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Pensions in the U.S. - The Role of Social Security
A Brief Overview
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Bismarck & Beveridge Club - Budapest
Presentation by
Martin B. Tracy, Ph.D.
Social Insurance Research International
1519 Canterbury Drive
Murray, Kentucky 42071-3250
USA
7 May 2007
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Historic Context
Social Security pensions in the United States clearly play a significant role in the redistribution of income within a framework of individual equity and social adequacy.
What is the historical context for this role?
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Committee on Economic Security
When President Roosevelt created the CES in 1934, he appointed a group of Wisconsin economists lead by Edwin Witte to develop the principles on which social security was to be based.
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Committee on Economic Security
Influence of programs in other nations, as reflected in 4 reports prepared for the CES:– Financial History of the Worker’s Invalidity, Old
Age and Survivor’s Insurance of Germany – British Old Age Pensions and Old Age Insurance– Report on Canadian System– Old Age Pension Statistics by Wilbur J. Cohen
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Wilbur J. Cohen
Special mention because of his influence in research and in understanding international policies, including conventions of the International Labour Conference, as well as principles of Bismarck and Beveridge
Instrumental in adding provisions to the SS Act to mandate continuing study of programs abroad
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Major Principles Adapted to US Culture & Political Realities
1. Universal coverage
2. Compulsory coverage
3. An earned right to benefits/pensions
4. A contributory and self-financed system
5. Wage related contributions
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Major Principles Continued
6. Old-age pensions that are not means-tested
7. A pension formula that redistributes contributions from higher paid to lower paid workers
8. Pensions protected against inflation
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Opposing Distributional Measures
Opposite distributional measures reflect different perspectives as to purposes of SS:
Individual equity (a fair return on contributions)
Social adequacy (reduce dependency and poverty)
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Individual Equity
Pensions based on a worker’s age and employment that are paid without regard to need
Pension formula that pays higher benefits to workers with higher earnings (a fair return on contributions)
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Social Adequacy
A basic pension amount that favors lower paid workers – higher replacement rate for lower income workers
Favors workers with dependent spouses & children
Favors workers who are less healthy or who die before retirement
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Progressive Formula
Progressive formula for calculating pensions gives a greater percentage of pre-retirement income to lower wage earner
For first dollar of average lifetime income, pension beneficiaries receive $0.90. At higher incomes, a $1 increase in average lifetime income adds only $0.15 to annual pension
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Progressive Formula & Women
Under the pension formula women pay 39% of social security payroll taxes and receive 50% of social security pensions
For the median income woman retiree, social security replaces about 54% of average lifetime earnings, compared to 41% for the median male
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Higher Risk for Women
Despite the advantages, women are at higher risk of poverty because of lower earnings, longer lives, and divorce when the marriage terminates before ten years
Married women are better off economically. Poverty rate for unmarried women is 4 times
as high as it is for married women
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Policy Issues
Lack of understanding– Many still believe that social security is an
individual private savings account– Often perpetuated by politicians favoring
privatization– Little promotion of role of social security as an
instrument of social adequacy, social solidarity, social cohesion, or social capital
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Privatization
Debate between equity and adequacy has been intensified by recent proposals to partially privatize social security
Such proposals have led to efforts by opposing groups to document the importance of the role of social security pensions in the distribution of income and in promoting social adequacy
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Sources of Income
88% of persons 65+ receive social security 52% - interest income 31% - private pension 18% - earnings 8% - rents, royalties, estates, or trusts 3% - Supplementary Security Income
(welfare)
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Distribution by Median Income
For median income persons 65+, social security is 67% of income
For age 75+ - 77% Non-married women – 84% African-American – 82% Hispanic – 84%
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Majority of Income for Elderly
One-third of 65+ depend on social security for 90% or more of their income, especially low-income women and minorities
Sixty-five percent depend on social security for 50% or more of their income
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Distribution to Lower Income Groups
Over 87% of income for 65+ with personal income under $10,000 is from social security
76% of income for persons with income between $10,000 and $20,000
20% of income for $50,000 to $75,000 9.6% of income over $75,000
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Social Security and Poverty Rates
Without social security, 47% of Americans age 65+ would have income below the poverty line.
The poverty rate for white women would more than double
13 million Americans are kept out of poverty by social security
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Rural Communities
People in rural communities rely on social security nearly twice as much as non-rural communities
Rural communities have a higher percentage of elderly persons, particularly women who are widowed or disabled
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Rural Communities Continued
90% of communities with an elderly population of 20% or more are in rural areas
13% of rural elderly live in poverty compared to 9% in metropolitan areas
The state with the highest reliance on social security is the rural state of Arkansas with 77% for 65+ and 86% for 75+
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Economic Benefit
Social security pensions are the economic lifeblood of rural communities, as small businesses depend on the purchasing power of the elderly
They are also the lifeblood of businesses in many low-income urban neighborhoods
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Summary
Social Security pensions are critical for a majority of persons age 65 and over, especially women, minorities, and persons living in rural areas and low-income neighborhoods
Social Security pensions have been an effective instrument in redistributing income in the context of social adequacy, while maintaining the principle of individual equity