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Detail Outline for Exam 7 – 2007 Part C - page 19 / 28





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Rejda, "Financing the Social Security Program," Social Insurance & Economic SecuritySK (1999)

Disadvantage 2) Higher-yielding private securities have greater risk.

Disadvantage 3) Investing in social goods should require decisions from Congress, not trust fund managers.

Disadvantage 4) Potentially higher returns must be weighted against the disadvantage of govt being involved in the private sector.

Erroneous Trust Fund Views

Double Taxation – there is a view that people are being taxed twice: once on payroll taxes, and again when the govt pays interest to itself on the invested excess funds.  However, if the trust funds didn’t exist, the govt would still need to borrow from other sources, and taxes would still need to be raised to pay the interest.

Fictitious Trust Funds – the securities held by the trust funds are not merely IOUs.  Rather, the trust funds receive securities as evidence of the loans the Treasury is borrowing from them.

Increase in National Debt – trust fund investments in federal obligations do not increase the size of the natl debt.

Concepts of Actuarial Soundness

Deficit for Present Members – actuarially sound if existing funds plus PV of future contributions from present members are sufficient to pay future benefits to those on the rolls (and to their survivors), to present active members, and to survivors of previously deceased members who have not reached the minimum age yet.  Under this definition, SS is not actuarially sound, but it is not in jeopardy because:

1) Social insurance and private insurance are noncomparable.

2) Since OASDI will operate indefinitely, we must also consider both the benefits for future entrants and their contributions.

3) OASDI is compulsory, so tax contributions are guaranteed.

4) It is wrong to consider just this closed group.

Pay-As-You-Go Financing – implies annual receipts and annual disbursement are approximately equal.  It is actuarially sound if the income from future contributions is approximately = the estimated future disbursements year by year over long-range future.

Financial Condition of OASDI and Medicare

Financing the Trust Funds

OASDI: OASI Trust fund pays retirement & survivor benefits; DI Trust fund pays benefits for disabled workers.

Medicare: HI Trust Fund pays for in-patient care; SMI Trust Fund pays for physician/outpatient services for 65/older plus workers disabled for at least 2 years.

Trust Fund Results in 1997 – non-interesting stats.

Paying for OASDI and Medicare – same as covered above – except with stats.

Administrative Expenses – these are low: 0.7% to 3.0%.

Estimating the Trust Fund Balances – short-range (10-yr) and long-range (75-yr) estimates.

Estimates based on economic growth, wage growth, inflation, unemployment, fertility, immigration, mortality, disability incidence, cost of hospital & medical services.

They do 3 estimates: low-cost (I), intermediate (II) and high-cost (III).  Number II is the best estimate.

Short-Range Financial Outlook (1998-2007)

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