GradeBuddy ECON 0110 1st Edition Lecture 14SECTION 11:SOCIAL SECURITYSOCIAL SECURITY SYSTEMEMPLOYER PAYS 6.2% OF WAGES AND SALARY (UP TOthe 2014 INCOME LIMIT OF $115,500) TO THE SOCIAL SECURITY FUNDEMPLOYEE ALSO PAYS 6.2% OF WAGE AND SALARY EARNINGS TO SS FUNDTOTAL = 12.4% OF WAGES AND SALARIES UP TO MAX EARNINGS OF $115,500IF SELF EMPLOYED, THE WORKER PAYS THE ENTIRE 12.4% OF PROFITSDuring 2011, the employee paid 4.2%, rather than 6.2%TO SEE THE INCOME CAPS:http://www.ssa.gov/oact/cola/cbb.html1GradeBuddy ECON 0110 1st Edition Lecture 14The social security tax is also called the PAYROLL TAX because the tax is paid on wages, salaries, sole proprietor profits and partnership profits Social security taxes are NOT paid on interest income, dividends, capital gains, royaltiesThere are NO STANDARD OR ITEMIZED DEDUCTIONS and NO PERSONAL EXEMPTIONSThus, unlike with Federal income taxes, you pay social security taxes on your very first dollar of wage earningsTO SEE THE HISTORICAL FICA TAX RATES:http://www.ssa.gov/oact/progdata/taxRates.html2GradeBuddy ECON 0110 1st Edition Lecture 14The social security tax takes the same PROPORTION of earnings from all workers (up to the earnings max of $115,500)6.2% if employee, 12.4% if self-employedThis is an example of a FLAT TAX (up to the earnings max)Tax RATE is the same for all workers, (as long as earned income does not exceed $115,500)TO READ ABOUT THE HISTORY OF SOCIAL SECURITYhttp://www.thinkadvisor.com/2014/05/27/social-security-then-now-and-the-future?eNL=538dca53160ba0933fb98c8f&utm_source=retirementreport060314&utm_medium=enewsletter&utm_campaign=retirementreport&_LID=137393525&page_all=13GradeBuddy ECON 0110 1st Edition Lecture 14 Lecture14SOCIAL SECURITY BENEFITSRetirees can begin receiving UNREDUCED BENEFITS at FULL RETIRE AGE (FRA)Full retirement age is 66 (if born after 1/1/943)(AGE 67 if born after 1/1/1960)Retirees can begin receiving REDUCED BENEFITS at AGE 62(Reduction is 25% if FRA is 66, 30% if FRA is 67)TO SEE FULL RETIREMENT AGE AND BENEFIT REDUCTION FACTORS:http://www.socialsecurity.gov/retire2/agereduction.htm#chartCURRENT CONTRIBUTIONS INTO THE FUND ARE USED TO PAY BENEFITS TO CURRENT RETIREESCURRENTLY THERE ARE ABOUT THREE WORKERS FOR EVERY RETIREEDURING MOST YEARS, THERE ARE MORE CONTRIBUTIONS INTO THE FUND THAN BENEFITS BEING PAID OUT OF THE FUNDSOCIAL SECURITY SURPLUS4GradeBuddy ECON 0110 1st Edition Lecture 14ALL THE PAST SURPLUS SOCIAL SECURITY CONTRIBUTIONS HAVE BEEN SPENT BY THE FEDERAL GOVERNMENT TO PAY FOR OTHER GOVERNMENT EXPENSESEARLY RETIREMENT BEGINS AT AGE 62THE “BABY BOOMER” GENERATION BEGINS WITH PEOPLE BORN IN 1946 (AFTER WWII)THE FIRST “BABY BOOMERS” BECAME 62 IN 20085GradeBuddy ECON 0110 1st Edition Lecture 14SINCE 2008, THE NUMBER OF RETIREES HAS EXPANDED RAPIDLY AND BENEFITS BEING PAID WILL INCREASE RAPIDLYIN RECENT YEARS, BENEFITS BEING PAID OUT OF THE SOCIAL SECURITY FUND HAVE BEGUN TO EXCEED CONTRIBUTIONS INTO THE FUNDTHUS, THE ANNUAL SOCIAL SECURITY SURPLUS WILL DISAPPEARSUPPOSE THAT EVENTUALLY THE ANNUAL SOCIAL SECURITY CONTRIBUTIONS INTO THE FUND AMOUNT TO ONLY 85% OF ANNUAL SOCIAL SECURITY BENEFITSTHAT NEED TO BE PAID OUTTHE FEDERAL GOVERNMENT WILL NEED TO FIND NEWWAYS TO FINANCE THE ADDITIONAL 15% OF SOCIAL SECURITY BENEFITSBASED ON CURRENT BIRTH RATES AND FUTURE RETIREMENT RATES, IT IS PROJECTED THAT EVENTUALLY THERE WILL BE ONLY TWO WORKERS FOR EACH RETIREEWITH NO CHANGES TO THE SYSTEM, EVENTUALLY ANNUAL BENEFITS PAID TO RETIREES WILL GREATLY EXCEED CONTRIBUTIONS INTO THE FUNDSOCIAL SECURITY BENEFITS ARE INDEXED6GradeBuddy ECON 0110 1st Edition Lecture 14BENEFITS PAID TO RETIREES INCREASE EACH YEAR BASED ON THE RATE OF INCREASE IN THE CONSUMER PRICE INDEXCOST OF LIVING ADJUSTMENTS (COLA)TO SEE SOCIAL SECURITY COLA INCREASES:http://www.socialsecurity.gov/OACT/COLA/colaseries.html7GradeBuddy ECON 0110 1st Edition Lecture 14WE NEED TO INCREASE THE AMOUNT OF MONEY COMING INTO THE FUND AND/OR DECREASE THE AMOUNT OF MONEY GOING TO RETIREESPOSSIBLE SOLUTIONS:1. INCREASE THE EARLY RETIREMENT AGE (62)THIS WILL REDUCE ANNUAL BENEFITS AND IT WILL INCREASE THE LABOR FORCE SLIGHTLY2. INCREASE THE FULL RETIREMENT AGE (67)THIS WILL REDUCE ANNUAL BENEFITS AND IT WILL INCREASE THE LABOR FORCE SLIGHTLY3. INCREASE THE TAX RATE THE TOTAL TAX RATE (NOW 12.4%) HAS BEEN INCREASED MANY TIMES IN THE PAST4. GREATLY INCREASE THE INCOME CAP (CURRENTLY$115,500)THE CAP IS INDEXED TO INFLATIONTHUS, IT INCREASES A LITTLE BIT EVERY YEARA MASSIVE INCREASE IN THE CAP (OR MAKING IT UNLIMITED) IS AN EASY SOLUTIONTHIS IS EQUIVALENT TO A LARGE TAX INCREASE ON HIGHER INCOME EARNERS8GradeBuddy ECON 0110 1st Edition Lecture 145. REDUCE YOUR STARTING ANNUAL BENEFITSYOUR STARTING BENEFIT IS BASED ON YOUR PAST 35 YEARS OF HIGHEST EARNINGS.Your past earnings are increased to adjust for past increasesin the average level of wages.CURRENTLY YOUR STARTING BENEFIT IS CALCULATEDBY ADJUSTING YOUR PAST WAGES ACCORDING TO THE GROWTH RATE OF WAGES IN THE US. THUS, YOUR EARNINGS DURING, SAY, 1995, WOULD BE BROUGHT UP TO CURRENT VALUE BY INCREASING YOUR 1995 EARNINGS AT THE SAME RATE AS WAGES HAVE