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Social Security Lecture.pdf

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Boston University
CAS EC 102
Jay Zagorsky

Syria article efforts to ease siege in Syria Social Security Lecture Friday, January 24, 2014 11:59 PM - 4 largest governmentcosts ○ Defense ○ Healthcare ○ Debt ○ Social Security - MPC and MPS ○ What percentage of the money that you earn should be spent and saved?  Economicterms: What is optimal MPC and MPS out of income? ○ Where is money going to come from during retirement? - Social Security ○ A federal pension program financed by taxes on worker's pay  Currently 15.3%of your pay 12.4% to pension programs and 2.9% to retiree health program called Medicare)  Half paid by employee  Half paid by employer  Tax only applies on income up to $113,700  Pension program is a defined benefit plan ○ Social security is a big government program  Recipients were paid $820billion in a year - One key idea ○ You must adjust for population  Population is a key issue because for many economicand business variables it is not the total amount that matters, but instead the amount per person - Social security per person ○ 55 million people get checks each year from the retirementportion of the program  What percent of US population is this? □ 80% of people getting checks are retired workers □ 20% of people are spouses, children of dead retirees  Typical beneficiary got $1,100per month ○ Social security is more than 1/5th of US gov't spending - Social security is important ○ Human longevity is rising ○ In US, a person expects to live 76/81 ○ US is a country that focuses on spending not savings ○ The survey of Consumer Finances shows about 44% of all families did not save in the past year ○ Some employerspay a high salary to avoid social security taxes; leads to longer hours and heavier work load  Other benefits such as health plan, dental plan, etc. - How do you get benefits? ○ Rules are complicated and lots of special cases ○ If you earn slightly more than $1,000in 3 months, social security coversyou - 2 Types of Pensions ○ Defined Benefit Plans (DB)  Single pool of money for all past and current workers at a company  Company:If pool's investmentsdo well company does not need to contribute any money. If investmentsdo poorly company owes extra money  Worker: Puts portion of salary into pool, no matter how investmentsare doing. When worker retires they get a fixed income based on the number of years they worked and the amount they were paid in their last few years at work the amount they were paid in their last few years at work □ In a DB plan, company shoulders all risk, while the workers shoulder none  Stay at one company for a long time  Dislike risk or uncertainty  Expect to live a long time, no chance of retirementrunning out ○ Defined Contribution Plans (DC)  Each worker has a separate pool of money managed individually for that worker  Company:Puts money into each person's individual pool each time period. Investmentsreturns do not influence the amount  Worker:Allowed to select type of investment(stocks,bonds, etc.) □ In a DC plan, workers should
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