Social Security - Research Paper Example

?Running Head: SOCIAL SECURITY Social Security Social Security Introduction Social security is a retirement program that provides an income for workers and their families during their lives and especially at retirement. It can be the only source of income for many retired Americans who have not made any other provisions for the twilight time of their lives. There has also been an influx in older Americans have to acquire “retirement jobs” in order to maintain their income. Many low-income households utilize social security as their only income source. Women and minorities depend on Social Security due to lack of education and employment therefore leading to accepting minimum wage positions in which they are unable to save or invest to supplement social security benefits. Social security also provides income for those people who have become disabled and can no longer work and for those spouses and children whose wage earner has passed away. Thesis Statement Social Security is facing a long-term financial problem but it is not a crisis as some are trying to lead everyone to believe. Background Social Security as an Agency The United States was among those lagging behind major developed nations to set up a social security organization. In 1911, Wisconsin was the first state that approved the first state workers' reimbursement law to be held legitimate. It was the time when most Americans assumed the government should have no consideration to bother for the elderly, disabled, or disadvantaged. But such approaches altered during the critical period of Great Depression of the 1930's. Many Americans at this specific point of time sensed economic calamity or failure could outcome from happenings over which workers or government had no control. In 1935, Congress passed the Social Security Act. This law became the basis of the U.S. Social Security system. It provided cash benefits only to retired workers in commerce and industry. In 1939, Congress amended the act to benefit wives and dependent children of deceased workers. In 1950, the act commenced to cover numerous farm and domestic working classes, self-employed workers, technical and vocational workers, nonprofessional and many government and local bodies’ employees. Coverage became almost worldwide in 1956, when legal professionals and other professional workers of different fields came under the scheme. Congress further added disability insurance for the special employees to the system in 1956 and thus Medicare was set up in 1965. In the late 1970's, prices increased much faster than wages. This trend caused benefits to rise more rapidly than payroll tax revenues and resulted in a major drain on the Old-Age and Survivors Insurance Trust Fund. The law accelerated parts of a previously scheduled tax increase and expanded the categories of workers covered under Social Security. It required all federal employees hired after 1983 to join the system. The law also required the participation of about a million employees of nonprofit organizations. The legislation made up to 50 percent of the benefits of some higher-income retired people subject to federal income taxes and gave the resulting revenues to the Social Security trust funds. In addition, the law required a gradual rise in the normal retirement age. From the mid-1960 through the mid-1980, the tax-paying labor force was enlarged by the entry of the baby boom generation that is, the group of people born during a period of high birth rates from 1946 to 1964. Also, low birth rates in the 1920's and 1930's resulted in a relatively small population of retirees in the 1980's and 1990's. Because of these developments and because of the 1983 legislation and strong economic growth Social Security costs as a percentage of earnings subject to the FICA tax declined significantly from 1986 to 1989. This percentage began to rise again in the early 1990's. (Justice, 2005) George Bush Era and social Security George Bush has been working on a proposal to privatize the social security system. This would actually cause more issues than help the current social security system that we have. The president had three options for reforming the system but they all include private accounts and two of the three options include some cuts in benefits to move the programs toward solvency. The current Social Security is important to millions of Americans. It is vital for our government to focus on correcting the system we have now. Any major change to the system will hurt more people than it will help. (Bush, 2005) The system we have now has some flaws that need to be addressed but with some focus time and effort than the country could have a more efficient system. The Privatization of Social Security It is the idea that instead of continuing to put money into the already existing Social Security system, money would be diverted into private accounts. These accounts would be carved out of the money that would normally go to social security and would weaken its financial health. This would mean that less money would go into the system and the benefits would have to be cut severely eventually. Many people believe that the money invested in private accounts would be a god-send and that they could control their own money and investments in these accounts. The proposed solution with privatization would only allow for limited investment options in order to keep costs down to a minimum. There is also no guarantee with regards to market returns and many people may lose money instead of funding their retirements as well as the loss of inflation protection. Plus it would be very easy to outlive these savings accounts which are not possible with social security benefits. Also, it is true that private accounts are more expensive to run due to administrative and management costs which could equal to the tune of $2 trillion. (Anrig, et. al. 2004) This means that most people would have to pay twice to keep this new system going. Currently, social security is invested in government backed securities which are guaranteed and no one has to bear any risk as is suggested in the privatization solution. How Privatization would affect the Young and Ethnic With such the proposed change in social security young people would receive much lower benefits with private accounts. They would also run the risk of not taking it too seriously because they feel that they are far from retiring and would not take appropriate measures. But it would appeal to the young more than anyone else because they have been brought up in the age of investment and the stock market. They are more likely to enjoy “playing” with their accounts compared to baby boomers. But the reality is that the young would find that there would be a severe shortfall in benefits by the time that they retire. Unfortunately, it is being sold to them as the only solution but little do they know that they will get the short end of the stick. Women and minorities rely heavily on the social security system. So by diverting money that these ethnic groups do not have, there will also be a short fall of benefits and possibly no benefits at all. These people are traditionally low wage earners and would not be able to save enough money to be able to support their eventual retirements. Current Scenario Nowadays, there have been hot discussions regarding status and utility of this agency. All political circles, think tanks, intellectuals and experts are giving their views on this issue. According to Cook; “In Washington each new day brings a fresh call to “reform entitlement programs” — Social Security, Medicare, etc.  Tackling Social Security has been on the to-do list of the corporate elite for years, and they’re not waiting any longer.  After years of promoting this cause, conservative think tanks have now garnered solid support from the political establishment as a whole, which includes the Republican and Democratic arties.”   (Cooke, 2010) On the other hand, its supporters are also hectic in offering their version. This perspective is presented by Burgess and Kingson in their article; “Social Security has for three-quarters of a century, never failing to meet all its obligations to hardworking Americans who have earned benefits for themselves and their families. And, as President Barack Obama reminded the nation in his speech Wednesday, "Social Security is not the cause of our deficit" and it is not in crisis.” (Burgess and Kingson, 2011) Social Security as an Organized Agency To become eligible for social security one must have earned work credits or have a family member that has. The number of work credits earned depends on the amount of money the person has earns per year. A worker can earn a maximum of four work credits a year, regardless of how much money they make. To qualify for retirement benefits a person must have 40 credits. Workers disability before the age of 31 may collect if they have earned at least six work credits and if they have earned work credit for at least half the time between their 21st birthday and the time they became disabled. Workers disabled after their 31st birthday generally need at least five years of work credit in the 10-year period before they became disabled. Baby boom workers will continue to support the small population of retirees while contributing a modest amount toward their own retirement. The reserves in the Social Security trust funds are expected to grow until about 2012. Soon after that, however, baby boom retirees will begin to draw down the funds. The Social Security Administration estimates that these funds may be depleted by about 2041. To address this problem, Congress in the 1990's began to consider such changes as increases in tax rates, further expansion of the categories of workers who must participate in Social Security, more increases in the retirement age, reductions in benefits for higher-income workers, further rises in the percentage of benefits that are subject to income taxes, and the movement of Social Security funds into stocks and other types of investments. (Wasow, 2005) The Social Security System will encounter even more problems if several of the current trends continue such as: slower wage growth, shorter working lives, and the general aging of the U.S. population. There are even more concerns facing the Social Security System that involve equity and effectiveness. One example of an equity problem is non-working spouses of high-income workers receive larger benefits than most working spouses. There have been several proposed changes to aid in the reform of the Social security System. Most of the changes have the central goal of helping to keep Social Security solvent. Some people say that instead of trying to save Social Security, we should begin the transition to a new and, they hope, better, retirement system based on individually owned, privately invested accounts. Advocates of this approach argue that it would encourage national savings, increase individual responsibility, make workers more aware of their public benefits and their need to supplement them, and increase the return to workers on their investment of retirement funds. A fully privatized retirement system would have many disadvantages to our society and would not be worth the extra effort it would involve. Even though the Social Security System would probably only need to match this during the transition period, it would not take long for the system to get deeper and deeper in debt. Citizens who know that their money will be matched may also take more risks with their money, which could compound the problem. The Social Security System also provides disability income for individuals who are injured and cannot work, as well as death benefit and survivors' benefits for widows age 60 and older and children under 18. (Connelly, 2005) Privatization would require more responsibility on the worker who would need to purchase extra life and disability insurance. In switching from the Social Security System to a system of private retirement, one generation would inevitably have to pay twice: first, for the retirement of its parents, and then for its own, since younger people in a private scheme will start paying for themselves. Of course, there are advantages to a fully privatized retirement system. If one did not lose money in their investments, then basically the money that you would contribute to your privatized account would all come back to you in the end and would not be reduced. The Social Security System, however, varies greatly in the amount you would receive back during retirement. Most current retirees have received far more money in Social Security benefits than they paid into the program. People should not be allowed and trusted to save for their own retirement or we will become a nation of poor people within a matter of time. There are several other proposed changes to keep the Social Security System solvent. One of these proposals calls for the federal government to invest a portion of the Social Security trust funds in the stock market. There are no definite moves in the stock market. Workers would have no certainty in this business. They would not know if their monies would be depleted completely or doubled by retirement. Investment decisions made by the government would also inevitably turn into political decisions rather than decisions made on economic factors. Alternatives to Social Security One proposed solution to the problems of the current pay as you go plan is to impose a system that would privatize the contributions of individuals. The plan presented would be to shrink Social Security by enough to permit part of the payroll tax to be put into individual accounts, and let individuals control the accumulation until they reached retirement age. Several different ideas for privatization have been introduced to the government, varying in the amount of privatization, but the focus of most of these still relies heavily on giving individuals the freedom to explore different investment options such as mutual funds, individual stocks, treasury notes, and other choices. These investment options would enable the individual to diversify his or her account accordingly to their level of risk. Proponents of privatization believe that the plan would have the following outcomes: a greater return on investment compared to the current system, an increase in national savings, and the plan would not require tax increases or benefit cuts. The main argument that many make for greater returns is often accompanied with a reference to the Chilean privatization of social security. There are a variety of economic and political questions about this sort of proposal. Chile privatized its social security system in 1981, beginning with a slow phase-out of its existing system. (Tanner, 2008) On average, they pay 13 percent of earnings in order to save 10 percent and have this insurance. (Andrews, 2005) The Chilean economy has grown quite well since 1981, although not without some setbacks. Before being allured by the advantages of privatization, one needs to consider the stated downfalls of switching to such a system. Clearly, as soon as you put people's money into their own hands to invest, the major issue that comes to mind is how you know if they'll make the right decisions. Well, in order to get the larger return, many individuals will also have to take greater risks in the financial markets. Another major disadvantage of privatizing is that there would no longer be a redistribution of income among the social classes. Over the years, the poverty rate among the elderly has steadily decreased. However, with privatization, many people in poverty may actually see a reduction in benefits, whereas the richer continue to experience greater benefits even though they may not need such benefits. There are too many factors that could cause a failure in the system. So improving the current plan is the only alternative to ensure future, long-term and equal benefits to all US citizens. Conclusion Many Americans believe that Social Security is bankrupt. But in reality Social Security will be able to continue paying out full benefits until 2053, after that 70 to 80% still could be paid out thereafter for decades. The baby boomers are beginning to retire and will be tapping the Social Security benefits in great numbers. This being the case, a reform is needed and the system needs to be strengthened to be able to pay 100% and be able to continue to provide the benefits it has in the past 70 years for those who need it. Solutions to the Social Security dilemma are daunting to say the least. Of course we know what President Bush’s solution is that private accounts are the way to go, regardless of whether it is equal to both low and high wage earners is not obviously his concern. Or whether the young will have be able to invest adequately and wisely in order to have a retirement account when they retire and hopefully will not have to feast on Alpo when they get older. Or if the cost of these privatized accounts will become overwhelming and present itself as the biggest Presidential boo-boo ever. One of the possible solvency options is diversifying the way part of the trust fund assets is invested to increase the rate of return. Investing part of the surplus will earn higher returns than that that is just offered through U.S. Treasury bonds. This will strengthen the social security surplus and will not be as risky an investment as the private accounts are. In this case everyone will win, not just the well to do or those who have lucked out. And an individual will not have to worry about outliving their retirement benefits. It will still always be there for generations to come. Also, raising the cap on the amount of wages taxed to cover more of the wages that have been paid out. Also, including all of newly hired state and local government workers can add their wages to the pot as well. These are adequate solutions that can be used to revamp…not scrap…the social security system. It is almost a black and white issue….we must reinvest the surplus to create more funds. It is a plain and simple solution that will fix the problem without creating more diverse problems as privatization would. Another plan that might be beneficial to look at is if every worker has the option to contribute 2% of their wages to an account. These wages would be able to be offset with a refundable income tax credit. Therefore, there would not be a reduction in a workers wages in the long run. Once a person reaches 65, that money would be turned into an annuity. This annuity combined with the reduced Social Security benefits would equate to full benefits. Also, if the annuity plan works and the annuities are substantial enough than the Social Security benefits could be reduced as well, therefore extending the Social Security Trust Fund possibly another 75 to 100 years. There are limited problems with this solution; the only one that can be foreseen would be the administrative costs to run the accounts. But hopefully that would be offset by the either by an extra one percent contribution to set up a fund to pay for the administrative costs. At least with this plan it would be painless for everyone no matter what spectrum of the earning scale one is on or what ethnic group one belongs to. References Andrews, Edmund L. “Social Security; Pros vs. Cons: A Guide to the Debate.” New York Times. April 12, 2005. Anrig, Greg Jr., Wasow, Bernard, “Twelve reasons why privatizing social security is a bad idea.” The Century Foundation. December 14, 2004. Burgess, Michael and Kingson, Eric: America's crisis? Not Social Security. April 17, 2011, Web Article Accessed on 17-05-2011 from http://www.timesunion.com/default/article/America-s-crisis-Not-Social-Security-1340363.php Bush, George. “Strengthening Social Security for Future Generations.” 2005. The White House. 29 April 2008. Connelly, Marjorie. “Social Security; A view that changes with age.” New York Times. April 12, 2005 Cooke, Shamus: The Drive to Eliminate Social Security in America: Global Research, February 23, 2010 Accessed on 16-11-2011 from http://www.globalresearch.ca/index.php?context=va&aid=17770 Justice, Glen. “Social Security; Groups that clashed in the campaign are facing off again.” New York Times. April 12, 2005 Tanner, Michael. “The Democrats Want to Raise Social Security Taxes.” 2008. CATO Institute. 30 April 2008. Wasow, Bernard. “Perspective on Social Security Hearings.” The Century Foundation. April 26, 2005 Read More