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ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom
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The structure of the benefit formula is such that a woman who worked while married to a high income-earning husband will get nothing or virtually nothing for the taxes she paid. She and her husband would get 1.5 times his PIA if she earned nothing and 1.5 time his if she earned a modest income.
Divorced people are entitled to either their own PIA or half the amount that they would have received as a couple had they not divorced.
Benefits are adjusted for inflation using the CPI.
Because the CPI overstates inflation (by estimates in the neighborhood of 1.1 percentage points), this means that there are real increases in Social Security benefits each year.
Not only does Social Security transfer income from those who are young to those who are old, it transfers income from the generation born after 1945 to the generation born before 1925. On average those born in between 1925 and 1945 will see approximately the same return they would have received in a similarly safe asset.
Birthrates have fallen such that the number of workers supporting each retiree has fallen from more than 30 in the 1950s to below 5 beginning in 1990. It is projected to be below 3 by 2030 and below 2 shortly thereafter.
Maintain benefits Increase taxability of benefits Invested Trust Fund in Corporate Securities Eventually increase payroll tax rate by 1.6 percentage points
Individual Accounts Raise the retirement age Reduce replacement rates for upper income people Allow 1.6 percent of payroll to be placed in special retirement
accounts Personal Security Accounts
Allow half of payroll taxes to be placed in individually managed accounts.
Savings Incentives of Social Security Asset Substitution Effect: People save less than they would
if Social Security did not exist because they are substituting government promises of a benefit for private savings. Stated simply, people save less because government is “saving” for them.
Induced Retirement Effect: People save more than they would if Social Security did not exist because they would not have retired or would not have retired as early had Social Security not been there. Given that it does exist, people choose to ultimately retire or retire earlier and save in order to do so.
Bequest Effect: People save more than they would have if Social Security did not exist in order to give more to the children and grandchildren when they die.
Medicare The program provides substantially subsidized
health insurance to those 65 and older. It is financed with premiums, a 2.9% payroll tax (1.45% on employers and employees) and general government revenue. Part A:
Mandatory Covers hospitalization Financed with payroll tax and premiums
Part B: Voluntary Covers doctor’s visits Financed from general federal revenue and premium