The Social Security System - Research Paper Example

? The Social Security System School The Social Security System History of the Social Security System In the year 1934, the Committee on Economic Security (CES) was created by the President Franklin D. Roosevelt. Roosevelt assigned the CES the responsibility of exploring the feasibility of a system of economic security that would provide the disabled and the elderly people with income. The government and the family members were the caretakers of the people who were not unable to work. Roosevelt felt the requirement of a national system. Therefore, the CES submitted their findings to Roosevelt in January 1935in which the plan of the economic security’s national program was outlined that was later recognized as the Social Security Act (SSA). Another name that is frequently used to refer to the Social Security System is the “pay-as-you-go pension system” (Garrett and Rhine, 2005, p. 103). The Congress passed the Social Security Act on 14 August 1935. The social insurance program introduced by the Social Security System covered individuals belonging to different categories. People aged 65 or more that had retired received a monthly benefit from the law. The primary worker received the monthly benefit upon retirement and the amount of money obtained was determined by the contributions made by the individual’s payroll tax. Benefits provided by the Social Security Act included but were not limited to aid to the dependent children, grants for the medical care to the states, and unemployment insurance. After establishment of the Social Security Board, it was charged with the implementation of the employees’ enrollment system, collection of contributions made by the payroll taxes, and the report earnings. How the Social Security System Works Money paid by an individual in the Social Security System is immediately paid to the individuals acquiring the checks of Social Security. When Roosevelt approved the Act of Social Security in the year 1935, there was a huge population of the needy people as they had been through the Great Depression period, but there was scarcity of money to compensate for the benefits they required. Thus, the retiring workers in all generations have been paid by the working people of the times, which happens to be the secret behind how the Social Security System has always worked despite the lack of money to start with. Social Security System: A Global Phenomenon Today, the Social Security System has been implemented in all developed countries. The Social Security System in a vast majority of countries is unfunded. A payroll tax applied on the working people’s income is the source of finance for these systems whereas the retirees get the pension benefits. Over the past few decades, there has occurred an increase in the size of the Social Security Systems around the world. In the year 1995, Social Security System consumed 4.5 per cent of the total Gross Domestic Product (GDP) of the USA, 13 per cent of the total GDP of Italy, 20 per cent of the total GDP of Sweden, and 16.5 per cent GDP of France (Galasso and Profeta, 2002, p. 2). Decisions related to the Social Security System ranging from the system’s design to all subsequent alterations extend beyond the economic theory and enter the political realm. Governments of a lot of countries across the world are presently considering structural reforms related to the Social Security System and many have already enacted the changes. “The key feature in these reforms is a shift from a pure pay-as-you-go tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts” (Feldstein, 2005, p. 33). Countries that have already enacted these changes include but are not limited to China, Australia, Sweden, Britain, and Chile. A similar plan was proposed for the USA by President Bill Clinton which was made a main priority by President Bush for his second term. Past Challenges for the Social Security System This clever strategy helped the economic system in the year 1935 and throughout the decades since then, but it may not prove quite as useful in the future. “Social Security’s financial woes are making headlines; both Congress and the President are publicly considering an overhaul of a system that has existed for 70 years but will face challenges in the coming decades” (King and Cecil, 2006). The fragility of the Social Security System was first recognized in the year 1975. The Treasury Development prepared a report which anticipated the insufficiency of the payroll taxes collected through the Social Security in meeting the payments by the year 1979 (King and Cecil, 2006). These steps helped avoid the failure of the Social Security System. As a result of these findings, the Congress took certain steps including the increase in the rate of tax, reduction in the benefits, and automatic adjustment in the Social Security earnings. Another challenge to the Social Security System was encountered in the year 1983 when the Greenspan Commission was directed by the President Ronald Reagan to investigate the Social Security’s financial state. The Greenspan Commission prepared a comprehensive report emphasizing upon the implementation of several sweeping alterations for the strength of the Social Security. On the basis of the suggestions made by the Greenspan Commission, the Congress passed a bill taxing the benefits of the Social Security. The bill covered the federal employees under the category of employees for the payroll tax purposes of the Social Security. In addition to that, the bill made a schedule for increase in the retirement age. Future Challenges Facing the Social Security System “Social Security is currently much in the news because it faces a projected funding gap, because of overall budget de?cits, and because of doubts in some quarters about its design” (Aaron, 2011, p. 385). There are two main reasons contributing to the anticipated unpopularity of the Social Security System in the future: 1. When the Social Security System was introduced in the year 1935, people paying into it outnumber the recipients of benefits. The working people to retirees ratio indicated that the working people were not required to pay a lot to support those who retired. Till the year 1950, no more than 2 per cent income was attributed to the Social Security, of which 1 per cent was paid by the employer and the other 1 per cent was paid by the employee whereas the percentage of income withheld for the Social Security is 15.30 in which 7.65 per cent is paid by the employer and the employee each. The ratio in the future is likely to be struck by the retirement of the baby boomers. The number of retirees would be much more than the working population so the latter would not be able to pay for the former. This problem would not have been encountered had the population grown steadily. The Social Security System’s design cannot deal with the baby boomers’ population spike. 2. Secondly, a lot of people have become fond of the idea of maximizing return on investment wherein the money belongs to the individual depositing it and investment compounding helps enlarge it over time. The Social Security System does not seem so well paying as compared to the other option. Presently, both the employee and the employer pay 7.65 per cent of the employee’s gross income with a cap at $70,000. Investing the same sum of 15.30 per cent of gross income in a 401(k) plan for the same duration would generate a much larger sum on the basis of the historical returns than what an individual gets from the Social Security System. The additional benefit offered by money invested in the 401(k) plan is that it is tax-deferred, so the investors do not have to pay tax on their contributions, rather they can withdraw the money and use it when they retire (Brian, 1997). On the other hand, the Social Security benefit of a retiree is assessed by means of a complex formula instead of the balance of account because of the absence of the traditional account. “With the discussion of more personal responsibility for the provision of retirement-income security in both Canada and the U.S., some commentators suggest that workers could do better by placing their money into private pension plans or other taxpreferred savings vehicles such as Registered Retirement Savings Plans (RRSPs) in Canada or 401(k) plans in the U.S.” (Brown, 1997, p. 2). Conclusion Social Security System is one of the oldest and globally employed pay-as-you-go pension system in which the employee and employer pay a certain percentage of the working employee’s earning to benefit the employees that have retired. The system has functioned quite successfully all over the world in general and the USA in particular since its enactment in the year 1935. However, several modifications have been made to the original design of the system at various points in time to accommodate the arising needs of the socio-economic system. Success of the Social Security System in the future is threatened by the declining number of working employees and increasing number of retirees, and the tendency of the employees to make more benefit by investing money in their personal accounts than investing in the Social Security System. References: Aaron, H. J. (2011). Social security reconsidered. National Tax Journal. 64(2): 385-414. Brian, M. (1997). Understanding and Controlling Your Finances: 401(k) plans. Retrieved from http://www.bygpub.com/finance/finance6.htm. Brown, R. L. (1997). Social Security: Regressive or Progressive? North American Actuarial Journal. 2(2): 1-33. Feldstein, M. (2005). Structural Reform of Social Security. Journal of Economic Perspectives. 19(2): 33-55. Galasso, V., and Profeta, P. (2002). The political economy of social security: a survey. European Journal of Political Economy. 18: 1-29. Garrett, T. A., and Shrine, R. M. (2005). Social Security versus Private Retirement Accounts: A Historical Analysis. The Federal Reserve Bank of St. Louis. 87(2 Part 1): 103-121. King, T. T., and Cecil, H. W. (2006, May). The History of Major Changes to the Social Security System. The CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/2006/506/infocus/p15.htm. Read More