Econ 14 Files
Econ 14 Lecture
Notes
Lecture 20: Social Security
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Economics 14 |
Lecture 20: Social Security
history of social security
financing social security
economic effects of social security
future of social security
History of Social Security
Social security was established in 1935. It originally paid monthly benefits to individual workers upon retirement at age 65. Benefits are based on each worker's contribution in the form of a payroll tax collected over his or her working lifetime. Benefits were extended in 1939 to the spouse and children of a deceased retiree and to the survivors of a deceased worker. In the 1950's and 1960's, benefits began to be provided to disabled workers. Almost 46 million Americans receive benefits today.
Financing Social Security
Social security operates as a pay-as-you-go system: benefits to current retirees are financed by contributions from today's workers.
Since the 1980's, tax contributions have exceeded the benefits paid. The surplus is held in the social security trust fund which will be used in the future to help pay benefits as the baby boomers retire.
Social security is financed by a tax imposed on wages: a flat percentage of gross wages, up to a certain limit, split evenly between the employee and employer (although the employer may be able to shift all or part of their burden to the worker in the form of lower wages).
Economic Effects of Social Security
- income - reduces the disposable income of current workers and increase that of retirees
- labor supply - since it leads to lower wages for workers, social security likely reduces the size of the labor force
- savings and investment - need to save less for retirement, so savings likely falls
Future of Social Security
| Under intermediate assumptions about population and economic growth, the trust fund will be depleted by 2043. |  |
However, even if the trust fund's assets are exhausted, tax income will continue to flow into the fund. So, incoming social security tax revenues will be sufficient to pay about 73 percent of promised benefits in 2043 and 66 percent in 2076.
| The problem is that the number of workers per beneficiary has declined. |  |
possible solutions:
- increase payroll taxes - would postpone depletion of trust fund by decades
- reduce expenditures - raise retirement age and adjust COLA's
- privatization - payroll taxes placed into individual account managed by the worker (Bush proposes that half of a workers taxes would go into such an account
- greater financial risk for workers
- where do the funds to pay today's retirees come from?
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David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31 |
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