Financial Crisis of Social Security - Research Paper Example

? On Financial Crisis of Social Security Outline Introduction A Brief History of Social Security The Funding of Social Security The Social Security’sBeneficiaries and Its Face at Present The Future of Social Security’s Financial Health Is Privatization of Social Security the Answer? Privatization Does Not Solve the Financial Problem of Social Security Proposed Change to Address the Financial Crisis of Social Security Conclusion Introduction Social Security covers several social welfare as well as insurance programs in United States. However, at present, the Social Security Act faces a long – term challenge for it is heading towards bankruptcy. Its funding is confronted by the fact that the Social Security payroll taxes are not sufficient to meet the assistance and benefits which will be provided to the next generation of insurance program recipients because of the generation of the baby boomers currently receiving their benefits. Indeed, the contributions paid to Social Security have gone much higher than it has been before though the 2000 Trustees Report stated that it is only up to 2037 that Social Security could pay and provide the full benefits (Social Security Administration (SSA), 2000). It is the case that the benefits and assistance that workers are likely to receive in the future is at full uncertainty. Given the problem that the public policy of Social Security is facing a long – term crisis, some proposes that privatization of Social Security would be the solution (O’neill, 2002). However, instead of resolving the financial crisis, creating private accounts does not strengthen Social Security but in fact, worsen such problem. A Brief History of Social Security In the 1930s during the period of Great Depression, the old – aged citizens had experienced more than a half higher level of poverty rates (Achenbuam, 1986). In this regard, President Franklin D. Roosevelt recognized that the economic security system was a real national need. He signed the Social Security Act of 1935 created by the Committee on Economic Security (CES) (SSA, 2004). The Social Security Act was implemented as a form of social insurance to address the needs of the old – aged citizens of America through a creation of assistance and system of benefits focusing on the needs of the elderly (SSA, 2009; Kollman and Solomon – Fears, 2001). Initially, all workers under age 65 were covered in this program only if they were working in commerce and industry excluding railroads. In 1939, there were no longer age restrictions imposed. In 1954, the act was amended to include workers with disability in which benefits are given to 50 to 64 year old disabled workers (SSA, 2004). Assistance is also provided to the adult children of the retired or deceased worker contributing to Social Security System only if disability occurred before 18 years of age (SSA, 2004). In 1969, coal miners who were affected and happened to be disabled due to a lung disease was also given assistance (SSA, 2004). Monthly cash benefits were given to those coal miners who had survived and also to their dependents (SSA, 2004). Benefits were given to the retirees and even the individuals who were laid off from their jobs (Achenbuam, 1986). In times of deaths, this program had provided a lump – sum benefit (Achenbuam, 1986). This Social Security Act was established to regulate the anticipated dangers of old age, joblessness, poverty, as well as the burdens of widows and fatherless kids in the contemporary American world (Achenbuam, 1986). The Funding of Social Security Social Security was initially funded through payroll taxes. Workers were taxed on their gross wages (SSA, 2010). The first collection of payroll taxes was in 1937. This year was the same year that the benefits from the Social Security program were first provided. From its inception up to present, payroll taxes are the contributors in the funding of the program (SSA, 2010). On the one hand, $3000.00 is the maximum taxable amount as agreed by the Social Security Act. Any income higher than this amount was not taxed by the Social Security. Nonetheless, there were lots of Presidents and Congresses that had proposed the increase of taxable minimum between 1950 and 1971. Over these years, a total of 200 percent increase in the taxable maximum had been implemented by these six laws. During the time of Richard Nixon’s presidency, a total of 47 percent increase in the taxable maximum was passed in 1972 and 1973. In 1975, changes on the taxable maximum were based in the average income levels. On the one hand, during Presidents Jimmy Carter’s administration, another law was passed which increased the taxable maximum at a more rapid phase that it was before. A total of 68 percent increase was observed in the taxable maximum in years 1979, 1980 and 1981.The taxable maximum has continue to increase over the years. In fact, a total of 108 percent increase was recorded between 1990 and 2009. This increase in the taxable maximum is based on the inflation. This is basically how the Social Security Act is funded. It is through the payroll taxes. Changes in the funding are basically on the taxable maximum over the years (Auchenbaum, 1986). Meanwhile, Hu (2005) stated that the contributions to the Social Security of the workers today are the benefits paid to the beneficiaries of the insurance program at present. At this time, the Social Security receives 6.2 percent of the wages and salaries as contributed by the employees as well as employers. This amounts to 12.4 percent of wages and salaries of employees and employers. In case Social Security takes more money that the capital it shells out to cover the benefits and assistance, the remaining balance proceeds to the Social Security trust fund. Such trust fund was established in 1983. The aim of this trust fund is to pre – fund the benefits and assistance to be given in the event of retirement of the baby boom generation. The Social Security’s Beneficiaries and Its Face at Present The Social Security program has secured economically the lives of modern American world. According to SSA (2005), at present, there are about 159 million workers contributing in the Social Security system in approximation. Today, the Social Security has benefitted about one in six Americans. There are almost 45 million people receiving the benefits as promised by Social Security at present (SSA, 2009). Social Security is an advanced scheme which provides higher portion of benefits among the low – wage workers compared to those of the high – wage workers. According to the American Association of Retired Persons (1998), through the provided assistance and benefits, Social Security has helped alleviate the poverty rate among elderly. It is the case that without the presence of Social Security supporting the senior citizens, the poverty rate among them would increase from 1 percent to about 54 percent (American Association of Retired Persons, 1998). The Social Security has indeed protected the lives of some 15 million Americans from poverty (American Association of Retired Persons, 1998). Even though it is the case that it gives support as well as benefits to disabled individuals same with the living family members of deceased workers of all ages, the retired workers as well as their dependents are considerably the biggest group of recipients as well as their dependents. According to SSA (2005), $955 is the average monthly benefit provided by Social Security to more than 90 percent of retirees. Moreover, about 65 percent of 65 year old and older Americans depends more than half of their salaries while there are about 33 percent relying for more than 90 percent of their income on Social Security (Liu, 1999). About 73 percent of 75 year old and older Americans depend on the Social Security program for more than half of their earnings (Liu, 1999). On the one hand, approximately 15 percent of Americans depend fully on Social Security for their income (Liu, 1999). Indeed, it is the case that beneficiaries are more likely to depend on the financial assistance given by Social Security as they age. Even though most benefits are given to the elderly, there are about 1 in 3 who are not retirees receiving benefits from the Social Security Program (SSA, 2009). The Future of Social Security’s Financial Health At the start of year 2005, the Social Security trust fund held roughly $1.3 trillion in asset (SSA, 2005). However, at some point in the future, the benefits paid out are anticipated to outstrip the contributions held by Social Security. The funding is not sufficient to meet the assistance and benefits which will be provided to the next generation of insurance program recipients because of the generation of the baby boomers currently receiving their benefits. Social Security is heading towards bankruptcy because of the aging post – World War II Baby Boomer generation. Social Security trust fund will be used to embrace the expenses of supplementary benefits. Even though the trust fund is created to be spent down over the generation of the baby boomers (Hu, 2005), the 2000 Trustees Report stated that it is only up to 2037 that Social Security could pay and provide the full benefits (Social Security Administration (SSA), 2000). Indeed, the Social Security is facing an impending fiscal challenge. This is for the reason that it could not cover the needs for assistance and benefits to be provided in the upcoming years. According to Hakkio and Wiseman (2006), the basic dilemma is that its sworn benefits would go beyond the program revenues in next to no time. It is the case that this economic challenge faced by Social Security concerns greatly the taxpayers and the beneficiaries (Hakkio and Wiseman, 2006). On the one hand, Hu (2005) stated that though there is an issue of Social Security facing long – term economic challenges, the issue that it heads towards bankruptcy is not true. It is the case that the Board of Trustees of Social Security stated in their 2005 annual report on its future of financial status that it is projected that it will take in more money than the capital it will pay out to the recipients until 2017. From the period of 2018 up until 2041, the money that will be used for paying out the benefits will be drawn from the Social Security trust fund. It is also anticipated by the trustees that the payroll taxes are adequate to compensate the assistance and benefits that will be provided among the beneficiaries 74 percent of the planned benefits in 2042 and 68 percent of the scheduled support after year 2079 (Trustees of Social Security, 2005). Nevertheless, there were also some opposing this view, in particular the non – partisan Congressional Budget Office. They project that the trust fund of Social Security is available up to 2052 only (Trustees of Social Security, 2005). Thereafter 2052, the Social Security has the capacity to cover about 78 percent of scheduled benefits among its recipients (Trustees of Social Security, 2005). This only implies that the Social Security system is confronted by a manageable financial shortage in the upcoming years. This is far from the anticipated bankruptcy in the future. As a point of fact, given that the Social Security has a pay – as – you – go nature, the only circumstance that its funds can get exhausted is when the American workers simply discontinue from working. Is Privatization of Social Security the Answer to the “Crisis”? Indeed, it is the case that the Social Security is confronted by a long – term fiscal crisis. Nonetheless, it is the Bush Administration who apparently claimed that the Social Security is heading towards bankruptcy because of the aging post – World War II generation of baby boomers (Ho, 2005). Given this allegedly bankruptcy of Social Security, President Bush proposed his plan to alter the Social Security. His proposal includes the mandatory benefit reductions for nearly all American workers as well as the optional privatization of accounts in the Social Security (Center on Budget and Policy Priorities, 2005). The effects of the proposed plan on Social Security reform by President Bush is analyzed in 2004 by Andrews in New York Times. Andrews (2005) suggested that such plan contains four (4) main elements such as: (1) workers are left with a choice to create into private accounts some percentages of their payroll taxes; (2) the established Social Security retirement benefits of the workers would be cut down by the approximate amount converted into private accounts; (3) the upcoming growth in the benefits relies on the modification of prices or inflation rate and it does not depend on the rate of growth of real salaries; and (4) the decrease in benefits would be moderated with exceptional facilities for low – income workers as well as widowed spouses. His suggestion would lessen the guaranteed benefits to the typical American workers than what they are actually receiving today from the Social Security. Meanwhile, O’neill (2002) supported the privatization of Social Security suggesting that compulsory saving is much more attainable through a scheme involving individual privately held accounts. For O’neill (2002), a government retirement program is not needed and it also does not satisfy the objective of Social Security to prevent impoverishment of the old age. This is because this goal only requires a smaller program focusing only on the poor. Privatization Does Not Solve the Financial Problem of Social Security Given this long – term fiscal problem challenging Social Security, there is a need to strengthen Social Security. Supporting and reinforcing Social Security are necessary in order to assure the fact that the future recipients of the program would take in the entire 100 percent of their guaranteed assistance and benefits. Meanwhile, Paul Krugman (2005), an economist, privatization of accounts in Social Security is regarded as a bogus solution to a false crisis. In this regard, the privatization of assets in Social Security as suggested by President Bush does not make stronger the Social Security. In fact, it is a mechanism to take down the Social Security system in total. According to Ho (2005), privatization of savings accounts is nothing but considerably an inadequate alternative for social security for the reason that such private accounts could not give assurance of payment for the rest of retiree’s existence. Aside from that, the benefits from the private savings accounts would not promise the benefits and assistance to the recipients’ surviving family members. It is also the case that privatization’s unintended consequence is that it left individuals having private accounts to have no choice at all but to invest in stocks the find morally offensive. Meanwhile, it is also the case that privatization entices people with guaranteed increased benefits under such privatized system even though an economic analysis of the proposed plan restates to be otherwise (Ho, 2005). As a matter of fact, there is an increased financial threat under a privatized system. There are fewer benefits that are waiting for the recipients under a privatized system compared to the existing Social Security provisions (Ho, 2005). Notwithstanding such ideas, likewise, privatization unreasonably harms groups of minorities including women, members of LGBT community as well as people of color (Ho, 2005). The current structure of Social Security advances the conditions of minority. Creating private accounts will harm the minorities given that the people of color used to have lower earnings than the white workers. Given the lower earnings, they have lesser earnings to be placed into the private accounts, which is an indication of fewer benefits in return. On the one hand, Anrig and Wasow (2005) stated arguments that do not support the privatization of Social Security. Primarily, Social Security is an insurance that protects workers and their families in the instance of death or disability. Privatizing Social Security threatens this objective. Also, it exacerbates the fiscal problem of social security instead of making it better. Besides, it reduces the economic development leading to more financial decline of the Social Security. Likewise, strong arguments against privatization are evident in other countries experiencing privatized Social Security because it has been a disappointment to them. Similarly, the chances are in contrast to those with successful investment. It is also the case that what you will get on the future is grounded on the status of market when you retire. Besides, the experience of United Kingdom is an indication of what the future could bring. Moreover, younger generations will bear the cost of the privatization of the program. What is more is that women will be the most disadvantaged of all because of the gender differences at work. In addition to that, Hispanics and African Americans are more helpless under privatization. Lastly, it does not protect the retirees in times of inflation. Proposed Change to Address the Financial Crisis of Social Security It is the case that the Social Security is facing financial crisis. However, the concern that it is heading towards bankruptcy is a myth. Meanwhile, privatization of the individual accounts is seen to be a solution to the problem by some, in particular, former President Bush. Nonetheless, the current President Obama, opposes the privatization as a solution to the fiscal problem of Social Security but supports increase of limit on the payroll tax in order to aid the funding. Obama made recommendations which make stronger the sustainability of Social Security (National Commission on Fiscal Responsibility and Report, 2010). Increasing the payroll tax cap would also save the Social Security though 12.4 percent payroll tax on their salaries and wages is already huge weight on the American workers today. Given this financial crisis, privatization does not solve the problem. What can save the Social Security is the re – establishment of the tax on the richest 1 percent of Americans alone. According to Kogan and Greenstein (2005), over the next 75 years, this alternative could give in return about $2.9 trillion in revenue. The long – term financial crisis that is faced by Social Security can be addressed by such alternative of reinstating the estate tax on the richest individuals in America. This solution would instantly offer a source of capital that can be used to address the needs of the recipients of Social Security in the near future. By bringing taxes on the wealthiest individuals in America, Social Security can be saved from such claimed crisis. This proposed alterative would not harm the greatest majority of American population who rely greatly on Social Security. This would only impact the wealthiest 1 percent of Americans. Conclusion There are claims that the financial crisis faced by Social Security is just a myth. On the one hand, some believe that Social Security is heading towards bankruptcy. Nevertheless, whether true or not, or even if it is just about to happen, such crisis must be resolved. The solution to the fiscal challenge of Social Security is strengthening it and not dismantling it through the means of privatization. Privatization of the Social Security does not strengthen the Social Security but worsen the financial dilemma instead. Not providing the sufficient assistance and benefits is the problem. Hence, creating private accounts would intensify this financial challenge. More and more people would be at a disadvantaged situation because of the beneficiaries of such proposal would only be those who can afford it. On the one hand, increasing the payroll tax cap would be a solution but weighing the pros and cons of it, it is the case that the weight of the financial problem will be passed on to the citizens of America again. Some 12.4 percent contribution is already a huge share on their part. What can solve this “issue” is not true creating private accounts of Social Security but by bringing taxes on the wealthiest 1 percent of the American population. In this case, the claimed crisis can be resolved. Thus, privatization is not a solution for it just dismantles the Social Security. Likewise, it does not advance the situation of the people but disproportionately harms them especially the group of minorities. To cut it short, it does not support for the greater good of the majority of people. Nevertheless, reinstating the estate tax among the 1 percent wealthiest Americans would not only save Social Security but would also prevent the poverty among the greatest majority of Americans. References: Achenbaum, Andrew (1986). Social Security Visions and Revisions. New York: Cambridge University Press. American Association of Retired Persons. (1998). Poverty and older people fact sheet. Washington: Author. Andrews, E. (2004, December 14). Most G.O.P. plans to remake Social Security involve deep cuts to tomorrow’s retirees. New York Times. Anrig, Greg and Wasow, Bernard (2005). Twelve reasons why privatization is a bad idea. TFC Issue Brief. Center on Budget and Policy Priorities. (2005, May 13). Why the President’s Social Security plan closes just 30 percent of the long-term shortfall. Washington: Author. Retrieved from http://www.cbpp.org/policy-points5-13-05.pdf Hakkio, Craig and Wiseman, Elisha (2006). Social Security and Medicare: the impending fiscal crisis. 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