PV Obligations >PV Assets

Transcription

1 The Situation PV Obligations >PV Assets In the 1930 s we established Old Age and Survivor s Insurance. Individuals would contribute a percentage of their salary (up to a maximum salary) Businesses would match When a person reached age 65, they would receive a pension based on their contribution. Lectures in Macroeconomics- Charles W. Upton Changes The tax rate has gone up as has the maximum level of income subject to the OASI tax. So too have benefits Other Changes People can draw benefits as early as age 62 The age of eligibility for the full pension is slowly increasing to age 67 The tax on earnings for retirees has been reduced. The Pension The formula for computing benefits is complex. John Smith has earned the median income every year he has worked (admittedly median income is a moving target). His pension will be about 40% of the median income when he retires The Pension The Pension The formula for computing benefits is complex. John Bill Smith Jones has has earned the median income earned every year 110% he of has the worked (admittedly median median income; is his a moving target). His pension pension will will be be about 40% of the median income approximately when he retires 41.5% of median income The formula for computing Sam Brown benefits has is complex. earned 90%; his John Bill Smith Jones has has earned pension the median will income be earned every year 110% he of has the worked 38.5% (admittedly of the median median median income; is his a moving income target). His pension pension will will be be about 40% of the median income approximately when he retires 41.5% of median income

2 The Joys of Matrimony The Joys of Matrimony John and Sally Smith are married: same birthday. They have worked all their lives and each made the median income. Each will get a pension equal to 40% of the median income, for a combined pension of 80% of the median income. John and Sally Smith are married: same birthday. They have worked all their lives Bill and and each Helen made Jones the median income. Each are will married; get a pension same equal to 40% of the median birthday. income, Helen for a combined pension of never 80% worked. of the median Their income. combined pension will be 60% of median income The Joys of Matrimony The Trust Fund John and Sally Smith are Note married: that the same Smiths birthday. They have worked paid twice all their as lives much Bill and and each Helen made Jones the median in OASI income. taxes Each and are will married; get a pension same equal only to 40% get of ⅓the more in median birthday. income, Helen for a combined pension. of never 80% worked. of the median Their income. combined pension will be 60% of median income The government collects social security taxes (now ~ $400B a year), pays them into a trust fund and pays benefits out of the trust fund. Currently benefits are a lot less (~$60B a year). The Trust Fund in the Future Because the population is aging, benefits are projected to exceed OASI receipts around The official forecasts are that, in 2037, the Trust Fund will run out of money. The Trust Fund in the Future Because the population is aging, benefits are projected to exceed OASI receipts Many around people argue The this official means forecasts Social are that, in 2037, the Security will be Trust Fund will run out of money. bankrupt in 2037.

3 The Trust Fund in the Future Because the population is aging, benefits are projected to exceed OASI receipts around These are point estimates The official after forecasts all, are that, in 2037, the but Social there Security is a date Trust in Fund will run out of the money. future when the social security trust fund will be empty. The Trust Fund in the Future Because the population Note that is aging, 2037, benefits are projected to exceed according OASI to receipts the around These are point official estimates, estimates The official after forecasts all, taxes are will that, equal in 2037, the but Social there Security is a date Trust in about Fund 73% will of run out of the money. future when the promised benefits. social security trust fund will be empty. Your Benefits Many people confuse social security with a well-run pension fund. Two types of well-run pension funds: Defined contribution Defined benefit Defined Contribution Every year, employees and/or employers contribute to a trust fund, run much like a giant mutual fund. When the employee retires, he can use the present value of the contributions made on his behalf to purchase an annuity. Defined Contribution Every The amount year, employees of the and/or employers contribute annuity depends to a trust fund, run much like a giant on just mutual how fund. much When was the contributed employee retires, he can use the present and the value earnings of the contributions made on his of behalf the pension to purchase an annuity. fund Defined Contribution Every The amount year, employees of the and/or employers contribute annuity depends to a trust fund, If the run fund much is like a giant on just mutual how fund. much invested in When was the contributed employee retires, common he can stocks, use the present and the value earnings of the contributions the employee made on his of behalf the pension to purchase bears an annuity. the risk of fund how well the market has done

4 Defined Contribution Every The amount year, employees of the and/or employers contribute annuity depends to a Examples: trust fund, If the run fund much is like a giant on just mutual how fund. much invested in When was the contributed TIAA/CREF employee retires, common he can stocks, Teacher s Insurance Annuity use the present and the value earnings Corporation/College of the contributions the employee made on Retirement Equities his of behalf the pension to purchase bears Fund an annuity. the risk of fund 401k Plans how well the market has done Each year employees and/or employers contribute to a trust fund. An employee is promised a defined benefit when she retires, with the benefit a function of years worked and salary earned. Each year employees and/or employers contribute to a trust fund. An employee is promised a defined benefit when she retires, with the benefit a function of years worked and salary earned. Each Actuaries year employees compute and/or employers contribute the obligations to a trust of fund. An the employee pension is fund; promised if a defined benefit when PV Obligations she retires, >PVwith Assets the benefit a function of years the employer worked and is salary earned. required to make extra contributions Each Actuaries year employees compute and/or employers Examples: STRS contribute the obligations to a trust of fund. and most traditional An the employee pension is fund; promised if union pension a defined plans benefit when PV Obligations she retires, >PVwith Assets the benefit a function of years the employer worked and is salary earned. required to make extra contributions Each Actuaries year employees compute and/or employers Examples: STRS contribute the obligations to a trust of fund. and most traditional An the employee pension is fund; promised if union a defined benefit when PV Obligations she retires, >PV Hence, pension the plans with Assets the benefit a function of years the employer employer worked and is bears the salary earned. required to make risks extra contributions

5 The Economics of Examined as an investment, is a bad idea. For a young person PV Future Benefits < PV Future Taxes The magic age is somewhere in the late 40 s The Economics of Examined as an investment, is a bad As idea. a For a young person PV Future Benefits < PV Future Taxes The most magic young age is somewhere in the late 40 s people are cynical about OASI. The Economics of The other side Examined as an investment, of the Social coin Security is is a bad As idea. a For a young person that older PV Future Benefits < people PV are quite Future Taxes The most magic young age is somewhere focused in the late on 40 s people are maintaining the cynical about current system OASI. The Economics of The The other side consequence is of the coin is is a bad As idea. a For a young person that Social that older PVSecurity Future Benefits is < people PV are quite Future Taxes most sometimes young focused on 40 s people called the are third maintaining the cynical rail of American about current system OASI. Politics Examined as an investment, The magic age is somewhere in the late The Economics of The The other side Any politician consequence of the coin is who is touches it, is a bad As idea. a For a young person that Social that older dies. PVSecurity Future Benefits is < people PV are quite Future Taxes most sometimes young focused on 40 s people called the are third maintaining the cynical rail of American about current system OASI. Politics Examined as an investment, The magic age is somewhere in the late The Privatization Option The general idea: No government funded System Individuals (and perhaps their employers) would be required to contribute to a government-approved retirement plan

6 The Privatization Option The general idea: No government funded System Individuals (and perhaps their employers) would be required to contribute to a government-approved retirement plan Examples Chile United Kingdom The Problem Suppose (to take an extreme position), the government allowed people to walk away from the social security system. No more taxes, no benefits. The Problem You would be required to contribute the amount you pay in Taxes to an approved retirement plan. Your employer would be required to contribute the amount it currently pays to your retirement plan. The Problem You would be required to contribute the amount you pay in Taxes to It an would approved be in retirement the interest plan. of almost Your employer everyone would under be required 45 to to contribute the do amount so. it currently pays to your retirement plan. Drawback What about current recipients? What about persons close to retirement, who would not walk away? There simply isn t enough money to pay their benefits. The Real Problem Most States use Funds Accounting

7 The Real Problem Most States use Funds Accounting Ohio has A general fund A highway fund And hundreds of others The Federal Unified Budget Beginning in the 1960 s the United States began to use something called the Unified Budget. The general fund The highway trust fund Airport trust fund trust fund The Federal Unified Budget Beginning in the 1960 s the United States began to use something called the Unified Without Budget. the Trust The fund general the fund reported deficit would The be highway significantly trust fundgreater Airport trust fund trust fund The Federal Unified Budget Beginning in the 1960 s the United States began to use something called the Unified Without Budget. the Trust The fund general the If fund reported we phased deficit out the Social would The be highway significantly Security trust fund Trust greater Fund and paid obligations out of general revenues, our budget deficit would soar. End 2004 Charles W. Upton. All rights reserved