Social Security and Other Government Benefits - Term Paper Example

? Social Security and Other Government Benefits of the of the Contents Contents 2 Background of the study3 Study methodology 3 Narrative 4 The debate on social security 4 Chained CPI and benefit check 5 Fiscal pressure on the government 6 Budget projections of 2014 7 Effect on domestic citizens 8 Findings 8 Conclusion 10 References 12 Background of the study The US is recovering at slow pace following the financial crisis of 2007. At this juncture austere fiscal policy is highly debated and is projected to further impair the development activities in the country. Social security faces the largest question. The harsh realization of these activities as realized by the common domestic citizen is that, Social Security and Medicare might not be available any further for the generation that is at their twenties in the current decade. The generations to come also runs the risk of missing out on the opportunities of receiving government aids and benefits in the form of social security and Medicare as they turn older. This fact makes it even more important for the government to fix its spending issues and figure out a way for future generations to have the same benefits as those before them did. The hypothesis is that the fiscal policy reform in the US is possible so as to keep social benefit level unaltered and move towards recovery of the federal budget deficit. The contents of this paper evaluates the validity of this hypothesis and establishes the possible alternative that might be followed for a more comprehensive reform in the US economy while accommodating policy changes for amending the gigantic federal debt. Study methodology The study has been conducted by making secondary research on the topic. Studies have been made on resources available from print and online media, such as newspapers, books, journals and online articles. Qualitative method of data analysis has been followed to reach the conclusion. Finally, strict adherence to personal timeline has helped in completing the research successfully. Narrative The new budget plan made by the Obama government has announced to make a change “in the way in which the annual cost of living adjustments for Social Security and other federal programs are calculated” (CNN, 2013). This shift from the current inflation measure to the chained CPI process is expected to reduce the debt of the Federal Government by US $230 billion. However, this policy also implies that the increment in the Social Security payments made to the senior citizens every year would be lesser than before. However, there are funds allocated for programs meant for benefitting the section of population that are in poverty or very close to it. Some of such programmes are the Supplemental Security Income. These programmes are exempted from the change in COLA calculations using chained CPI (CNN, 2013). In the initial years, the growth in Social Security benefit checks would be reduced by only a small amount. For an average retired worker the Social Security benefit in the first year would range between $38 and $45 (CNN, 2013). This range would however increase over time, and would amount to many hundred dollars. The debate on social security Social Security in the USA is funded from the revenue generated from the Federal Insurance Contributions Act tax (FICA), which is a kind of payroll tax (Whittington & Delaney, 2008). Both employees and employers make contributions for the FICA. Workers covered under this regulation receive retirement benefits along with Medicare facilities (disability benefits for people aged below 65 years as well as selected health benefits and disability benefits for people above 65 years of age) (SSA, 2013a). In case of demise of any worker covered under this scheme, the spouse of that person and children are eligible to obtain survivors' benefits. However, the payments made on the social security accounts are not directly invested on the tax payers. The total receipts are used for making payments for the total number of beneficiaries (SSA, 2013b). Chained CPI and benefit check According to the concept of chained Consumer Price Index, when prices of some of the consumer goods rise, consumers react to this price rise by buying less costly alternative goods and services. This implies that the purchasing power of the beneficiaries remain the same even when they receive “a smaller benefit check” (Holman, 2013). According to Max Richtman, from the National Committee to Preserve Social Security and Medicare, the necessities of the senior citizens are different from the typical consumer needs of the average general citizen of the US whose purchasing behavior forms the basis of the chained Consumer Price Index. The senior citizens are in need of certain goods that do not have substitutes. These goods have to be consumed for the purpose and cannot be replaced or the consumption be postponed. The Medicare facility in the US does not cover dental care. If a person needs dental care he has to go for the check up from a dentist and cannot replace this need with check up from some other doctor or some other benefit. Also if a person faces problem of vision or can see less than normal, he needs to avail the prescription of a trained optician and in case of necessity to wear glasses the person is left with no other option but to wear glasses. These kinds of demand is highly inelastic; they appear in greater frequency among the senior population and are categorized under chained CPI, even if the price of these services rise, the customer would not have the option to substitute his need with some other less expensive benefit. Hence their needs are acute and if these are considered under the chained CPI then it has to be considered as a scheme of calculating the cost of living adjustment (COLA) in such a way that the government expenditure made on benefits can be reduced. The choices of senior citizens are further limited than general consumer choices and the uniqueness of their needs restrict their mobility of choices. Fiscal pressure on the government Since 1983 till 2009, there has been a surplus in the budget due to higher tax receipts that payments on these benefits. However, the slowdown in the economy brought about by the financial crisis has created massive unemployment, due to which the total number of workers making payment for the social security plan is less than the total number of recipients. In 2013 the two programs, Social Security and Medicare, accounted for 38 percent of the country’s GDP. It has been projected in the reports published by the Social Security and Medicare trust funds that these programs would experience substantial cost growth fuelled by three demographic factors; population aging due to the baby boomers, lower birth rate and lower number of people entering the working generation (SSA, 2013c). Total expenditure on Social Security has exceeded total non-interest income received from the combined funds of both trusts in Social Security since 2010. The payroll tax rate for Social Security was reduced temporarily in 2011 and 2012, which shrunk the payroll tax revenue by an approximate amount of US $222 billion as a total of these two years. In order to compensate for the forgone amount of revenue due to payroll tax reduction, legislation was established that made “transfers from the General Fund to the trust funds” (SSA, 2013c). This was done in order to recompense the revenue to the maximum extent and keep the level of revenue at the level that would be at the pre-tax reduction level. The amount of these reimbursements from the General Fund accounted for approximately 15 percent of the non-interest income of the Social Security program together in 2011 and 2012. In December 2012, this temporary reduction in payroll tax expired. Budget projections of 2014 The President of USA, Barack Obama, has unveiled a proposal for the 2014 budget in April 2013. This proposal claims to make a deal with the Congress about deficit reduction in the US budget. Mr. Obama’s budget proposal for 2014 is set to “present a fiscally responsible blueprint for middle-class jobs and growth” (The Hindu business line, 2013). It would reduce the budget deficit of the Federal Government by US $1.8 trillion over the span of the next ten years. This process of deficit reduction would follow from sharp spending cuts on the social security programmes and Medicare made by the government for the low income population and the retired workers as well as increases in the tax rates for the high income group. The liberals or the left wing has already wedged protests against the plan of making reductions in spending on social programmes of the government. The cost reduction steps proposed by Mr. Obama signify a move towards increasing the cost of living for pensioners and other beneficiaries. Obama has prepared a spending blueprint of US $3.8 trillion in total that would work on achieving a "grand bargain" (Crutsinger, 2013). The deficit reduction plans would be materialized over tax raises and spending cuts. Higher taxes along with reductions in spending on Medicare and other government funded social security programs coupled with the shift of cost of living calculations to the chained CPI method would bring down the deficits by 1 trillion US dollars (Crutsinger, 2013). Besides, approximately 1.2 trillion US dollars would be realized through automatic spending cuts that are planned to replace some other smaller reductions. In 2013 alone, sequestration would bring the federal debt down by 85 billion dollars. The financial deficit is expected to be below US $1 trillion for the first time since 2008. The projected deficit would fall in the next fiscal year (2014) to $744 billion from $973 billion (Crutsinger, 2013). Effect on domestic citizens Social Security and Medicare facilities might not be available any further to the domestic citizen of the current generation or the generations to come. The future generations are at the risk of not receiving government aids and health benefits through social security schemes as they turn older. Leaving aside the discussion about the generations that are yet to be born, it is an imperative for the government to allow the currently working generation that have been paying a good amount of their incomes in paying payroll taxes for the coverage of these benefits to reap the rewards of what they have paid into. The sequestration or across the board spending cuts are expected to bring in a strong impact on the economic activities in all spheres of the economy. Public reactions are not yet very strong since the immediate effects are smaller than the long term effects that are to be felt with the passing of each year. The effect on current as well as future generations would be felt strongly in the field of education and research. The health research institutes would have to fund the ongoing projects and lack of government support would affect the initiative to start with new projects. It would hinder the prospects of modern medicine and health related research. Findings From a fiscal point of view, spending cuts on government programs are easy to implement thereby starting a new system that works efficiently towards the recovery of the debt studded government. However, there are other aspects to this of action. The President has taken proposed steps to follow the route of sequestration. This is a broad based, across-the-board and automatic cut that is set to affect almost every category of government spending, starting from defense expenditure, military construction, domestic benefits, veteran accounts and social security benefits (Hennessey & Memoli, 2013). Although the sequestration process is not expected to remain in effect for a long period of time, the long term effects of this process would be strong. Although the president has predicted that the impact of this fiscal policy would be phased out with the passage of time and has also assured that it would not put immediate negative effect on the normal economic activities, the US economy, which is recovering at a very slow rate from the 2007 subprime crisis, is expected to become weaker. Growth rates of employment facilities would become slower due to the tax rise on the rich class. The rich class is the entrepreneurs in the society. Tax rise on their earning would act as disincentive towards investment. Spending cuts would adversely affect the middle-class families. The president has however admitted and warned that although this situation is not going to be an apocalypse, its effects would hurt the interest of the individual as well the overall economy (Hennessey & Memoli, 2013). The longer the sequestration remains in place, the severe would be the depth of damage to the US economy. It would be a dawdling grinding action that would lock the routine government operations and limit them to the new restructured lower levels “with each passing day” (Hennessey & Memoli, 2013). This view has even been agreed to by Mr. Obama. An analysis of the benefit of sequestration and the costs associated with it shows that the ratio of cost to benefit is high. The fact that the congressional leaders and President Obama has failed to come to a negotiation to obviate the $85 billion through automatic reduction process led to the final outcome of the sequestration that all parties are reported to have desired to avoid (Hennessey & Memoli, 2013). While the sequestration has become the only remaining option to reduce the federal deficit, the cost to this action is quite high. The social benefits have been in place for quite a long time now. The effect of spending cuts on social security immediately with the expiration of the Bush tax cut would affect two segments of populations the most. The current working generation that has been paying the taxes with the notion of receiving the benefits on retiring would be hurt as the chained CPI calculations would reduce the benefit level entitled to them. The immediate impacts would be faced by the population above 65 years of age that have become already dependent on these benefits. Conclusion President Obama had made healthcare for the people of his country a cornerstone of his administrative agenda. ‘Obamacare’, a comprehensive healthcare reform, has been a promoter of his campaigns since the initial stages of his coming into power (Odom, 2011). The study shows that the current federal deficit coupled with the demographic pressures on revenue earned for social security purposes has led to the austere fiscal policy of the Obama government. There are unresolved debates regarding whether the comprehensive healthcare reform is a privileged in the US or is a right for the citizens of the country. However, at the present stance, the spending cuts are found to be inevitable and avoidable at the cost of soaring federal budget deficit. Although the sequestration is bound to cast severe growth hindering impact on the operations of the government and the development activities of the economy any fiscal policy reform to keep the spending on social security and Medicare unchanged is not possible at this economic juncture. Hence the hypothesis made at the beginning of the paper is rejected. However, it emerges from the study that the as time passes the economy would again revive. The strength of the negative impacts would be softened and development activities would take the upper stage in leading the economy towards progress. It would help change the progress of economic developments and alter policymakers’ decisions in relation to public spending and taxes. References CNN. (2013). Senior citizens would see their Social Security checks shrink under President Obama's latest budget proposal. Retrieved from http://money.cnn.com/2013/04/10/news/economy/chained-cpi-social-security/index.html Crutsinger, M. (2013). Obama budget: Trim Social Security, tax wealthy. Retrieved from http://news.yahoo.com/obama-budget-trim-social-security-tax-wealthy-171603266--finance.html Hennessey, K. & Memoli, M. A. (2013). Across-the-board budget cuts are set to slice federal spending. Retrieved from http://articles.latimes.com/2013/mar/01/news/la-pn-sequester-budget-cuts-spending-20130301 Holman, K. (2013). Social Security Advocate: Obama's Budget Is 'Bad Policy. Bad Politics.' Retrieved from http://www.pbs.org/newshour/rundown/2013/04/social-security-advocate.html Mathews, D. (2013). Former NIH director: The sequester will set back medical science for a generation. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/21/former-nih-director-the-sequester-will-set-back-medical-science-for-a-generation/ Odom, L. (2011). Obamacare: An ethical analysis of his leadership and the health reform initiative. Leadership in Health Services, 24(4), 325-336. SSA. (2013a). Medicare. Retrieved from www.ssa.gov/pubs/EN-05-10043.pdf SSA. (2013b). Contribution and Benefit Base. Retrieved from http://www.ssa.gov/oact/cola/cbb.html SSA. (2013c). A summary of the 2013 annual reports. Retrieved from http://www.ssa.gov/OACT/TRSUM/index.html The Hindu business line. (2013). US budget would cut social spending, boost taxes: Obama. Retrieved from http://www.thehindubusinessline.com/news/international/us-budget-would-cut-social-spending-boost-taxes-obama/article4601625.ece Whittington, O. R. & Delaney, P. R. (2008). Wiley CPA Exam Review 2009: Regulation. 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