Introduction to Social Security

To hear the lecture, click here.

Largest single category of Federal outlays.

• 2 percent of Federal spending in 1950
• 20 percent of Federal spending in 2000
• Baby Boom still to come (born 1946-1964, retire 2012-2032)

For most Americans, Social Security tax is largest tax that they pay

Employer's payroll tax falls on workers

Social Security is not a Pension Plan

Types of Pension Plans

Lump Sum vs. Insured Annuity (explain insured annuity)

Defined Contribution vs. Defined Benefit

Risks of defined benefit plans: investment risk, actuarial risk; role of reserves

Social Security: insured annuity, defined benefit plan, without reserves. Transfer program from worker to retirees

Key ratio: number of workers per retiree

• 1950 in the U.S., more than 6 workers per retiree
• in 2000, about 4.7 workers per retiree; by 2025, fewer than 3 workers per retiree
• stays low thereafter

For Japan and Western Europe, crisis begins sooner and goes deeper.

• fewer than 3 workers per retiree today
• fewer than 2 workers per retiree by 2035