Draft of Presentation on Social Security
by
William Larsen
April 14, 2005
For those who want a short quick history lesson into what Social Security's problem is, please use this link to a pdf file. It may take a minute to open, but it is well worth the wait.
For those who want a more detailed explanation on Social Security, this file contains links to several different files containing detail information.
In 1937 Social Security began collecting a 2% payroll tax up to $3,000 of wages. For this 2% payroll tax, a 21 year old making $25 a week would be paid $53 a month at age 65 (roughly 49% of wages).If the worker died prior to age 65, the workers family would be paid 3.5% of total wages subjected to the Social Security Tax. This death benefit was 75% larger than the amount paid in taxes. http://www.ssa.gov/history/ssb36.html
Using life tables, I calculated the actuarial social security tax rate needed based on age 21, to be paid the average benefit. http://justsayno.50megs.com/charts/actuarial_pay-go_tax_age-21.GIF Included in this graph is the actual Social Security tax rate and the calculated Pay-Go tax rate needed.
The actual social security tax can be found at http://www.ssa.gov/OACT/ProgData/oasdiRates.html
The pay-go tax rate is based on paying social security benefit using the current formula http://www.ssa.gov/OACT/COLA/Benefits.html and population of the United States.
A similar graph is shown for a person at age 45 who begins paying social security taxes. In 1937 all workers paid the same tax rate, though not all workers would pay the same number of years. http://justsayno.50megs.com/charts/actuarial_pay-go_tax_age-45.gif
The original Social Security Act had legislated automatic tax increases of 1 percent every three years when in 1949 the tax would be 6 percent. http://justsayno.50megs.com/charts/initial_tax.GIF The problem is the tax rate was too low for over 30 years while full benefits were being paid.
Much has been said about the worker to beneficiary ratio, but there is much not said as well. This chart identifies the total number of individuals age 65 and over as well as the number of beneficiaries by year. When Social Security began, many of those age 65 and over had already stopped working. It would take about 35 to 40 years to have a full compliment of beneficiaries across all ages. http://justsayno.50megs.com/charts/age_65_beneficiary_population.GIF
There is only one ratio that should have been used in designing social security and that was the worker to retiree ratio and not the worker to beneficiary ratio. http://justsayno.50megs.com/charts/beneficiary_ratio.GIF
This chart shows the total potential workers age 21 through 64.Keep in mind few women worked outside the home. The trend line for potential workers to potential retirees has been decreasing for a long time.http://justsayno.50megs.com/charts/potential_workers_to_retiree.GIF
In the early part of the 1950's, Social Security ran into problems, in fact the very same one we are debating how to solve today. To solve the problem then, congress raised the tax http://justsayno.50megs.com/charts/social_security_tax.GIF and they raised the base http://justsayno.50megs.com/charts/base.GIF In addition they required non covered work groups to contribute into Social Security. This did two things: First it provided a short term revenue increase, second it created a huge unfunded liability.
The social security benefit up till 1977 was dictated by congressional legislation on a yearly basis. This was a political football. In 1977 congress left the determination of the social security benefit to a formula. This formula indexed previous year's wages by the change in the US Average Wage. This was done so that each retiring cohort at age 60 was given the same benefit as a percentage of average indexed wages (exact same buying power as a percentage of the standard of living at age 60). In the early 70's Cost of Living Legislation was passed which indexed benefits by inflation. This chart shows the average Social Security Old Age benefit by year. http://justsayno.50megs.com/charts/oasi_benefits.GIF
Life expectancy has increased, but far less than most realize. The Social Security Administration has Period Cohort Life Tables starting in 1900 through 2000 in ten year increments. These tables are a snap shot of how long people can expect to live at any given age for a specific birth cohort. When we look at the combined life expectancy of men and women we see three specific events that few realize. http://www.ssa.gov/OACT/NOTES/as116/as116LOT.html
A baby born in 1900 had a life expectancy at age zero of 54.9 years. However, just one year later, the life expectancy has increased for this person to 63.3 years. This is a jump of over 8 years. The reason was a high infant mortality rate. The life expectancy for a 16 year old was 69.3 years. http://justsayno.50megs.com/charts/life_expectancy_0-1-16.GIF
The rate of increase in life expectancy peaked in 1920. Since then the rate of growth in life expectancy has been decreasing. http://justsayno.50megs.com/charts/life_expectancy_rate_of_change.GIF
Life expectancy at age 65 since 1900 has increased six years over 100 years. A baby born in 2005 can expect to live 19 days longer than a baby born in 2004 at age 65. This is an increase of just 0.27%. Inflation at 2.5% a year is over eight times greater in magnitude in just one year than increased life expectancy. Compound this by 22 years and the conclusion is in escapable: Increased Life Expectancy is not the problem behind Social Security. http://justsayno.50megs.com/charts/life_expectancy_ 65.GIF
The life expectancy to use is that when a person is eligible for benefits, not birth. Life expectancy at age 65 provides a good indication of the number of years benefits will have to be paid and the number of people who potentially will be eligible for them. Life expectancy for those between age 20 and 65 provides the information needed to fund those benefits so that a tax rate is applied that is fair. A fair tax rate is one which requires those who receive benefits within a cohort to pay for those benefits without help from another cohort.
In 1937 we had a full compliment of workers, but there were no beneficiaries. Benefits began in 1940. It would take 35 years to obtain a full compliment of beneficiary cohorts. Today we have a full compliment of beneficiary cohorts and a full compliment of workers and a unfunded program. We are in a much more difficult position today than in 1937.
