Social Security

You are currently browsing articles tagged Social Security.

How much of your income goes to Medicare and Social Security?

June 8, 2011 in Taxes | 3 comments

15.3%.

Does that seem a little high?  If you check your paycheck, the amount of money that is actually deducted from your paycheck for Social Security and Medicare is only 7.65%.  Employers, however, pay an equal amount of taxes on your behalf (i.e., an additional 7.65%).  Previous studies have indicated that all taxes employers pay on employees behalf is funded through lower employee earnings.  In other words, if the employer didn’t have to pay these taxes, your salary would be 7.65% higher.  Ouch!

Here is the breakdown of what where your payroll tax deductions are going.

OASDI HI Total
Employees 6.20 1.45 7.65
Employers 6.20 1.45 7.65
Combined total 12.40 2.90 15.30

 

Notes that OASDI (Old Age Survivors and Disability Insurance) is Social Security and HI (Hospital Insurance) covers only for Medicare beneficiaries’ Part A  (i.e., hospital) medical costs.

Source: A SUMMARY OF THE 2011 ANNUAL REPORTS

Tags: , ,

The CBO’s Budget Outlook: Not Good

February 9, 2010 in Medicaid/Medicare, Public Policy | No comments

In January, the CBO released a report titled The Budget and Economic Outlook:  Fiscal Years 2010 to 2020.  A summary of the findings is available on the CBO Director’s blog.  Today, however, I focus on CBO’s evaluation of how changes in health care spending affect the federal budget.

“Medicaid spending (excluding stimulus funding) increased by 9 percent ($18 billion) in 2009—exceeding its 7 percent average annual growth rate of the previous 10 years—largely because higher unemployment boosted enrollment in the program. Medicare outlays (including an offset for premium payments) also rose at a faster rate than the average of the past decade, growing by 10 percent ($39 billion).“

Why did Medicare outlays increase at higher than historical averages?  It is possible that physicians are cost shifting in the face of a bad economy.  With more unemployed workers (and thus fewer privately insured individuals), more physicians may be willing to see Medicare patients or physicians may use supplier induced demand to increase the number of services they supply to this population.  On the other hand, this could simply be explained by the fact as baby boomers retire, there are more Medicare-eligible individuals which will increase cost even if spending per capita increases at historical rates.

Additional large spending outlays last year include the American Recovery and Reinvestment Act of 2009 (ARRA) ($80 billion)–which was largest annual adjustment since 1982–and military operations in Iraq and Afghanistan ($155 billion).

In the long term, the CBO projects that debt levels will continue to rise:

“In addition, the share of the population age 65 or older will continue to expand rapidly. As a consequence, the growth of spending for Medicare, Medicaid, and Social Security will speed up from its already rapid rate…Medicare and Medicaid spending are projected to grow by 7% per year between 2011 and 2010…debt held by the public would reach 98 percent of GDP by the end of 2020, the highest level since 1946.“

The most important point the CBO makes in the report, however, is the following:

“The single greatest threat to budget stability is the growth of federal spending on health care—pushed up both by increases in the number of beneficiaries of Medicare and Medicaid (because of the aging of the population) and by growth in spending per beneficiary that outstrips growth in per capita GDP.”

Source: Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” January, 2010.

Tags: , , , ,

Medicare trust fund to be tapped out by 2017

May 12, 2009 in Medicaid/Medicare, Social Security, Taxes | 1 comment

Bond Markets seem to be concerned over the escalating level of U.S. Government debt.  Yields rose during the latest $14 billion auction of U.S. 30-year Treasury Bonds.  This graph shows an ominous budget deficit trend as well.  There seems to be good reason for this.  

American’s stimulus plan and entitlement programs are putting an increasing burden on American tax payers.  With the recession taking a toll on tax revenues, Social Security and Medicare funding is increasing jeopardy.  CNN reports that the “Social Security trust fund will be exhausted by 2037 — four years earlier than estimated last year… The recession also hit Medicare. The Medicare trust fund is forecast to be tapped out by 2017, or 2 years earlier than the trustees’ estimate last year.”

Tags: , ,

No Increase in Social Security Benefits

May 2, 2009 in Social Security | No comments

The N.Y. Times reports that Social Security benefits will not increase this year.  This makes sense on a number of levels.  First, over the last year we have been experiencing deflation.  The CPI decreased -0.4% between March 2008 and March 2009.  Second, wage growth has been negative as well over the past year.  Unemployment has grown and tax receipts have slowed.  Thus, it only makes sense that seniors should share in the economic burden.

Holding Social Security benefits constant will also affect Medicare.  This…”in effect, puts a cap on premiums for Part B of Medicare, which covers doctors’ services.  If there is no cost-of-living adjustment for Social Security, about three-fourths of beneficiaries will not see any change in their basic Part B premiums, federal officials said. But some beneficiaries do not have this protection and could face substantial increases in their Part B premiums.”

Not all is bad news for seniors. Deflation means that the money seniors have saved will be able to purchase more goods.

Tags: , ,

Canadian Social Security and Well-Being

March 3, 2009 in Public Policy, Social Security, Taxes | 1 comment

Does Social Security work?  By that, I mean does giving elderly individuals a government pension increase their level of income, the amount of goods the can consume, or even their happiness?

An NBER working paper by Baker, Gruber and Milligan (2009) tries to answer this question in the Canadian setting.

Background

Currently, Canadian income transfer programs to seniors make up 2.3% of GDP, but this figure is expect to rise to 3.2% of GDP by 2030.  Unlike Social Security in the U.S., the pay-as-you-go (PAYGO) component of the Canadian Social Security System if fairly small.  Further, population growth in Canada is higher than in Europe making the old-age income transfer programs more solvent.

The Old Age Security (OAS) program is the oldest elderly income transfer program in Canada.  It was enacted in 1952.  Currently, “the monthly benefit paid to individuals who fully satisfied the residency requirement was $479.83.   This benefit is clawed back from higher income pensioners at a 15 percent rate, starting at incomes of $60,806 (2005).  Benefits are full indexed to the CPI and fully taxable under the Income Tax Act.”

The Guaranteed Income Supplement (GIS) is a means-tested income supplement for elderly individuals with low income.  Benefits are taxed back at a 50% rate.  The current enefit is between $370 and $570.  

The Canadian Pension Plan (CPP) and Quebec Pension Plan (QPP) are finance by contributions from employers and employees.  Individuals pay a 4.95% tax on earnings from $35,00 to $41,100 and benefits are based on a measure of average earnings over the individual’s working life.  Participants can claim benefits at age 60, but the benefit level is increased by 0.5% per month if the benefits are claimed at an older age.

Data

 The authors aim to investigate how changes in the programs described above affect the income, consumption and happiness level of individuals in different birth cohorts. These measures are taken from survey data from Statistics Canada.  Income data comes from the Survey of Consumer Finances (1971-1997) and the Survey of Labor and Income Dynamics (1998-2002).  Consumption data comes from the Family Expenditure Survey (1969-1996) and the Survey of Household Spending (1997-2002).  Happiness is measured by the General Social Survey.

  • For more details on the Canadian Social Security System, see my post from 4 July 2006.

Methodology

If there are time trends in elderly income and consumption, how does one identify the impact of the Canadian Social Security?  The authors use changes in Canadian Social Security legislation to identify this impact.  The regression methodology has 3 specifications:

  1. Regress actual retirement benefits on the dependent variables (income, consumption and happiness).
  2. Partial Simulation. In this approach, the authors hold constant the earnings, capital income, and family status of the individual, but allow the retirement age to vary.  Benefits are based on a fixed earnings histories across all birth cohorts, not actual earnings.
  3. Full Simulation.  In this case, earnings, capital income, family status, and retirement age are held constant and the authors calculate simulated benefits levels based on an average earnings histories and retirement ages across all cohorts.

Results

In general, the authors find that a higher Social Security benefit increases elderly income.  In the full simulation and when simulated benefits are used as an instrument for actual benefits, Social Security income benefits increase elderly income benefits dollar-for-dollar.  Further, elderly income poverty decreased significantly when more generous benefits were enacted; the authors claim that 96% of the reduction in elderly poverty is due to these added benefits.  However, in the partial simulation methodology, the authors find that a $1 increase in benefits leads to only a $0.55 cent increase in elderly income, thus indicating significant crowd-out.  

For consumption, the authors also find that more generous income benefits increase elderly consumption levels, but not dollar for dollar.  A $1 increase in benefits leads to a $0.66-$0.80 increase in consumption, thus indicating some crowd-out.  Unlike for the case of elderly income poverty, more generous Social Security benefits did not affect consumption poverty.  Thus, it may be the case that poor elderly individuals have other sources of consumption (e.g., purchase by family members, unreported income gifts from family members, unreported labor income) that may offset lower government supplied income benefits. 

“For the very happy question, we see no sign of a statistically significant relationship between benefits and being very happy.  On the other hand, there is some evidence of a decrease in reports of being unhappy or very unhappy with higher benefits in the reduced form results, but not in the IV results.”

Healthcare Economist’s Take

This paper indicates that more generous income benefits do increase income and consumption for the elderly.  Social Security benefits create more crowd-out in the case of consumption than income.  It is likely that consumption is a better indicator of well-being, especially since elderly savings is very low (i.e., the elderly are generally spending down their assets than building them up).  While income poverty declined due to these income benefits, consumption poverty did not.  Overall, I would say that these program do help increase elderly well-being, but likely not dollar for dollar.  As the authors note, this paper only looks at the benefits of Social Security without taking into account the costs of raising a significant amount of revenue to pay for these government program.

I will not comment on the happiness measure.  Although many people may think it is the government’s job to make individuals happier, I believe that happiness is determined on an individual level and often based on things the government can’t control (e.g., do you get along with your spouse, has their been a death in the family).  Further, happiness is often measured by comparing your emotional feelings against some status quo.  Thus, a poor family would be very happy to have their income increased to $80,000, but a millionaire would be very disappointed.  

I think this paper makes an important contribution showing that government old age income benefits do increase income and consumption, even if there is some crowd out on the consumption side.  The question for me is less whether or not there should be some government benefit, but more about how generous it should be and whether it should serve only the poor or all elderly.

Tags: ,

Who should be responsible for your retirement?

December 2, 2008 in Public Policy, Social Security | 2 comments

The Economist reports that Argentina has recently passed “a law to nationalise the country’s private pension system.”  Is this a good thing?

With the stock market in the tank, many individuals yearn for the security of a government-funded retirement plans compared to private, individual investments in stocks and bonds.  However, public pensions may not be so safe after all.

An NBER working paper by Novy-Marx and Rauh finds that public pension funds run by the states in the U.S. are significantly underfunded.  

“We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.”

As a San Diego resident, I know first hand how the government can mess up public pensions.  San Diego was named “Enron by the Sea” because underfunding the public pension system has created an enormous deficit.  City attorney Mike Aguirre is considering having San Diego declare bankruptcy because of the huge shortfall.

Tags: , , ,

Age Inflation

September 16, 2008 in Medicaid/Medicare, Public Policy, Social Security | Permalink

Medicare was implemented in 1965 to cover the medical costs of the oldest members in society.  In 1965,  the U.S. life expectancy was only 70 years old.  Now, however, life expectancy at birth is over 78 years.  Medicare is now not just covering the oldest of the old, it also covers the “moderately” old since we are living so much longer.

An NBER working paper by  John B. Shoven, Gopi Shah Goda examines what eligibility ages for programs such as Medicare and Social Security would be today and in 2050 if adjustments for mortality improvement were taken into account.  The authors conclude the following:

“We find that historical adjustment of eligibility ages for age inflation would have increased ages of eligibility by approximately 0.15 years annually. Failure to adjust for mortality improvement implies the percent of the population eligible to receive full Social Security benefits and Medicare will increase substantially relative to the share eligible under a policy of age adjustment.”

Tags: , , ,

I.O.U.S.A.

August 22, 2008 in Economics - General, Medicaid/Medicare | Permalink

The U.S. is in a huge amount of debt. This will only worsen in the short- to medium-term as the the baby boomers retire and Medicare and Social Security budgets balloon. Here’s a movie about it.

  • “This country has started consuming more than it produces.” – Warren Buffet

Tags: , ,

Medicare to surpass Social Security expenditures in 2028

March 25, 2008 in Medicaid/Medicare | Permalink

The [Medicare Hospital Insurance Trust] fund also continues to fail our long-range test of close actuarial balance by a wide margin. The projected date of HI Trust Fund exhaustion is 2019, the same as in last year’s report, when dedicated revenues would be sufficient to pay only 78 percent of HI costs. Projected HI dedicated revenues fall short of outlays in this and all future years. ”

Who is this scare-mongering quotation from?  Rush Limbaugh?  Conservative think tanks?  Fox News?

Actually, this message is from the Social Security and Medicare Boards of Trustees 2008 Annual Report.  Currently, Medicare accounts for 3.2% of GDP.  The authors of the report project that by by 2028, Medicare expenditures will surpass Social Security expenditures.  By 2082, Medicare expenditures will account for 10.8% of GDP!

What is to be done?  We can increase taxes to levels that in the long run would cripple the economy.  We could cut the number of people receiving Medicare benefits.  For instance, we could increase the age at which people are eligible for Medicare or limit Medicare benefits to only certain groups (e.g.: the poor, those who are eligible for Social Security benefits, etc.).  The government could reduce the generosity of the plans by either shifting more costs to patients (i.e.: increasing co-pays and deductibles), or reduce the generosity of the benefit package (i.e.: rationing).  Or we could scrap Medicare all together and start over (e.g.: a voucher program, no elderly health insurance, mandatory savings for the purchase of health insurance later in life).

All of these ways to solve the Medicare crisis have pros and cons and those adversely affected by any change are likely to vehemently protest any reform.  Nevertheless, Medicare as it currently is structured is not a fiscally sustainable program.

Tags: ,

Who values the Social Security Annuity?

March 10, 2008 in Public Policy, Social Security | Permalink

If you were offered an actuarially fair lump-sum payment, would you give up half of your Social Security benefits? This is the question asked by Brown, Casey and Mitchell in their 2008 NBER working paper.

Overall, about 60% of respondents from the HRS data set preferred the lump-sum payment. The authors find the following individuals are more likely to prefer a lump-sum payment over the annuity:

  • those with shorter expected longevity or who are in poor health,
  • those with more education,
  • those with less financial sophistication conditional on education,
  • those who believe Social Security benefits will be cut.

Predictably, individuals who think they live longer will choose the annuity since they will get paid over a longer period of time. We also see that those who believe that there is significant political risk (i.e., Social Security benefits will be cut) are more likely to choose the lump-sum benefits.

Men aged between 63 and 67 have only 5% of their assets in private annuities. People have claimed that this was due to one of the following reasons:

  • Adverse selection leads to high load factors on annuities, making them a poor value.
  • Because they are made up of a fixed payment, Annuities are subject to inflation risk.
  • Social Security may be a substitute for private insurance annuities.

The study finds evidence to contradict all three of these hypotheses. Social security benefits are actuarially fair, and inflation-adjusted. If people really benefited from Social Security annuities, than they should be hesitant to give up this stream of payments. Yet three of five people still would prefer a lump sum payment over the Social Security annuity, a type of annuity that offers significant advantages over those offered in the private market.

Maybe Social Security isn’t as valuable as once thought.

Tags: ,