Public Finance-Social Security Insolvency - Term Paper Example

(Assignment) Public Finance-Social Security insolvency History of social security: The phrase ‘social security’ simply refers to providing security to individuals of the society who struggle with life situations subsequent to the absence of adequate financial resources. The social security programs were firstly implemented by European traders in its primitive form; but it was not effective since it had been framed on some weaker laws. The pension programs for the Civil War veterans were the first social security policies formulated in the United States. At the initial stage of this program, permanently disabled soldiers and widows of soldiers were given the benefits of social security policies. The most noted disadvantage of this program is that it had not designed any provisions for the Confederate side veterans and families. In order to remove the inefficiencies of the program and to coordinate the whole unions of soldiers, this program was restructured later and thereby all unions of soldiers got the benefit of the program regardless of the intensity of their injuries. Due to the expansion of the program, the federal government was driven to spend more than one third of its funds to meet the military pensions in 1984. The United States was shaken by the great depression of 1930 when millions of Americans lost their jobs and struggled to meet the livelihood. The event prompted the thoughts of a comprehensive social security system for the survival of the weakest in times of such severe situations. Franklin Roosevelt became the president of America in 1932 and the depression was at its intense stage in this period. He was the first person who suggested an idea of social insurance in America although it was characterized by several weak aspects. Roosevelt’s idea was the milestone in the history of social security programs and it was molded into its present form subsequent to various amendments of Roosevelt’s basic frame. As a result of Roosevelt’s fruitful concepts, Committee on Economic Security (CES) was formed in 1934 and it became the stepping stone in the history of social security systems. Roosevelt’s CES idea has very much similarity with the system of social insurance program which already existed in some European countries. This plan persuaded the workers to set aside a specified percentage of their income to a separate account so that they can use this amount to meet the monthly expenses after retirement. Subsequently, Social Security Act (SSA) came into force in 1935. Since 1935 the SSA system has been exercising in US with relevant modifications in accordance with changing economic situations and population of the country. Currently, social security system in United States is known as Federal Old-Age, Survivors, and Disability Insurance (OASDI) program. Deaven and Andrews (vii) lists other social security programs which include “Unemployment Insurance, Temporary Assistance to Needy families, Health Insurance for Aged and Disabled (Medicare), Grants to States for Medical Assistance Programs (Medicaid), State Children’s Health Insurance programs (SCHIP), and Supplemental Security Income (SSI). 2. Causes of the anticipated insolvency: Anticipated insolvency or expected insolvency is a threat to business as it leads the business to failure in the near future. Insolvency may occur in small businesses as well as in big businesses although small business ventures have more possibility to confront with it. There are large numbers of causes for anticipated insolvency. Lack of working capital is the main cause of anticipated insolvency as it interrupts the smooth running of the business (The 65 most common reasons for business failure). The inadequate capital resources cause to diminish the management incompetence which is the catalyst that leads the business upwards. The thoughtless managerial decisions, unfair issue of credits, and unnecessary purchases are the major factors which create the situation of capital deficiency. Unforeseen contingencies like floods, storms or severe competition may also appear as the reason for anticipated insolvency. When an enterprise possesses a huge total of assets than its liabilities, it would face severe difficulties with meeting the obligations on its assets. It is called technical or financial factors of anticipated insolvency. On the other hand, as Kane (8) says, if an enterprise possesses a greater total of liabilities more than its assets, this situation also anticipates insolvency and it is called economic insolvency. In the case of small business houses, they deal with large troubles in getting assistance from financial institutions since they have no sufficient securities to offer. In this situation, the owner(s) may take loans from all available sources at any rates of interest and it makes them liable for huge debts in the future. Similarly, it is important for financial managers to make sure that cash inflows to the business are always greater than cash outflows; otherwise, they may bear the risk of insolvency. In addition, the business may anticipate insolvency by the unfair deeds of its suppliers, customers, competing organizations, and sometimes even by government trade restrictions. Sometimes, individuals also may become insolvent due to their inability to pay off debts. Individual insolvency usually happens due to the unpredictable losses rather than natural factors. In rare cases, anticipated insolvency may arise on the ground of inefficient individual decisions. 3. Governmental regulations: Government initiates several measures to assist and prevent the situations of insolvency. One of the major actions taken by governments as a supportive measure is the provision of bailout money (Dokupil). Bailout money is the financial assistance offered by the government for a particular firm or individual in order to facilitate in facing the situation of insolvency. Many factors may be responsible for this monetary loss. As a matter of fact, this economic support may not prove worthy enough for the government. Therefore it is very essential that the government either undertake measures to avoid the situation of insolvency or make certain that the bailout money provided being used effectively. In order to attain status in the market, a firm may bring out alterations in the annual financial expense submitted in the form of inflation or deflation in the profit. All these factors must be well analyzed by the government so that they may not be kept under the wrong notions. Knowing the actual status of the firm will surely play a vital role in preventing the company from being insolvent as minor assistances can be provided in the initial stage itself. At the same time, it is well important that the government being aware of the provision of the bailout money. It must verify how effectively the bailout money is being utilized. While providing the bailout money, it is very necessary that the government makes provisions to acquire the money from the firm using effective monetary tools. As ‘prevention is better than cure’ it is well advised to avoid the situations of insolvency rather than taking actions after getting insolvent. For this, a well coordinated auditing is required from the part of governmental machinery. Companies also must take sincere efforts to avoid every chance of insolvency. 4. Responses to causes of insolvency: Although various factors lead to the risk of insolvency, majority of the factors may not be basically ineffective. Sometimes, firms may take some unusual decisions, the results of which depends on future events. Hence, often the factors that lead to insolvency may be positive even though their results are negative. For instance, a company may present an inflated profit in order to attract more creditors and investors. On the other hand, this inflated profit may demand the company to pay more dividends to its shareholders. Here, the company assumes that the inflated profit would bring more money through investments and loans than the expenses incurred by way of dividend distribution. If the investors and creditors do not show any interest toward the inflated profit of the company, it would act against the strategies of the company and subsequently the company would face insolvency. In the same manner, the small business houses would like to take huge loans so as to expand their business. These concerns think that they can procure more money from business operations which would be adequate to cover the loan interests. Perhaps, they may be forced to fight against insolvency as they failed to operate business in the way they had desired. It will be difficult for any business houses to expand its horizon without taking some risks. In short, it would be meaningless to say that risk taking mentality of management is the main cause of organizational failure. The risk taking mentality and its impacts play same range of roles in individual insolvency also. However, insolvency occurs depending on future changes in one’s fiscal status and transactions. Sometimes individuals and firms commit malpractices so as to achieve unfair earnings. Although, they can implement their unlawful intentions successfully, in the long run they would collapse. For instance, the directors of a public company may deflate the company’s profit with intent to obtain some personal benefits. When the company’s profit is being deflated, the investors hesitate to deposit with the company, and shareholders get a reduced dividend. In this situation, the directors might acquire more company shares which would increase their personal financial stature. The above discussion reflects the fact that we cannot categorize any deeds as the stimulants of insolvency because insolvency stimulants are determined on the basis of actual intensions of deeds and future probabilities. Works Cited Deaven, Paul, O. Andrews, William, H. (Eds.). Social Security: New Issues and Developments. New York: Nova Science Publishers, Inc, 2008. Print. Dokupil, Susanna. Rethinking the airline bailout. The Federalist Society. 1 Dec 2003. Web. 28 Jan 2011 Kane, Edward, J. The S & L Insurance Mess: How Did it Happen? US: The Urban Institute. 1989. Print. “The 65 most common reasons for business failure”. The UK Insolvency Helpline. Web. 28 Jan 2011 Read More