This webpage covers the Retirement portion of Social Security known as OASI
Old Age, Survivors Insurance
Old Age, Survivors Insurance
Analysis of Program
· Entitlement and redistribution of income
· Trust Fund and sustainability of program
· Comparison to private industry plans
· Seniors and poverty
Social Security Reform
It’s an entitlement, but ….
Every American can participate in the OASI program and in fact must participate by paying payroll taxes if they have a job or are self-employed. But benefits are only paid to Americans that work enough to qualify for them or be a spouse of someone who did. Once qualified for benefits low-income workers have their pensions enhanced at the expense of the high-income workers. It is estimated that 65% of the retirement benefits to low-income workers are based on the money collected from the worker and 35% is from income redistribution. More
Deficit Eats up Trust Fund
All the payroll taxes made to the OASI program are deposited in the OASI Trust Fund. Benefit payments are made from the same Trust Fund. The fund had a positive balance of about $2.3 trillion as of December 31, 2009, but this has turned out to be for accounting purposes only. The fund balance has been loaned out to the federal government and used over the years in the general budget. Today the federal government is about $14 trillion dollars in debt. Repayment of the Trust Fund is the greatest risk facing Social Security today.
Seniors and poverty
Percent of U.S. population in Poverty
One of the main goals of the OASI program is to protect the economic health of retired Americans. The program has been successful in this regard. There are fewer senior citizens in poverty than younger adults or children. Senior citizens that are in poverty generally did not participate in the OASI program because they did not work long enough to qualify for an adequate pension.
Is OASI Sustainable?
Assuming the Trust Fund is repaid from the general budget, the OASI program parameters still need to be adjusted for the program to be sustainable. The trustees estimate that a combination of retirement benefit reductions of 12% or payroll tax increases of 15% is necessary to keep the fund sustainable for the next 75 years. This is often referred to as the unfunded liabilities and is estimated to be $16 trillion. More
Is the OASI program comparable to private industry plans?
This is an “apples and oranges” comparison but here is an approximation. Low-income retirees get a good deal based on the redistribution of income aspect of OASI as described above. The reverse is true for high- income retirees. How about those in the middle? Such a worker would get an annual investment return, or interest rate, of about 4% using payroll taxes as contributions and the pension payout assuming the worker lived to the 78-year-life expectancy. This is comparable to a market rate for an investment with very low risk. More.
Description of Program
· Payroll Tax
· Mandatory program
· Retirement Formula
· 10 year minimum
OASI Program Summary
The OASI portion of the Social Security Program is a mandatory retirement and survivors insurance program for all Americans. Every worker pays payroll taxes into the program over their entire working career. At retirement age the program begins payments of monthly retirement checks based on the amount contributed over the workers’ highest 35 years of contributions. If the retiree has a nonworking, retired spouse the retirement income is raised by 50%. Upon the workers death a non working, surviving spouse continues to receive the workers retirement benefit until the spouse dies. Children of the retired worker can also qualify for benefits.
OASI was created 75 years ago as a mandatory retirement program to help provide all Americans a minimum level of retirement income. The goal of the program was to provide stable income and reduce the poverty level of the senior population of America. It also was meant to protect the government and fellow citizens from having to provide for those senior citizens that failed to adequately provide for their own retirement security.
OASI is tailored to each American
The OASI program collects payroll taxes from all American workers over their entire working career. These records are kept by the Social Security Administration and form the basis for retirement benefit calculations specific to each individual.
Is OASI a retirement program or an insurance program?
Both – Everyone contributes toward their own retirement income. But the program is also set up like an annuity whereby the retired worker and their spouse get a payment for as long as they live. The current life expectancy for an American is 78 years. Some Americans will die early and get few benefit checks while others will live long and get many checks.
Payroll Tax / Contribution
Payroll taxes to the OASI program are made by all workers and self-employed individuals. The tax totals 5.3% of wages from the employee and an additional 5.3% from the employer. This same combined rate of 10.6% is paid on earnings from self-employed individuals. Wages or self-employment income up to $106,800 in annual earnings are subject to the tax. If you believe the program will repay you a reasonable rate of return in your retirement years than the tax is really a contribution – if not it’s just a tax.
Must pay in to receive a payout
The only way for a worker to receive retirement income from OASI is for them to work a minimum of 10 years. Even with this qualification the retirement formula averages these earnings over a 35 year period and the pension amount is dramatically reduced. To receive the full program benefits a worker must contribute to the program for 35 years.
Determination of retirement income – the formula
The formula to determine retirement income is quite complex and not very intuitive. The first portion of the formula selects the highest 35 years of an individual’s historic earnings which have been subject to payroll taxes. These earnings are then adjusted for inflation to state them in current day dollars. The total is then divided by 420 months to come up with the average indexed monthly earnings (AIME) over a 35 year period. AIME is then applied to a three tiered formula to arrive at the primary insurance amount or PIA. This PIA becomes an individual’s retirement income which is adjusted over future years for inflation. More