
adds 3%
 Earnings test for ages 65 – 70 earnings above
$14,500 subject to tax of 33%
 85% can be taxed if taxable income > 34,000
(single) or 44,000 (married)
Distribution Issues:
 Women receive more benefits on age than men
as they live longer
 Married receive more than single because
spouse receives 50%. Surviving spouse
receives entire benefit
 One-earner couples gain more than two-earner
couples. The 50% bonus may be more than the
benefit from the secondary worker
Does social security help to prevent poverty
among the elderly?
Income dependence:
 40% of income to aged households comes from social
 as old people get older, % of total income coming
from social security rises
 for 40% of elderly with lowest incomes, social
security is 80% of income
 with S.S. 1 in 11 elderly Americans is poor
 without S.S. half of elderly Americans would be in
Does social security affect work incentives and
retirement age?
 People can afford to retire early with S.S. income as
an option
 Structure of S.S. payments distorts work incentives
with a 50% marginal tax rate for workers from age