Social Security Be Voluntary - Research Paper Example

? Social security should be voluntary Social security should be voluntary Introduction Social security refers to health and social insurance programs and benefits that were introduced in the United States since 19351. Social security offers various benefits like retirement income, medical insurance such as Medicare, Medicaid and death and survivorship benefits to the dependants of those covered by the programs. The programs were introduced by Roosevelt’s administration in order to curb the negative impacts of Great Depression on the US citizens and economy2. Social security is the largest federal program in the world and accounts for more then $ 3 trillion of federal budget. Social security is an entitlement program whereby the Congress can make changes to the benefits and eligibility of workers thus workers paying in to the social security system do not necessarily have right to receive any guaranteed benefits at the end of retirement3. Currently, billions of US dollars are spend in financing the programs through deductions on payrolls of employees and government expenditure. The social security programs also cover the unemployed and those incapable of getting employment due to disability and other disadvantages. There is an intense debate on whether social security should be a required or voluntary due to the mandatory payroll deductions and the high government tax revenues that are spend in financing the programs4. Social security is a major political issue that has attracted strong opinions across the US demographic segments. Proponents of social security maintain that it should be required while opponents of the system assert that it should be voluntary5. The debate of social security is centered on various major philosophical arguments such as the right of ownership and choice of private investment alternatives that will guarantee personal retirement income. In addition, another controversial argument that surrounds the social security is the right of the government to collect payroll taxes and finances social security and importance of wealth redistribution in the society. Accordingly, intergenerational rights such as right of those living today and the ability to impose financial burden to future generations is also a topic of intense debate in determining whether it should be required or voluntary6. Some people argue that social security is a charitable safety net while others hold that it is an earned benefit program. The other controversial debate attached to the topic is the trade-off between private wealth creation and social insurance. Thesis statement: social security should be voluntary. Opponents of social security assert that it should be voluntary since Americans will not be capable of sustaining the needs of the social security system in the future and the growing middle class should have the freedom to invest for their retirement7. Middle-income individuals pay a high proportion of their income to the program in order to secure their retirement thus hindering any opportunities for making personal viable savings and investments. Since the social security systems does not create any meaningful wealth, the benefits that individuals get after retirement are just financed by the current tax payers thus making the social security system unsustainable8. For instance, Medicare and social security accounted for 38 percent of the federal spending in 2012 fiscal year and estimates point out that the current federal spending on the programs will exceed the federal GDP growth by 2030. Accordingly, the US is currently experiencing low employment rate and increasingly aging population, thus the projected collections from employment will be less than the high spending that will be caused by the high number of aged individual. Accounting to the 2013 edition of the annual trustee’s reports of Medicare and Social security, the reports indicate that the trust funds must be abolished. The report indicates that 2012 Medicare benefits and social security totaled $ 1.323 trillion, but at the Medicare premiums, payroll taxes and other related fees totaled $ 920 billion thus leading to a deficit of $ 403 billion. Social security had a deficit of $ 160 billion while Medicare had a deficit of $ 243 thus meaning that the Treasury had to finance the deficit. Surprisingly, the deficit represents about 37 percent of the overall federal deficit thus implying that social security is doing more harm to the overall growth of the US economy. Indeed, all actuaries agree that all contributions such as Medicare fees, payroll taxes and other fees will have to increase in order to meet the high deficit in the future or squeezing some programs and even cutting the social security benefits9. Social security should be made voluntary because private investments guarantee freedom and liberty. Through controlling the amount of money that individuals will earn at their retirement amounts to controlling their liberty and life. Citizens have no opportunity of controlling the 12.4 percent of the deductions from their salaries. Accordingly, social security is unconstitutional since no any constitutional provision that mandates the government to confiscate money from the working employees in order to distribute it back upon retirement. Although the 16th amendment grants the federal government the rights to collect income taxes, it does not provide for the collection of retirement contributions on top of the real income taxes. Social security deductions are responsible for the lack of savings and investments when people retire from employment10. In addition, going by private investment returns in the financial market, it is imprudent to pay 12.4 percent of your entire employment life income and expect a return of 10 percent upon retirement. Although some people may argue that employees only contribute 6.2 percent of their payroll taxes, this is ridiculous since employers are forced to make a contribution of 6.2 percent thus denying the employee money that could be aggregated in their salary11. The opponents of the social security still argue that the current system lacks a sound rationale of transferring the payments since older workers have more wealth and higher incomes than the younger employees12. Accordingly, the system distorts the connection between working and compensation since workers are in some cases paying money to non-working people. In addition, the social security benefits are paid to all citizens including those, individuals who never raised any children thus regarding the sacrifices that individuals made in raising the children13. It can be termed as a system whereby children are accruing the long term debt to their payments since the youthful workers are just paying money to their payments in return for the benefits and sacrifices the parents made in educating the youth14. There are other alternative retirement plans that are sound and popular among the US workers. Retirement plans like 401 (k) plans, thrift plans and IRAs offer sound investment opportunity for retirement funds. These plans enable workers to save and make individual decisions pertaining their retirement through providing flexibility on the rate of return and risk level that the worker would be willing to bear. Numerous private companies and qualified professionals are capable of guiding the workers on the sound investment opportunities depending on the economic changes and investors preference. In addition, workers can invest their funds in the stock exchange market, bond markets, and money market funds since this investments offer a higher rate of return than the social security programs15. Self-funding plans also address the solvency problem associated with social security programs since there is no need of replacing the underfunded benefits to be earned in the future. Accordingly, the private retirement funds eliminate the transition costs since individual funds are put in personal accounts and purchase assets at the prevailing market prices. In this regard, the transition costs associated with social security programs emanate from the reason that the social security was never funded from the private pension plans16. In addition, the long term returns in the stock market are not risky as portrayed by the federal government since long term returns of stocks in the market has exceed the social security internal rate of return on the contributions made by an individual. Similarly, treasury bonds provide more guarantee source of retirement income due to the legal obligations of the government to finance the repayment of interest and principal on the bonds at the maturity periods. Statistics point out that contributions from 17 workers were used to pay just one retiree in 1935, but the estimated ratio of contributors to beneficiaries will be 2:1 in 2035 due to estimated 40 million baby boomers who will be receiving benefits by 2035. However, those opposed to making the programs voluntary argue that privatization will substantially reduced the benefits by more than 40 percent by 203517. The opponents of the current mandatory social security program assert that it lacks contractual rights and agreements. The Congress has the right to change the eligibility requirements and amendment the benefits notwithstanding the worker’s contribution. They point out the Supreme Court decision of the case of Flemming v. Nestor (1960), whereby the court concluded that retiring legal immigrant who was eligible for the social security benefits and had contributed in to the program for 19 years could be denied the benefits after being deported for claims of being a member of the Communist party. Accordingly, middle-income workers born in 1964 expect less than 3 percent rate of return in the current social security system while the returns of S & P 500 investments have averaged about 8 percent since 1926. This is a clear example that mandatory social security hinders wealth creation at the expense of a social insurance that does not generate adequate return to the contributors18. Opponents of social security assert that is must be voluntary since the current social security programs are based on falsehoods and misleading statements. The social-Fascist propaganda that created the social security programs also led to Ponzi-Schemes that led to high bankruptcy and poverty among the contributors. The designers of the social security perceived Americans as ignorant and lazy when it relates to preparing for eventual retirement and without any knowledge of viable investment opportunities in the market19. Proponents of required (mandatory ) social security assert that it should be required and mandatory to all working citizens. They argue that life is full of uncertainties and does not turn out as people plan. In this regard, social security is like an insurance program that offers safety net that keep the working citizens safeguarded from possibility of poverty. They assert that social security extends to other benefits such as disability benefits since more than 7 million disabled workers including their children and spouses have benefited from the programs. Accordingly, close to 2 million families of deceased workers are enjoying social security benefits thus enabling children to complete their college education20. Previous estimates suggest that more than 13 million senior citizens would be living below the poverty level if they had no social security benefits. Conservatives argue that social security should be required since it leads to redistribution of income in the society which is not possible in a free market economy21. According to liberals, the US federal government has the obligation to guarantee the social security and insurance of the citizens thus it should be required. In addition, the programs provide more than half of the income that is available o retired workers thus helping to close the poverty gap in the society22. Another argument put across by those in favor of a mandatory social security program such as liberals is that privatizing the programs will never address the long-term funding challenges experienced by the schemes. In this regard, funding private accounts would lead to higher deficits. Accordingly, making the social security voluntary is akin to converting the defined benefits to defined contribution plans thus making the ultimate retirement payout subject to fluctuations of stock and bond prices23. In addition, social security payout are indexed to wages thus protecting the beneficiaries from inflation since wage growth rates have historically outpaced the inflation rates in the economy. In this regard, private retirement plans will faced challenges in protecting the contributors from loss in value of payouts due to increase in inflation in the market24. Making the social insurance voluntary will provide Wall Street financial institutions the opportunity to exploit the workers through imposing higher management fees and diverting the funds to more risky investments due to greedy of making higher profits. The recent economic downturn and financial crisis acted as a testimony on how citizens can suffer in case of stock market crash and decline in bond returns in a scenario whereby social security is voluntary25. . Another argument that has been put across by those opposed to mandatory social security system is that the current system has attained its original objectives of making life longer. The designers of the current system desired to raise the life expectancy. Statistics point out that there were less than 6 million citizens aged 65 years in 1935 as opposed to current demographic composition of the US population. At the inception of the system, the life expectancy was about 62 years as opposed to the current life expectancy of around 77 years. In this regard, it is important to offer retirement benefits at the age of 65 years in order to increase the life expectancy in the society26. Those in favor of a mandatory system argue that private accounts would remove certain essential social protections such as benefits to survivor’s and disability benefits. In this case, setting up private accounts will also be costly since upfront costs such as advisory costs to individual workers and transaction costs of setting up private accounts would exceed any returns and benefits that have accrued under the system27. The transfer of the funds to decentralized system of private investment accounts will create a complex investment scenario since individual investors who diversified opinions, preferences and expectations thus ultimately leading to mismanagement of the private retirement investment accounts. A case scenario is the private retirement accounts of UK in 1988 whereby marketing costs and management costs accounted for almost 45 percent of the return on investment. In addition, such system will create higher social security funding gaps and inequalities since high-income earners will receive higher yields than low-income workers28. Conclusion Social security should be voluntary since it discourages savings on the part of the workers and the programs are not self-funding. Accordingly, the payroll taxes discourage employers from offering higher salaries and employing more workers. The programs are likely to stagnate if the contributions are not increased or benefits reduced due to the current demographic changes that have witnessed a high number of aging population and low birth rates. Social security enriches the elderly at the expense of youthful workers and privileges the high-income earners thus leaving the middle class with low income to make private savings and investments. The programs ignore risk differences across the population unlike alternative private insurance plans that account for the risks. Making the current social security system voluntary and putting the funds in individual investment accounts will boost the economic activity in the financial system thus generating higher returns and eliminate the transaction costs since the annual growth rate in the investment will offset the management costs. Accordingly, making the system voluntary will reduce government spending and eliminate bureaucracies that are associated with accessing the retirement benefits. Many US citizens are aware of the viable retirement investment opportunities in the market and can make sound retirement plans that will ensure smooth life after leaving employment. Bibliography: Blahous, Charles. Social security: the unfinished work. Stanford: Hoover Institute Press. 2010. Dixon, John. The marketization of social security. Westport, CT: Quorum Books. 2001. P 201. Feldstein, Martin. Privatizing social security. Chicago: University of Chicago Press. 1998. Livingston, Steven. U.S social security: a reference handbook. Santa Barbara: ABC-CLIO. 2008. Mitchell, Olivia. Prospects for social security reform. Philadelphia: University of Philadelphia Press. 1999. Tanner, Michael. Social security and its discontents: perspectives on choice. Washington, DC: Cato Institute. 2004. P 311. Turner, John. Individual accounts for social security reform: international perspectives on the U.S debate. Westport, CT: Upjohn Institute of Employment research. 2005. P 139. Read More