Public Finance -Social Security in the United States and Its Impact on the Economy - Essay Example

Public Finance: Social Security in the United States and its Impact on the Economy Name Course Tutor Unit Code Date Introduction In recent times, particularly under the Obama administration, social security issues have taken center stage. The topic has been debated widely by the citizens, the media, the policy makers as well as the politicians. However, the United States has faced some serious economic issues as the debate rages on, such as the 2008/09 Global Financial Crisis that originated from this side of the world. Social security is a matter of public concern, but it has to be aligned to the prevailing economic situation of the country. The topic covers a wide range of issues that include; Old-Age, Survivors and Disability Insurance (OASDI), Unemployment Insurance, Worker’s Compensation, Temporary Disability Insurance, Medicare, Medicaid and now the impending Obamacare, among others. All these facets of social security are likely to impinge on the country’s economy in some way. This paper delves into the issue of social security in the United States and its impact on the country’s economy (Mitchell, 2005). Social Security in the United States Social security matters emerged in the 19th century as the United States industry developed swiftly and the economy was more and more disposed to industrial development, specialism, and suburbanization. This led to the country having more employees who were hooked on a persistent flow of money income to cater for their own needs as well as the needs for their families. Temporarily the States as well as the Federal Government came live to the reality that certain risks in an ever more industrialized economy may well best be met through a social insurance slant to public welfare. The governments recognized that contributory financing of social insurance programs would guarantee protection as a matter of right as opposed to a public assistance approach whereby merely those persons in need were entitled to benefits. Just like in many other industrial countries, social insurance in the United States first began with workers’ compensation (Krugman, 2005). The Great Depression of the 1930’s deprived the Federal governments, private charities and local communities the much needed finances to satisfy the growing need amongst the American people. This resulted to a Federal action. In the beginning of 1932, the Federal Government started to issue loans, then grants, to States to pay for direct aid as well as work relief. This led to the introduction of special Federal emergency aid and public works programs. A specially created Committee on Economic Security made recommendations to President Franklin D. Roosevelt who suggested the same to Congress economic security legislation in 1935. This led to the enactment of the Social Security Act, signed August 14, 1935 following the request by President Franklin Delano Roosevelt, as part of the New Deal. It created a program to provide lifetime payments to retired workers beginning at age 65, laying the basis for today’s Social Security program. The program began as a measure to implement “social insurance” during the Great Depression, against uncertainties brought by death, disability and old age (Mitchell, 2005). The long standing customs as well as the changing economic and social conditions have shaped the social welfare system in the United States. Social welfare programs have been developed in very sensible and incremental ways. In general, proposals for change are framed in a rejoinder to particular problems as opposed to a general national agenda. Also, the United States social welfare policy improvement is developed with a large degree of decentralization. Some programs are more or less totally Federal as regards their administration, funding, or both; others just involve the States (with or with no involvement of local government); whereas others take in all the three levels of government. The private sector too engages a key role with respect to the decentralization in the advancement of American social welfare programs. The private sector mainly provides health and medical care as well as income maintenance benefits (group life insurance, employment related pensions, and sickness payments) (Krugman, 2005). The OASDI program is the most common and prevalent income-maintenance social security program in the United States. It is founded on the precepts of social insurance. OASDI provides monthly benefits intended to partially supplant the loss of income as a result of retirement, disability, or death. Its coverage is virtually universal, covering over 98 per cent of the jobs in the United States. Impact on the Economy Ever since around the mid-1980s, economists have established an all-encompassing writings on the subject of social security’s impact on national savings as well as so the size of the economy, as a whole. It has been found that the buildup of assets in the social security trust funds cuts the problem of imminent retirement costs on upcoming taxpayers by boosting the nation’s saving. As savings increase, investment goes up, there is increased productivity growth, plus a bigger economic pie. The bigger pie will offer future workers extra stuff left over after they rally up the claims of the ageing Americans. Social Security has been touted to be one of the United States’ greatest effective government programs. The program has brought about a substantial reduction in the level of poverty among senior citizens. Today, Social Security is an important federal program that supports income stability amongst millions of households in the United States. It enables this through providing a secure flow of income to supplant wages lost owing to retirement, disability, or death. Approximately 1 out of 6 Americans take home Social Security benefits, comprising 9 out of 10 people with 65 years and above. Social Security is the base of most of the beneficiaries’’ economic security, and for over 22 million folks of all ages, it is the helping hand that keeps them out of paucity. The momentous role social security plays in the monetary haven of its beneficiaries is celebrated, as is the program’s great financial outline. According to AARP Public Policy Institute Report (2013), in the year 2012, Social Security rewarded $774.6 billion in benefits. These benefits engage an even bigger part in the country’s economy than commonly acknowledged. The program’s impact on the economy starts when its recipients expend their benefits on goods and services. The businesses that collect these dollars channel them to paying employees, procuring other items to sell, paying rent and taxes along with other ordinary costs of doing business. The owners also take home good profits. On the other hand, their suppliers make use of the income they collect to pay their employees, suppliers, and the chain goes on. Also, the employees expend their wages and services on additional goods and services which forms additional outlay and income for more people. This results to a potent multiplier upshot that benefits the whole economy, businesses as well as workers. That’s why, in 2012, each one dollar of Social Security benefit spent engendered around $2 of economic output (goods and services). The AARP (2013) report, by means of a refined economic model known as IMPLAN (IMpact analysis for PLANning), reveal that Social Security assistance payments sustained well over 9.2 million jobs in 2012. Around 4 million of the jobs were created in just ten industries with the biggest impact being in the real estate, food services, health care plus retail industries. Moreover, the social security benefits added just about $1.5 trillion dollars in amounts produced (goods and services) to the whole economy of the United States. Furthermore, close to 21.4 million people avoided poverty including 1.1 million children, 5.8 million under 65 adults and 14.5 million over 65 adults. The report further shows that the social security benefits add close to $774 billion dollars in value added (gross domestic product) and over $370 billion dollars in salaries, wages, plus other payments. Social security programs also contribute to tax revenues. In 2012, the tax revenues realized for local, state, as well as federal governments surpassed $222 billion dollars, with over $78.9 billion dollars being from local and state taxes and $143.3 billion dollars in federal taxes. Indeed every state in the United States, big or small, feels the influence of social security benefits being used up inside its borders. For instance, California, which has the biggest economy of the 50 states, experienced the biggest influence. In California alone, social security benefits sustained 888 thousand jobs, $147.4 billion dollars in output (goods and services), and $8.7 billion dollars in state plus local tax revenues. In general, it is estimated that social security adds in excess of $1 trillion dollars to the United States economy for each year. The AARP (2013) report states that if social security benefits are cut by 25 per cent across the board (approximately $190 billion dollars), according to the projections from social security actuaries for the years around 2033, the united states economy will lose around 2.3 million jobs, close to $349 billion dollars in economic output (goods and services), approximately $194 billion dollars in gross domestic product, and around $93 billion dollars in employee payments based on the 2012 terms. Despite the effect social security benefits have on the United States’ economy, the current debate is on how social security’s finances disturb the federal budget as a whole. This has sparked opinions regarding major arguments such as whether social security “reform” ought to be pursued as part of current budget politics, and whether the payroll tax “holiday” supported by President Obama hovers over the forthcoming capacity to dole out benefits. In fact, debate on whether to reduce the payroll tax has intensely divided Democratic policy experts as well as activists, who fear that it will hurt social security even as the Obama administration assert that it would not impinge on the program’s capacity to dole out benefits. For the meantime, the Obama administration and its adherents differ in opinion with the Republicans plus lots of other avowed centrists whether social security has to influence the current budget politics. Even though, social security affects the federal government’s fiscal capacity both economically and politically, the vital economic subject matter is how a government can set funds aside for future expenses (AARP, 2013). In the face of the success social security has achieved in assisting millions of senior Americans to circumvent poverty, it faces a longstanding deficit and policymakers have been mulling over changes to deal with these quagmire. The trustees of the social security also Medicare systems (programs containing age-related social disbursements) keep on to lay emphasis on the actuarial deficits of both systems amid the impending retirement of the baby-boom generation besides pressures on healthcare costs. In addition, the wearing down of the United States fiscal position ever since 2001 (when predictions were for hefty surpluses plus the riddance of public debt by 2009) in addition to the comeback of budget deficits have revived anxiety as regards the effect of these demographic trends on the longer-term fiscal situation. At the moment, social security is at a precarious point in time. The joint forces of the retirement of the baby-boom generation, growing life expectancies, as well as dwindling birth rates will put the system under pressure over the coming 30 years. Consequently, the yet to come generations possibly will face a considerably higher level of taxation to maintain the contemporary level of benefits (AARP, 2013). Conclusion Social security programs in the United States have contributed substantially to the state as well as the federal governments. The programs have helped a lot of Americans to shun poverty. The reimbursed benefits contribute to the economy by creating jobs, expanding the national output (goods and services), and contributing to the tax incomes. However, the system is at the moment under intense debate as to whether it should be altered owing to the payroll tax. Policymakers have embarked on an intervention that will determine the future survival of the social security programs (AARP, 2013). References AARP (2013), Social Security’s Impact on the Economy, retrieved 23 July 2014, < http://www.aarp.org/content/dam/aarp/research/public_policy_institute/econ_sec/2013/social-security-impact-national-economy-AARP-ppi-econ-sec.pdf> Krugman, Paul (2005), Confusions about Social Security, The Economists’ Voice, Volume 2, Issue 1, The Berkeley Electronic Press . Mitchell, Daniel J. (2005), Rising Benefit Levels Drive Social Security’s Fiscal Crisis, Web Memo # 640, . Read More