Structure of Social Security Basic Components Explicit transfers Supplemental Security Income(Ssi)was enacted in 1972, and is administered by the Social Security Administration More accurately viewed as a welfare program rather than social insurance
11 Structure of Social Security: Basic Components • Explicit transfers – Supplemental Security Income (SSI) was enacted in 1972, and is administered by the Social Security Administration. – More accurately viewed as a welfare program rather than social insurance
Structure of Social Security Basic Components · Benefit structure Average Indexed Monthly Earnings-are an individual's average wages throughout their working life Adjusted for inflation Wages up to a ceiling Only highest 3 5 years of earnings 12
12 Structure of Social Security: Basic Components • Benefit Structure – Average Indexed Monthly Earnings – are an individual’s average wages throughout their working life. • Adjusted for inflation • Wages up to a ceiling • Only highest 35 years of earnings
Structure of Social Security Basic Components Only highest 35 years of earnings count toward AIME Consider a person with a typical"age earnings profile who starts work at age 22 and retires at 67 and therefore has 45 years of full-time work Likely that the Social Security taxes paid from ages 22-32 will not matter for AMME 13
13 Structure of Social Security: Basic Components • Only highest 35 years of earnings count toward AIME. • Consider a person with a typical “ageearnings” profile, who starts work at age 22 and retires at 67, and therefore has 45 years of full-time work. • Likely that the Social Security taxes paid from ages 22-32 will not matter for AIME
Structure of Social Security Basic Components · Benefit structure Convert AIME into Primary Insurance Amount(PlA)-basic benefit payable to a work who retires at the "normal retirement age Benefit schedule is progressive, where lower earners receive a higher proportion of previous earnings 14
14 Structure of Social Security: Basic Components • Benefit Structure – Convert AIME into Primary Insurance Amount (PIA) – basic benefit payable to a work who retires at the “normal retirement age.” – Benefit schedule is progressive, where lowerearners receive a higher proportion of previous earnings
Example of Benefit Calculation (using 2004 rules Average ame Maximum ame $2,774 $5,892 PIA formula 90 percent of the first S612 of AIME 550.80 55080 32 percent of AIME over 691.84 984.64 $612 and through $3, 689 15 percent of AlM over $3689 0.00 330.45 1,24264 1,86589 PIA 1,24260 86580
Example of Benefit Calculation (using 2004 rules) Average AIME Maximum AIME $2,774 $5,892 PIA formula 90 percent of the first $612 of AIME $550.80 $550.80 32 percent of AIME over $612 and through $3,689 691.84 984.64 15 percent of AIME over $3,689 0.00 330.45 Total 1,242.64 1,865.89 PIA 1,242.60 1,865.80