Date post: | 17-Jan-2018 |
Category: |
Documents |
Upload: | rachel-willis |
View: | 219 times |
Download: | 0 times |
20CHAPTER
Social Security
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
20-2
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Social SecuritySocial Security Largest redistribution programLargest redistribution program Established in 1935, expanded in Established in 1935, expanded in
1956 and 19651956 and 1965 Paid for by earmarked payroll taxPaid for by earmarked payroll tax Pay-as-you-go programPay-as-you-go program Taxes and benefits have continually Taxes and benefits have continually
risenrisen
20-3
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Social Security Payroll Social Security Payroll TaxTax
Established to function as Established to function as government-operated retirement government-operated retirement programprogram
No need-based requirement to No need-based requirement to collect transfercollect transfer
Eligibility contingent on having Eligibility contingent on having contributed to program in pastcontributed to program in past
20-4
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
ContributionsContributions In form of payroll taxIn form of payroll tax Income taxed at constant rate up to Income taxed at constant rate up to
specified maximum levelspecified maximum level Employer/employee contribute equal Employer/employee contribute equal
amountsamounts Increase in tax rates and maximum Increase in tax rates and maximum
wage that can be taxedwage that can be taxed
20-5
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
ContributionsContributionsYear
Combined Employer and Employee Tax
RatesMaximum Taxable
IncomeSocial Security as a Percentage of Total Federal Expenditures
1940 2.00% $3,000 0.6%1950 3.00% $3,000 2.5%1960 6.00% $4,800 12.6%1970 8.40% $7,800 15.5%1980 12.26% $25,900 20.0%1990 15.30% $51,300 19.8%2000 15.30% $76,200 22.9%2004 15.30% $87,900 22.4%
Source: Statistical Abstract of the United States , various issues.
Table 20.1 Characteristics of the Social Security Program for Selected Years
Note: Tax rates are for Social Security and Medicare. Beginning in 1994 all income above the Social Security maximum taxable income is taxed 2.9 percent for Medicare.
20-6
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Structure of the TaxStructure of the Tax Social security payroll tax more than Social security payroll tax more than
39% of total federal taxes39% of total federal taxes Adheres to benefit principleAdheres to benefit principle Criticized on regressive natureCriticized on regressive nature
20-7
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Burden of Payroll TaxBurden of Payroll Tax Tax Shifting and Payroll TaxTax Shifting and Payroll Tax
Wages set by supply and demandWages set by supply and demand Who pays tax irrelevant to after-tax Who pays tax irrelevant to after-tax
income of employeeincome of employee
20-8
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Visibility of Payroll TaxVisibility of Payroll Tax Tax levied on employer will be Tax levied on employer will be
hidden from employeehidden from employee Easy for taxpayers to estimate their Easy for taxpayers to estimate their
share of cost to social security share of cost to social security programprogram Double amount shown on W-2 formDouble amount shown on W-2 form
20-9
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
CoverageCoverage More than 90% of workers in paid More than 90% of workers in paid
employment are covered by social employment are covered by social security programsecurity program
EligibilityEligibility Must have worked for 40 quarters in a Must have worked for 40 quarters in a
covered jobcovered job Benefits paid do not reflect present Benefits paid do not reflect present
value of past contributionsvalue of past contributions
20-10
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Redistributive Nature of Redistributive Nature of ProgramProgram
Reasons social security is compulsory:Reasons social security is compulsory: Adverse selectionAdverse selection
Low earners get paid more in proportion to Low earners get paid more in proportion to social security taxes than high earnerssocial security taxes than high earners
Those who do not fare well likely to bypass Those who do not fare well likely to bypass systemsystem
Pay-as-you-go systemPay-as-you-go system Requires new contributors to keep system Requires new contributors to keep system
solventsolvent
20-11
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Pay-As-You-Go System of Pay-As-You-Go System of FinancingFinancing
Collects contributions from current Collects contributions from current workers, redistributes them to workers, redistributes them to current retirees as benefitscurrent retirees as benefits
Current contributions not investedCurrent contributions not invested Dependent on new individuals Dependent on new individuals
entering systementering system Liabilities of social security system Liabilities of social security system
unfundedunfunded
20-12
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Viability of Pay-As-You-Viability of Pay-As-You-GoGo
More new contributors entering More new contributors entering system each generationsystem each generation
Affected by increasing benefit Affected by increasing benefit paymentspayments
Affected by demographic factors:Affected by demographic factors: Population living longerPopulation living longer Baby boomBaby boom People have fewer childrenPeople have fewer children
20-13
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Political Determination Political Determination of Benefits and Costsof Benefits and Costs
Expect rate of return on contributions Expect rate of return on contributions to equal growth in national incometo equal growth in national income
Program subject to change through Program subject to change through political processpolitical process
In self-interest for older generation to In self-interest for older generation to vote for higher taxes in exchange for vote for higher taxes in exchange for higher benefitshigher benefits
20-14
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Social Security and Social Security and Capital AccumulationCapital Accumulation
Reduces incentive for private savingReduces incentive for private saving Funded PensionsFunded Pensions
Funds from pension substitute for Funds from pension substitute for private savingprivate saving
No net effect on aggregate investmentNo net effect on aggregate investment Unfunded PensionsUnfunded Pensions
Reduction in amount of investmentReduction in amount of investment
20-15
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Social Security and Social Security and Capital AccumulationCapital Accumulation
20-16
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
The Growth of the Social The Growth of the Social Security ProgramSecurity Program
Original tax was combined rate of 2 Original tax was combined rate of 2 percent on income up to $3,000 percent on income up to $3,000 annuallyannually Today is 15.3 percent on income up to Today is 15.3 percent on income up to
$84,900$84,900 In 1950, expenditures equaled 7.5 In 1950, expenditures equaled 7.5
percent of assetspercent of assets Today, 32.3 percent of assetsToday, 32.3 percent of assets
20-17
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Social Security as an Social Security as an InvestmentInvestment
Social security as good investment Social security as good investment depends on:depends on: Structure of future systemStructure of future system Future tax ratesFuture tax rates Higher rates imply higher benefitsHigher rates imply higher benefits Growth of future income in countryGrowth of future income in country
20-18
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Future of Social SecurityFuture of Social Security Will pay out more in benefits than it Will pay out more in benefits than it
receives in revenues within a few receives in revenues within a few decadesdecades
Possibility of tax increasesPossibility of tax increases Possibility of benefit cutsPossibility of benefit cuts
20-19
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Proposals for ReformProposals for Reform System’s current status produced System’s current status produced
only through continual tax increasesonly through continual tax increases Suggestions have been made for Suggestions have been made for
reform to overcome the system’s reform to overcome the system’s main weaknessesmain weaknesses
20-20
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Insurance and WelfareInsurance and Welfare Reformers have suggested Reformers have suggested
separating insurance and welfare separating insurance and welfare functions of the systemfunctions of the system
Insurance plan should pay benefits Insurance plan should pay benefits as a function of earlier premiums as a function of earlier premiums paidpaid
Welfare system to pay additional Welfare system to pay additional benefits based on needbenefits based on need
20-21
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Other Reform ProposalsOther Reform Proposals Raising the retirement ageRaising the retirement age Eliminating pay-as-you-goEliminating pay-as-you-go Instituting mandatory private Instituting mandatory private
pension planspension plans
20-22
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Financing Program’s Financing Program’s Deficit from General Deficit from General
RevenuesRevenues Federal government could provide Federal government could provide
funds using general revenues to funds using general revenues to avoid bankruptcy of programavoid bankruptcy of program
Most likely way future imbalance will Most likely way future imbalance will be addressedbe addressed
20-23
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Cost of Imbalance in Social Cost of Imbalance in Social Security Revenues and Security Revenues and
ExpendituresExpenditures Federal government transferring Federal government transferring
assets among its own accountsassets among its own accounts Social security trust fund is an asset Social security trust fund is an asset
and liability to federal governmentand liability to federal government