BRINNER1902mit07.pptSocial Security Reform and the Macroeconomy: Issues The Problem:◆ Pending InsolvencyFinding a Solution: Key Macroeconomic Issues◆ Effects on Savings and Capital Accumulation◆ Distributional Effects (Across Generations)TTTTTHEHEHEHEHE C C C C CONCORDONCORDONCORDONCORDONCORDCCCCCOALITIONOALITIONOALITIONOALITIONOALITIONSource: Social Security Trustees’ Report, March 2001--Intermediate Projections.2000 2010 2020 2030 2040 2050 2060 2070 20752000 2010 2020 2030 2040 2050 2060 2070 20752000 2010 2020 2030 2040 2050 2060 2070 20752000 2010 2020 2030 2040 2050 2060 2070 20752000 2010 2020 2030 2040 2050 2060 2070 2075CalendarCalendarCalendarCalendarCalendar YYYYYearearearearear202020202018181818181616161616141414141412121212121010101010PerPerPerPerPercent of cent of cent of cent of cent of TTTTTaxable Payraxable Payraxable Payraxable Payraxable PayrollollollollollCashCashCashCashCashSurplusesSurplusesSurplusesSurplusesSurplusesSocial Security OutlaysSocial Security OutlaysSocial Security OutlaysSocial Security OutlaysSocial Security OutlaysSocial SecuritySocial SecuritySocial SecuritySocial SecuritySocial SecurityCash DeficitsCash DeficitsCash DeficitsCash DeficitsCash DeficitsBENEFITS PROMISED FBENEFITS PROMISED FBENEFITS PROMISED FBENEFITS PROMISED FBENEFITS PROMISED FAR EXCEEDAR EXCEEDAR EXCEEDAR EXCEEDAR EXCEEDDEDICADEDICADEDICADEDICADEDICATED TED TED TED TED TTTTTAX REVENUESAX REVENUESAX REVENUESAX REVENUESAX REVENUESPayrPayrPayrPayrPayroll oll oll oll oll TTTTTax & ax & ax & ax & ax & TTTTTaxation of Benefitsaxation of Benefitsaxation of Benefitsaxation of Benefitsaxation of BenefitsBRINNER3902mit07.pptBackground: What is Social Security?◆ A retirement benefit: when you retire, the gov’t sends you a check based in part on your earnings history◆ Benefit formula is progressive◆ Married households get approx. 36% of retirement income from Social Security, on averageBRINNER4902mit07.pptHow Social Security is Financed◆ Pay-as-you-go “Pay-go” financing– Today’s retirees benefits are paid for by today’s workers (and employers) via a 12.4% payroll (FICA) tax◆ This is not saving! Even though one’s benefit is tied to one’s earning history (so you are meant to “get what you put in” in some loose sense), Social Security is simply a transfer from thecurrent working population to the current retired population– Remember: Saving = Private Saving + Public Saving◆ “Trust Fund” is a mirage:– “Surplus” used to fund government operations– IOUs where payer and borrower are same person!BRINNER5902mit07.pptProblems with Pay-go financing: Overview◆ Reduces savings rate and capital accumulation◆ Vulnerable to demographic shiftsBRINNER6902mit07.pptProblem:Pay-Go Financing Reduces The Savings RateHow much exactly is controversial…◆ But generally agreed the a pay-go system reduces savings relative to a retirement system that is financed with actual savings:– In any given year, workers are being taxed to finance current retirees. This reduces disposable income that could be used for savings– If workers expect they will receive benefits when they retire, then why save?◆ Effects of lower national savings:– Lower capital accumulation– Lower output in long-runBRINNER7902mit07.pptEffect of Lower National Savingson OutputY/L=yK2*Saving= s1Y = s1 f(k)Production=Y = f(k)Saving= s2Y = s2 f(k)Depreciation = d kK1*BRINNER8902mit07.pptProblem: Demographic ShiftsThreaten the Solvency of Social Security ◆ General Problem: Pay-Go systems vulnerable to an increase in the dependency ratio◆ If population composition changes such that the there are more retirees, kids, and other nonworkers per worker, then taxes or government borrowing must increase, or benefits must decreaseTHE NUMBER OFTHE NUMBER OFTHE NUMBER OFTHE NUMBER OFTHE NUMBER OF WORKERS PERWORKERS PERWORKERS PERWORKERS PERWORKERS PERBENEFICIARBENEFICIARBENEFICIARBENEFICIARBENEFICIARYYYYY IS FALLING IS FALLING IS FALLING IS FALLING IS FALLING5555544444333332222211111000001960 1970 1980 1990 2000 2010 2020 2030 20401960 1970 1980 1990 2000 2010 2020 2030 20401960 1970 1980 1990 2000 2010 2020 2030 20401960 1970 1980 1990 2000 2010 2020 2030 20401960 1970 1980 1990 2000 2010 2020 2030 2040CalendarCalendarCalendarCalendarCalendar YYYYYearearearearearCoverCoverCoverCoverCovered ed ed ed ed WWWWWorkers Perorkers Perorkers Perorkers Perorkers Per Beneficiar Beneficiar Beneficiar Beneficiar Beneficiaryyyyy196019601960196019605.1 workers5.1 workers5.1 workers5.1 workers5.1 workersper beneficiaryper beneficiaryper beneficiaryper beneficiaryper beneficiary200120012001200120013.4 workers3.4 workers3.4 workers3.4 workers3.4 workersper beneficiaryper beneficiaryper beneficiaryper beneficiaryper beneficiary203520352035203520352.1 workers2.1 workers2.1 workers2.1 workers2.1 workersper beneficiaryper beneficiaryper beneficiaryper beneficiaryper beneficiarySource: Social Security Trustees’ Report, March 2001--Intermediate Projections.TTTTTHEHEHEHEHE C C C C CONCORDONCORDONCORDONCORDONCORDCCCCCOALITIONOALITIONOALITIONOALITIONOALITIONTHE BABYTHE BABYTHE BABYTHE BABYTHE BABY BOOMERS BOOMERS BOOMERS BOOMERS BOOMERS AND AND AND AND AND THE U.S. POPULATHE U.S. POPULATHE U.S. POPULATHE U.S. POPULATHE U.S. POPULATIONTIONTIONTIONTIONIN 1960, 1990, 2030IN 1960, 1990, 2030IN 1960, 1990, 2030IN 1960, 1990, 2030IN 1960, 1990, 2030United States Population in 1960:United States Population in 1960:United States Population in 1960:United States Population in 1960:United States Population in 1960:Boomers (in rBoomers (in rBoomers (in rBoomers (in rBoomers (in red) ed) ed) ed) ed) ArriveArriveArriveArriveArrive76 Million Str76 Million Str76 Million Str76 Million Str76 Million StrongongongongongUnited States Population in 1990:United States Population in 1990:United States Population in 1990:United States Population in 1990:United States Population in 1990:Boomers (in rBoomers (in rBoomers (in rBoomers (in rBoomers (in red)ed)ed)ed)ed)Dominate the Dominate the Dominate the Dominate the Dominate the WWWWWorkfororkfororkfororkfororkforcececececeUnited States Population in 2030:United States Population in 2030:United States Population in 2030:United States Population in 2030:United States Population in 2030:Boomers (in rBoomers (in rBoomers (in rBoomers (in rBoomers (in red)ed)ed)ed)ed)in Retirin Retirin Retirin Retirin
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