Social Security Membership Should Be Optional - Essay Example

Social Security Membership Should Be Optional Informative Social Security has been an integral part of the American welfare structure for many decades now. That is not to say however that is services and financial support of the American people who are members of the system has been above excellent. Rather, the company has always experienced problems with collecting and manipulating its funds for the benefits that its members are receiving. Although the intention of the system if good, the method by which it is implemented leaves plenty to be desired. Today, the social security is known to be on the verge of bankruptcy and the politicians have acknowledged that it is a big problem that needs restructuring in order to repair the broken system. It was Republican senator Marco Rubio who said that “But heres what I would tell people of my generation. I turn 40 this year. There isnt going to be a Social Security. There isnt going to be a Medicare when you retire. Forget about what your benefit is going to look like. There isnt going to be one if we dont make some reforms to save that program now.” It is this understanding that has led many leaders to believe that in order to survive, social security must be turned into an optional program for it members rather than mandatory. This case study shall be written in terms of someone who has had previous experience with the inner working of social security, yet through provide suggested solutions to the problem based upon the feelings, understanding, and needs of the members of the system. It shall thoroughly present the situation of the company and confidently describe the future of social security if changes are not made to the program immediately. iii Table of Contents 1. Introduction 2. History of Social Security 3. Why We Need Social Security 4. Problems With Social Security 5. Why Opting Out Should be an Option 6. Benefits of Opting Out 7. Conclusion iv 1 Introduction Social Security is something that employed people from all walks of life look forward to collecting once they reach the mandatory age of retirement. It is like a forced savings account that everyone is forced to participate in so that they can have some sort of financial nest egg once they become too old to work. That is the main concept behind the existence of Social Security. Although the system had a very premise for being brought into existence by then President Roosevelt, the system was mishandled and its programs ended up being mismanaged over an extended period of time. This led to the financial disarray and incapacity of the system to truly answer to the needs for which it was first created. However, that is not to say that the problems in the system cannot be fixed. But the solutions may be difficult to implement so other options to social security should be looked into by present and future members. That is why it is important for everyone to understand the history of the system, what problems beset it, and the possible options for those who may not wish to become a part of the social security system. I hope to be able to present all of the pertinent information within the next pages in order to help the over 30 generation understand and decide upon what kind of retirement future they truly wish to have, a government mandated one, or a retirement program that they are fully in charge of. History of Social Security The Social Security Administration was created by an act of the president. President Roosevelt signed the Social Security Act in 1935 in answer to the growing 2 needs of the elderly population of the nation that worked in the commerce and industry fields. By 1937, the Federal Insurance Contribution Act was implemented. This law forced the workers to contribute in order to support the financial needs of the system. By 1950, the system had expanded to cover disability, dependents, survivors, and jobs outside of the commerce and industry field. The contributions to the system were steady and flowing smoothly for decades so that nobody thought that the system would ever incur any problems. In fact, in 1977, the system was thought to be actuarially sound (“History of Social Security”). It is important to note though, that this was also the point in time when social security first showed its vulnerability to miscalculations as they had to correct a benefit formula that was used to pay out a retirement windfall during that year. The financial instability of the system came to the forefront in 1983 with the creation of the National Security on Social Reform in order to address the financial problems of the system. The committee failed to address the financial problem of the system so that by 1996 the Social Security Trustees report indicated that deficits would begin to pile up by the year 2012. However, as early as 1999, the system already had an unfunded liability of $19 Trillion (“History of Social Security”). Why We Need Social Security While most people believe in saving for a rainy day and having a bank account in order to draw finances from during times of need. Not everyone is capable of setting aside money for those future needs. Social security is a system by which the working public is forced to save money for their future needs. Be it a medical emergency or as a 3 pension plan for their old age. Everyone contributes to the system in order to make sure that the financial needs of their members are met. It is because of this reliability of the system that people have readily agreed to contribute in order to keep the system going since it was first established. As a form of social insurance, the system was once considered to be “... an institution whose importance transcended politics...” (Achenbaum 1). The reason for the existence of social security stems from the fact that people cannot predict their future financial lot in life. For those who are incapable of setting aside a nest egg, they will need a source of money in the future. What better way to save for such situations than by forcing people to save up for it. By placing the money in a pool and growing it, the members of the financial pool will all benefit from the collated savings at a certain point in the future (Trattner 12). Without social security, people will not have access to these forced savings when the need arises. It is because of these situations that our society saw a need to develop a social security program for the working people in our society. Problems with Social Security We would like to think that because the system has a continuous influx of money from the current crop of members, money will never be an issue. The system should be more than capable of answering for the needs of their members regardless of what the cost or final figures might be. After all, the system works in a cycle of contribution and support for the people who are an active part of the system. If you actually believe that the system is as actuarially sound as those running the department wish us to believe, 4 then you have successfully deluded yourself. The reality of the financial situation of the social security program in the United States is that the administration has under estimated the financial needs of the members “...to the tune of $800 billion by 2031, more than the current annual defense budget. “ (qtd. in Kennedy). The problem with the system is that their computation and and forecasting methods have remained the same ever since the system was founded during the Great Depression. By using outdated methods of predicting the longevity of a persons life, the system has msicalculated the amount of money that it will require in order to provide for all of the benefits that the members expect to receive prior to their retirement and once they begin to receive their pensions upon reaching the mandatory retirement age. By failing to consider the medical advancements that people receive these days, there is no doubt that there is an urgent need to rethink the formula the system uses for its actuarial studies. The medical advancements and the new medical predictors for a persons life span must now be taken into account when the computations are done so that the system can correctly respond to the predicted needs of its members. According to Montgomery (qtd. in Matthews), “... in 2010, when a sagging economy significantly reduced tax revenues, the government paid out more in Social Security benefits than it collected in payroll taxes, for the first time since 1980. “ That is why the system is expected to pay out at least $46 Bn this year in benefits. It is easy to see how the deficits happen within the system. Montgomenry further asks us to take into account that: “... the payroll tax holiday—a 2-percentage point reduction in workers’ share of the payroll tax, from 6.2 percent to 4.2 percent, passed last December—means 5 an extra $105 billion was never paid in to the system.” (qtd. in Matthews). Not to be forgotten that, in addition to the collection woes of the system, the government also continues to borrow heavily from the system collection in order to cover the budget deficits and these loans are not paid back on time or with the proper interest. That is why the system has taken on a Ponzi scheme like existence at this point. The government, in an effort to cover up for the misculations and bad loans, needs to borrow from other sources in order to pay the member benefits. Which results in a vicious cycle that has helped to rapidly deplete the collection from the members. In other words, the system is spending money faster than they can collect it. Given the current state of the system, it is safe to say that regardless of the amount of money that a person contributes to the social fund, he will never get a sufficient return on his investment. Simply because the system cannot afford to pay him back at the rate that he should expect to be paid at. That scenario will not change even if the system ups the retirement age yet again. There simply will never be enough money to give back because the increases in contribution are only sufficient to cover for the current pay outs. Why Opting Out is an Option The problem with the social security benefits being paid out at the moment is that it is not commensurate to the amount of money that the member contributed during his working lifetime. A sample calculation for the retirement benefits of an average single man working was done by Urban Institute economists Eugene Steuerle and Stephanie Rennane. They calculated that “... a single man earning the average wage in 6 his working life and retiring in 2010 at age 65 will have paid $294,000 in lifetime Social Security taxes and can expect to receive $265,000 in lifetime Social Security benefits.” (qtd. in Matthew). Such computations do not bode well for the current members of the system and will make the future members rethink their contributions as well. Although social security is not supposed to be seen as the sole source of retirement benefits of retirees (Starr, Paul “Why We Need Social Security”) , it is only fair that those who contribute to the system get a commensurate benefit for the amount they worked hard to contribute. Let us not forget that the reason that we contribute to a savings system is because of the promised earnings at the end of the investment period. That is not the same case with social security. They do not promise a regular rate of return on investment, neither do they make promises as to how much benefits one will receive upon reaching the age of retirement. Everything about the system is arbitrary in nature and therefore not conducive to long term investing / contribution. Hence the need to be able to opt out of the system. There is no way that future retirees can benefit from a program that is already facing an insurmountable budget deficit and insolvency in the near future. That is why they need to know that they have options aside from social security. Social security should not be tied to the notion of a stable retirement life. Instead, our government should work towards creating an opt-out clause for those who feel that social security membership will not prove to be beneficial to their projected financial interests of the future. 7 We must remember that there are a number of underlying reasons to opt out of the current social security system. These include the fact that (Horowitz, Daniel “Time to Opt-Out of the Social Security Ponzi Scheme”): It is clear that even after contributing over 12% of their income to SS (including the employers’ share), younger workers will not receive enough money for retirement. Even if they receive those benefits and if the current system prevails, the government will continue to violate our property rights by preventing SS contributions from unconditionally being passed onto the families of those who die before retirement. Moreover, the government will continue to tax the “benefits” of retirees who earn income, interest, and dividends with a graduated scale (yes, Social Security already is means tested). It’s time to opt out of the current system. Social security membership has been hotwired into our working system as individuals because the program has been in existence for over 75 years. However, just because a program has been traditionally thought of as the mandatory retirement plan of the governement, a government sponsored type of retirement welfare if you wish to call it that, there is nothing that states that people should stick to it. If the program is broken and not working to the full benefit of its members, then the members should have the option to leave the program. Just like any other investment account in our financial society. Benefits of Opting Out At this very moment that is a bill languishing in our congressional halls. 8 Sponsored by Congressman Pete Sessions, the SAFE Act or House Resolution 2109 offers people an alternative to the slowly dying social security government program. It is a program that gives people more control over their retirement investments and allows them to set up a tax free account that will definitely help those who collect their retirement pension in the future. The SAFE Act suggests that (Horowitz, Daniel “Time to Opt Out of the Social Security Ponzi Scheme”): very American would be able to opt out of the current system and direct the full 6.2% of payroll taxes to a personal retirement account beginning January 1, 2012.  Conversely, anyone who wishes to remain in the current system would not be affected.  An employee who chooses to opt for the SAFE account can switch back to the current system during the first five years after opting out. After 15 years of the bill’s enactment, employers would be able to contribute “their share” of payroll taxes to the employee’s SAFE account. Self-employed individuals would be able to divert the full amount of their payroll taxes to a SAFE account. The SAFE accounts would be tax free and any cash contributions would be tax deductible.   Also, all post-retirement distributions from the account would be tax free.  Any pre-retirement distributions would be taxed as income. Upon the death of the account beneficiary, irrespective of his/her age, the inheritors of the estate will be able to assume full ownership of the 9 account. We need to change our mindset from being one of a welfare state to one of a society that takes control of its individual destiny. There is a template by which social security is expected to operate. Although social security is meant to help ease the financial needs of a population desperate for government assistance, social security is not a contractual right of the people. Rather, these benefits should be expected to change over time due to the existing economic conditions, legislative priorities, and judicial wisdom (Achenbaum 1). Opting out of the system need not be a sudden and financially draining move on the part of the government. After all, we cannot ignore the fact that opting out of the social security program will have an immediate fiscal impact on the benefits of the current retirees. One method that the government can propose to those who wish to opt out of the system would be to (Matthews, Merril “The Under 30s Should Demand an Opt Out of Social Security”) : ... let the under-30s keep the 6.2 percent they contribute to Social Security while the government continues to take the 6.2 percent employer contribution.  That would still be a much better deal than the under-30s expect to get from Social Security, which is nothing. And probably a better deal than what the government promises they will get. or perhaps the government retirement benefits can be treated like a savings account in the sense that (Matthews, Merril “The Under 30s Should Demand an Opt Out of Social Security”) : 10 If that split approach isn’t feasible, the under-30s could demand a separate, personal, voluntary, tax-free retirement account where they can deposit part of their income in exchange for giving up their claim on most or all of their Social Security benefits—which they don’t think they’ll get anyway. The important concept here is to be able to provide the future retirees with a fair and baneficial method by which they can recover the money that they contributed to their government retirement fund. If they will continue to pay for payroll taxes, then they should at least be given the benefit of recovering close to 100 % of the taxes that they paid when they need the money the most, during their twilight / retirement years. The system has been mismanaged for so long that it is going to be tremendously difficult and it would probably take decades to turn the system around and fix the problems that began when the first miscomputation was done within the system. Knowing the problems that the system is facing and will continue to face in the future, it is only fair that opting out of the system be turned into a solid and viable option for those who wish to do so. After all, social security is not a contract based agreement between the government and the employee, why should both parties then be bound to an agreement that both know the other cannot fulfill ? With over $8 Bn in improper payments in 2009 (Horowitz, Daniel “Time to Opt Out of the Social Security Ponzi Scheme”), the money that we have contributed to the system has gone down the drain and there is no way that we can retrieve the lost funding from those it was mistakenly paid out to. Why should be continue to pay for the mistakes of the social security actuarial department? When will the abuse of collecting 11 contributions that will never be properly paid out to the members end? Without the opt out option, members will have no recourse. Conclusion To be fair, we must admit that the government had the best interests of the working population at heart when it developed our social security program. They saw the peoples need to be guided into properly saving for their retirement and future financial needs by creating the social security program. The goals for the program were lofty and for a great period of time, the system actually worked. It was able to provide benefits to those who retired or needed loans in order to get out of financial troubles. It even helped people heal from their illnesses and pay off medical bills. But just like the best laid plans of mice and men, something went wrong and when it did, there was no turning back and saving the system. No amount of legislation to increase the payroll tax contributions to the social security program will fix the trillion dollar deficit in the system. Raising the retirement age will only serve to prolong the agony for the members of the system. Some of whom may not even live long enough to reap their retirement benefits anymore should the retirement age be raised yet again. The problem with the system is that nobody in the government seems willing enough to take a chance on properly fixing the problem. Nobody that is until Rep. Pete Sessions and his SAFE Act which is currently languishing in the house. Opting out of social security does not mean that the government has failed to provide for the working public. Instead, it shows that the government cares enough for 12 the citizens of the country and trusts them enough to make sound financial decisions when it comes to their retirement plans and benefits. It will also allow the government to restructure the social security program for those who require its benefits the most. Once a number of people have opted out of the system, the actual financial value of the system can finally be computed and the proper payment adjustments to the current and future members can predicted well into the future. If only the politicians would pay as much attention to our social security problem as they do debating the fiscal cliff and other budget problems, maybe the system can still be saved for the future members. But that can only happen if people are given options by the government. Just as we have the freedom of choice and other options to consider when planning our lives well into our retirement years. Works Cited Achenbaum. Andrew. “Social Security: Visions and Revisions: A Twentieth Century Fund Study”. New York: Cambridge University Press, 1986. Print. “History of Social Security”. History. Social Security Reform Center. n.d. Web. 13 Mar. 2013. Horowitz, Daniel. “Time to Opt Out of the Social Security Ponzi Scheme”. RS Member Diary. Red State. 16 Mar. 2013. Web. 16 Mar. 2013. Kennedy, Bruce. “Did the Government Make a Social Security Goof?”. Whats Trending on Money. MSN Money. 8 Jan. 2013. Web. 10 Mar. 2013. Matthews, Merrill. “The Under 30s Should Demand an Opt Out of Social Security”. Forbes. Forbes.com. 11 Nov. 2011. Web. 11 Mar. 2013. Starr, Paul. “Why We Need Social Security”. The American Prospect. princeton.edu. 2005. Web. 14 Mar. 2013. Trattner, Walter. “From Poor Law to Welfare State”. New York, The Free Press. 1994. Print. Read More